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Advantages And Disadvantages Of Ntms Economics Essay

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Published: Mon, 5 Dec 2016

What are ”non-tariff measures” (NTMs)? As the term implies, any policy measures other than tariffs can be included in NTMs that can impact trade flows. At a broad level, NTMs can suitably be separated into three categories.

A first category of NTMs are those imposed on imports. This category includes import quotas, import prohibitions, import licensing, and customs procedures and administration fees. A second category of NTMs are those imposed on exports. These include export taxes, export subsidies, export quotas, export prohibitions, and voluntary export restraints. These first two categories encompass NTMs that are applied at the border, either to imports or to exports. A third and final category of NTMs are those imposed internally in the domestic economy. Such behind-the-border measures include domestic legislation covering health/ technical/ product/ labor/ environmental standards, internal taxes or charges, and domestic subsidies.

Types of Non-Tariff Barriers

The non-tariff measure include of some constraint to trade. Here are some examples of the popular NTMs

Licenses

A document which is issued by a national government allowing the importation of certain goods into its area is called an import license. Import licenses are believed to be non-tariff barriers to trade when it is used to distinguish in opposition to any other goods of another country so as to guard a local industry from foreign competition. The volume of import allowed is specified in each license, and the total volume allowed should not go above the quota. Importing companies can buy the licenses at a competitive price, or simply a fee. However, it is said that this distribution method endow with encouragement for political lobbying and corruption. certain restrictions can be imposed on imported goods as well as the amt of imported goods.

Quotas

A quota is a quantity restriction used in international trade, usually on imports, but it could also be on exports, focusing on licensing of the foreign trade that is nearly related to quantitative restrictions. This category includes global quotas-a system that protects domestic industries by being restrictive on the cost of international trade- and seasonal quotas.

Quantitative controls on foreign trade transactions are done through one time license. Quantitative restriction on exports and imports is a direct administrative type of government regulation of foreign trade. Quotas and licenses restrict the independence of enterprises in respect of entering the foreign markets, narrowing the range of countries, and also minimize the range of countries for transaction in case of certain commodities. However, it turns out to be that the system of quota and licensing exports and imports whilst establishing firm control over foreign trade in some particular goods, happen to be more supple and of use than economic instruments of international trade regulation. This is defined by the fact, that licensing and quota systems are a key instrument of trade regulation which is an important part of the world.

The result of this trade barrier is seen in the loss of consumer due to an increase in prices and limited selection of goods. An import quota controls the volume of many commodities that can be imported in a country during a specific period of time. An export restricts a certain amount of goods that can leave the country. The reason for imposing of export quota by country is due to the control of goods that is fundamental to the country and the manipulative price found on international level.

Embargo

 The incomplete or entire exclusion of commerce and trade with a particular country, in order to isolate it is called embargo.  A strong political measure imposed in an effort, by the imposing country, to remove a given national-interest result from the country on which it is imposed is considered as embargoes. It is same as economic sanctions and is often taken as legal barriers to trade, not to be confused with obstructions, which are usually taken to be acts of war. The same principle is used for most trade barriers: the obligation of some kind of cost on trade that increases the price of the traded goods. If many nations repeatedly use trade barriers against each other, then a trade war results

Subsidy

 A subsidy is a type of financial support paid to a business or economic sector. The government makes most subsidies to producers or distributors in an industry to stop the decline of that business or a boost in the prices of its goods or plainly to persuade it to employ more labor. Some examples of subsidies to encourage the sale of exports; subsidies on some foods to keep down the cost of living, especially in cities; and subsidies to support the expansion of farm production and achieve self-reliance in food production

Import deposits

Import deposits is a type of deposit required importers to put a certain of money in an account for a significant period of time whose purpose is to guarantee that import duties will be paid, or the deposit may simply be a non-tariff barrier intended to discourage imports.

Why NTMs

The drastic rise in the use of non-tariff barriers stemmed largely from the WTO new rules about reduction in tariff use, which formed part of the WTO’s mission to ensure free trade across the globe. While the WTO rules do allow for the use of NTBs in some circumstances, the specifications about when they can be used are very strict such that they can only be employed for purposes such as to guarantee health, safety or sanitation, or to safeguard non-renewable natural resources. Should NTMs be used for other purposes, they are deemed to be ways of evading free trade rules. Apart from the WTO, such rules, which are set to curb the use of tariffs as they are threats to free trade, are also laid out by institutions like the European Union (EU) and the North American Free Trade Agreement (NAFTA).

Another reason for the transition from tariffs to NTMs is that many countries, especially developed ones, do not have to rely on tariffs as a source of funding anymore, like they did in their early stages of development. They can afford to switch to other trade barriers that do not involve tariffs, but that still provide them with a means to regulate international trade.

