3.9 Instruments of trade policy
We noted in the previous section that some barriers to trade are obvious while others are less so. As the WTO becomes effective in removing the obvious barriers we can expect the more subtle impediments to become more common.
Your textbook provides a good explanation of seven major instruments of trade policy. The following catalogue is included for interest and to show that there are more than seven ways for governments to influence trade.
- Tariffs
A tariff or customs duty is a tax levied on imports or exports.- Import duties are levied on goods entering a country. They serve two purposes: revenue and protection. If the duties are for revenue purposes, they must be relatively low or they will discourage the import of such items and limit the amount of revenue that can be collected. If the duties are for protection, they can be relatively high, such as the 490% tariff placed on imports of foreign rice into Japan .
- Export duties on goods leaving a country serve three purposes: to provide revenue, conserve domestic resources, and/or stimulate the growth of domestic industries. For example, if export duties make it more cost-effective for local raw material suppliers to sell to local manufacturers than to international markets, international supply of these materials will be limited. This increases the price of the materials to overseas producers and gives local manufacturers a relative cost-advantage in export markets.
- Penalty duties are levied on imports for the violation of some customs rules of the importing country, such as importing jewellery at a fictitiously low cost.
- Anti-dumping duties are levied on goods which are sold below the fair market value in the importing country or below the cost of production in the exporting country. For example, Brazilian orange juice and South American crayfish have in recent years been 'dumped' on the Australian market.
- Retaliatory duties may be levied as a tit-for-tat measure by a nation for discriminatory treatment of its products. For example, Australia and other rice-growing countries might tax Japanese products in retaliation for Japan 's refusal prior to 1995 to allow the importing of rice.
- Preferential duties are sometimes granted to maintain ties with certain countries for political or economic reasons. Former British colonies, after gaining independence, were often granted preferential treatment by the mother country.
Some examples of the size of tariffs are evident in Figure 3.4 that shows the changes in tariffs and quotas into China from 2004. Large falls in tariffs can also be found in the recent US-Australia Free Trade Agreement that came into force on 1 January 2005. Duties on more than 99% of tariff lines covering industrial goods have been eliminated. For example, tariff savings for US manufactured goods exporters will result in savings of $US300 million in the first year alone.
Figure 3.3 Changing tariffs and quotas on imports into China
Source: Henning 2002, p. 10.
- Subsidies
A subsidy is a government payment to a domestic producer. By receiving subsidies, manufacturers are able to set prices that are not completely dependent on the cost of production. Countries which import these subsidised products usually retaliate by levying a countervailing duty (a tariff) to offset the advantage of the subsidy.
As reported in the following reading, subsidies can represent huge amounts of assistance, such as the $A117 billion subsidy provided to farmers by the European Union. The reading is also useful because it explains potential damages to developing countries created by government subsidies in developed countries. Take note of the suggestions of how the EU subsidy could be better spent to assist developing countries. Another example of the extent of subsidies used can be found in Figure 3.4 in relation to the US and Mexico .
Reading 3.3
Ayodele, T. 2003, 'Subsidies underline WTO hypocrisy', Australian Financial Review , 30 December, p. 47.
Figure 3.4 Subsidies and tariffs in the US and Mexico
Source: Czinkota et al. 2005, p. 83.
- Quantitative controls
Quantitative controls take the form of import quotas, export quotas and voluntary quotas:- Import quotas are used to foster infant industries or to protect domestic industry from foreign competition. An example is the Australian car industry.
- Export quotas limit the quantity of raw materials or manufactured goods leaving a country. They are used to encourage domestic use of raw materials or to maintain high prices abroad. For example, South Africa has the world's largest source of chromium. By limiting supply, South Africa has some ability to control the price of chromium.
- Voluntary quotas are a response to pressure exerted by domestic producers or organised labour. An example of this was the voluntary quota adopted by the Japanese government in 1981 to limit the number of vehicles exported to the US . Anther example is the limit on textile imports imposed by the US against China in 1983: in retaliation, China stopped buying cotton, synthetic fibres and soya beans from the US .
- Embargoes and boycotts
- An embargo is an official act to prohibit the import or export of a product. Embargoes may be imposed for military objectives, to prevent the entry of exotic diseases, protect the health of a population from mislabelled foods, protect its morals from pornographic material or to protect national treasures. For example, Egypt has an embargo on the export of ancient Egyptian artefacts.
- A boycott is an unofficial act to discourage relations with a person, firm or country. Certain Arab nations, for example, have boycotted firms that trade with Israel .
Figure 3.5 gives an example of an embargo applied by the Russian government on US poultry: note the impact in the US economy due to the embargo.
Figure 3.5 Russian embargo on US poultry
Source: Czinkota et al. 2005, p. 75.
- Exchange controls
Exchange controls are used generally in wartime (although Germany employed them before World War II) to prevent the flight of capital, to conserve gold stocks and to limit the import of those commodities which do not fit government plans. - Other non-tariff barriers
- Local content regulations specify that a certain percentage of a product must be from domestic sources. The Button Plan for Australian automobiles originally required 85% of a car to be manufactured locally.
- Export licences in the US are issued to prevent the export of equipment used for military purposes. For example, there was a total ban on the export of super-computers to the USSR during the Cold War. The ban on the export of war materials to Iraq before the Gulf War in 1991 was circumvented by a British company which exported components of a 'super gun' to Iraq as 'industrial pipes'.
- State-owned corporations enter markets with the financial backing of governments so that they are able to outbid private firms. Australian Defence Industries (ADI) which manufactures armaments is such a State-owned organisation. ADI bids in competition with overseas arms manufacturers, some of whom are privately owned.
- Administrative impediments, two examples of which are France requiring customs and import documents to be written in French to protect the French language and culture and the Japanese insistence on opening a large proportion of express packages to check for pornography.
Nations usually adopt trade regulations to achieve stated national objectives, but these regulations generally have undesirable effects on many sectors of the economy. We look at this aspect of international trade in the next section. Before doing so, however, you should read what Hill (2005) has to say about tariffs and other instruments of policy.
In your text
Hill 2005, Chapter 5, pp. 179-186.
Activity 3.6
Conduct a web search for tariff rates in your country. For example, visit the Google search engine at http://www.google.com and type in 'tariff rates' and the name of your home country. Those of you interested in Australia 's tariff rates can visit the Federal Government's Department of Foreign Affairs and Trade website at http://www.dfat.gov.au and conduct a search for tariff rates.
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