Moreover, NTBs allow these countries to help weak industries or provide compensation to those industries that have been adversely impacted by the WTO laws on reduction of tariffs.

Also, it is a logical way for countries to respond to the reduction of tariffs – since it has been declared that tariffs are no more to be used, NTBs offer traders an alternate method of influencing the market.

Thus, NTBs can be quite similar to tariffs, apart for a few exceptions. After the laws of tariff reduction were enacted during the eight rounds of negotiations in the WTO and the General Agreement on Tariffs and Trade (GATT), those who persisted in believing in the concept of protectionism have turned to NTBs. In fact, most of the NTMs can be defined as protectionist measures.

In short, NTBs can be thought of as a ‘new’ means of protection which has replaced tariffs as the “old” method of protection.

Advantages and Disadvantages of NTMs

Advantages

Since the main purpose of NTMs is protectionism, the advantages of NTMs will also mainly be those of protectionism. Non-tariff barriers help protect the development of new industries against foreign rivals. If foreign industries compete with domestic industries that are not developed enough or large enough yet to take advantage of economies of scale, then NTBs, such as import quotas, can protect the ‘infant’ industry from too much competition through its maturing stages until it can compete on its own.

Similarly, NTMs also offer protection to certain economies against foreign countries that are interested to trade with them only because they know that the domestic economies will not be able to face competition from them and will eventually collapse, leaving them a monopoly of the domestic market. An example of such unfair trading is ‘dumping’. The barriers to trade protect the domestic economies from such countries with an unfair relative advantage.

It is believed that the use of NTBs can result in increased domestic employment. Since foreign firms create jobs abroad, NTBs such as import quotas, reduce imports, make domestic production rise instead, and thus create domestic employment. Also, reducing imports from countries with cheaper labour levels the competition compared to the higher wages being paid for local production.

NTBs, moreover, by cutting down imports, help countries boost those local industries that are concerned with the national security and also those industries which help give the country economic independence.

Disadvantages

The main disadvantage of NTMs is that they hinder free trade and the benefits that accompany the latter. The protectionist aspect of NTBs discourages competition from bigger industries and also from foreign countries. While this might help domestic firms and industries to grow at first, in the long run, it in fact dampens future growth. This is because, due to the lack of competition, domestic firms can then afford to provide a narrow choice of goods to customers, to lower the goods’ quality, and to raise their prices. Because of this inefficient production, there is also no more incentive for the firms to strive for constant innovation and excellence. Thus, ultimately, NTBs do not help in the future growth of firms.

There is another way in which NTMs drive up the prices of goods in the domestic economy. By restricting access to foreign countries where goods could be made more cheaply, more resources have to be employed domestically itself to make the same goods at a higher price.

Also, while free trade allows countries to benefit from the concept of comparative advantage, the use NTMs prevents countries from enjoying these benefits. If countries specialise only in the production of goods in which they have a competitive advantage, this allows each country to produce at the minimum prices. This efficiency in production benefits all parties to the trade. However, NTMs, by restricting trade, do not help in achieving that goal.

The use of NTBs can also result in trade wars. By raising trade barriers against a foreign country, the latter can decide to do the same in retaliation. The imports and exports of both countries are thus restricted, and this greatly reduces the markets open to them, lowering their scope for growth and efficiency. If many countries across the world engage in these trade wars, global trade and economic activity will suffer drastically. These retaliations can also quickly spread beyond the source of conflict and affect the countries’ other economy policies as a way to retaliate.

It can be seen that all participants can take advantage of free trade through efficiency of the market, for instance, increased choice and reduced prices. However, non-tariff measures also have their uses and are necessary in certain conditions. There must be a balance between the quest for efficiencies and the use of barriers to trade.

EFFECTS OF NON-TARIFF MEASURES (NTMS)

Effects on trade

It is generally assumed that NTMs have negative effect on trade, even if it has been elusive for quantitative assessment. Sometimes, these policy measures are referred to as barriers, when the emphasis is made on the difficulties an exporter may have to comply with them. In fact, NTMs can hinder exports for countries or companies when they are not able to pay the cost of adapting their product or production process to the norm of a trade partner. Then, another less competitive exporter may be able to take on a restrictive market if it complies with that regulation. NTMs would be trade distorting in this case.

However, NTMs may also facilitate trade when they reduce asymmetries in information between consumers and producers, for example about the quality or safety of the product. The effort of complying with NTMS could also help countries to upgrade capacities, (or mitigating institutional deficiencies for monitoring and enforcing regulations, in words of van Tongeren, Begin, Marette, 2009) in which case the ultimate development impact is positive for the exporting country. On the importing country’s side, NTMs could reduce negative externalities, for example in the case of environmental threat or food safety.

Effects on Price

A quota is defined as an upper limit on the number of units of a commodity that can be imported into a country. When such a restriction is imposed, domestic consumers are prevented from buying an imported good, the supply of which is no longer perfectly elastic as it would have been in a free trade situation resulting in a rise in the price of the product. This can be better explained using a demand and supply diagram as follows:

In a situation where there is free trade and no barriers to trade are imposed then at the world price of “wp” domestic producers will supply Q1 and Q1-Q2 will be imported, i.e, equilibrium quantity will be at Q1. The supply curve to the domestic market will be denoted by the curve “ABws”. The effect of imposing a quota will be to limit the amount of imported goods. Let us suppose that the quota cut imports from Q1-Q2 to Q1-Q3. A new supply curve can now be drawn incorporating the amount of the quota (Q1-Q3). The world price “wp” no longer acts as the supply curve but instead the latter is represented by the curve “ABCSS”. we can nothe that the new equilibrium will be at “E” and the new equilibrium price will be at “pq”. It is clear that price has risen from the implementation of quota. This is explained by the fact that the supply of the commodity is now restricted causing a slight increase in the price of the commodity. The extent of the increase will depend on the quota imposed. The lower the quota, the higher will be the price.

A simple example can be taken to explain the above theory. Suppose you have milk imported freely into a country and account for 50% of the domestic demand. If government imposes a quota on the amount that can be imported, the supply of milk will fall giving rise to a shortage. This shortage will exert pressure on price which will finally rise to eliminate that shortage and restore the equilibrium.

Effects on society

Another measure is embargo. This is a complete ban on imported product. Such a measure can be imposed to protect the society as whole. For example, a country may ban or severely curtail the importation of things such as harmful drugs, pornographic literature and live animals. Had embargoes not imposed on such products, society would suffer enormous damage as they have high level of negative externalities

Effects on multinational

Import quotas generally have a negative impact on multinational companies. These enterprises such as Nike and General Motors are intensively engaged in international trade as domestic consumption only cannot meet their high targets. When a quota is imposed on their goods by a major buyer, MNCs must find other markets to supply their products, otherwise they will have to cut production and profits figure will suffer.

Effects on employment

However, import quotas affect positively domestic employment. The fall in imports will divert demand to local suppliers and the latter will have to increase production to cover the gap which foreign products used to occupy. This applies to domestic supplies that have the capabilities and were unable to compete internationally. In order to boost production, they will have to recruit more people. This will have a multiplier effect in the economy giving rise a lower unemployment rate and higher economic growth.

How globalisation is affecting NTMs?

Globalisation is a process by which countries are linked altogether in a peaceful manner as view to only one planet. In technical terms, it is described as being a process by which national and regional economies, societies and cultures have all been united via global network of trade, communication, immigration and transportation. Hence a worldwide movement towards economic, financial, trade and communications integration. Recently, globalization expanded its field to other activities such as social areas. At present, globalization also considers culture, media, technology, socio-cultural, political and biological factors.

The evolving nature of NTMS has gained an important place in international trade today. More recently, it has been considered in the annual World Trade Report of 2012. Most trade agreements clearly speaks of tariff reductions whereby leaving less than halfway entrance for NTMs. It has nonetheless the capacity to reduce the effectiveness of tariff reductions upon agreement. NTMs have ever since in its introductory mode been driven by multiple policy motives and are still subject to change. These policies in themselves have evolved through the years as countries forged agreements and became interdependent through globalization.

NTMs has become a necessity not only to protect domestic industries but to the globalized world as a whole. Globalisation raised changes in countries among which are increased social awareness, growing concerns regarding health, safety and environmental quality which led to increase in NTMs. For the better understanding of the impact of globalization on NTMs, trade in goods and services were considered. Examples of regulatory measures are Technical Barriers to Trade and Sanitary and Phyto-Sanitary measures in goods and regulations in services which have recently cropped up. These measures do not have a direct influence on trade but have a strong influence on trade agreements and amount of trade between countries. Some say that NTMs have been encouraged via globalization for a viable peace. Public policy can thus enhance trade flows in a positive or even negative way. Trade in services has evolved in recent years and is no longer similar to traditional trade. New policies came into force to handle these new trends. Globalisation relates to WTO. Trade in services has the relatively same importance as trade in goods for good networks between countries. The WTO knows they hold the same weight in international production affairs and hence measures to restrict trade and competition in the services market that could affect more than the sector directly concerned. Examples where cases are most suited are infrastructural services, spill-over effects on other services and goods.

Unlike in the past when NTMS role were solely to protect domestic producers from foreign competition, nowadays NTMs are more to do with public policy objectives. These policies not only consider protectionism but also take precaution measures. In the sector of health and environmental services, NTMS were recently boosted in numbers.

NTMS were found not to be an easy task to be observed and quantified, however with globalization, WTO observes that NTMS are meant to have a long stay with their several arrangements between countries which adds to the main agreements.

The emerging in change of NTMs with time is not protected against negative effects. NTMs may in other words reduce benefits gained from the main agreement, for example negate some tariff reductions. Moreover, non-tariffs measures have a long list of measures which are also difficult to quantify and also sometimes are invisible in the agreements. In addition to that, those measures are not regular to all countries that it is served and to that, their effect sometimes bring distortions in agreements between sectors and countries.

Globalisation is known to have brought changes or complete change in more than one country structure and future. It has greatly changed policies of countries and to that NTMs continue to be evaluated and are still expanding.

Quoting from the WTO Director General: “Regulatory interventions addressing market failures and international spillovers, with inevitable consequences for trade flows and investments are here to stay.”

The foremost thought, hence, of NTMs is that it will not have a decreasing or reducing effect on the tariffs agreements between countries.

As deducted from above, globalization does not only bring positive results onto a country trade flow. As globalization strengthens alliances amongst nations, NTMs continue to be on the rise in their arrangements. NTMs may also be used as a tool to restrict trade flows in the case of where some countries might be oligopolies of certain commodities on the global market.

Technical Barriers to Trade and Sanitary and Phyto-Sanitary measures is said to be the source of last resort for some developing countries since it impacts the worst results on them. The reason is that these countries may be differently structured and may not be able to meet those criteria mentioned in the measures.

Though, globalization intensify the relationship between countries does bring both good and bad results, harmonious plans between countries may help to reduce the negatives effects. Globalisation has neared most of countries and consequently has brought help where such measures were not easily identified. In simple terms, it has allowed experiences to be shared in recognition and quantitation.

In the light of the above, globalization not only brought amendments in NTMs but also has greatly influenced its use in countries.

NTMs Measurement

Measuring non-tariff barriers remained one of the confusing answered questions for a long time enough. This is mainly because of their inconsistency in countries where they are applied. As these by themselves cannot be measured, their affiliations are quantified to give a result as the measurement of NTMs as a whole. Typologies of the affiliations are: frequency measures, price-change measures, quantity measures, rates of assistance, and indices deflators.

A brief discussion of these measures is now to be listed and considered below.

Frequency measures

Laird & Yeats (1990) exposed two frequency measures, namely, frequency ratio and import coverage ratio. Both of them are based on calculation of ratio of commodity lines subject to at least one NTM in total number of lines for the respective group of trade flows. The frequency ratio can be calculated by formula:

where Ni is category i of commodity in trade group; Di is dummy variable, Nt is general number of categories in trade group, i.e. i = 1,…,T . Dummy variable is used as indicator of NTM: where Di = 1, in good in category i is subject to at least one NTM; otherwise Di = 0.

In import coverage ratio, value of imports of commodities subject to at least one NTM is used as a weight instead, unlike the frequency ratio. That way, time factor is considered and it also helps to evaluate the importance of the NTM for the whole trade.

B. Price-change measures

NTMs often influence price and cause change. Under this section, a measurement on evaluation of changes in price due to the introduction of NTMs is considered. Unlike other measures, it allows direct comparison between impact of tariff and non-tariff trade barriers. Price-change measures are commonly used in international trade theory and a formula was derived; influence of trade restrictions in terms of price and quantity changes. Deardorff & Stern (1997) used the most known type of price-change measures which is tariff equivalent. In other words, it is calculated as growth in commodity price before and after use of NTMs. Despite all its positive characteristics, price change as a sole indicator for NTMs of a country is not sufficient. Moreover, the impact of NTMs on change on price is difficult to be taken out of any factors affecting prices.

C. Rates of assistance

Rates of assistance can be broken down into two types; nominal and effective rate of assistance. Nominal rate of assistance is founded on calculation of a rise in the gross returns from production resulting from protective measures. The effective rate of assistance is the most commonly used and can be calculated as follows;

;

where VAN is value added in case when the NTM are applied, and VAB is value added under free trade.

These measures fit theories perfectly, nonetheless have drawbacks as it requires mass information that is not always available. The effective rate of assistance is faced with another problem which is to differentiate between the different NTMs in its calculation.

D. Indices – deflators

Anderson and Neary were the first ones who brought the application of trade barriers to both tariffs and non-tariffs measures. They constructed two indices; mercantilist trade restrictiveness index and trade restrictiveness index. These are defined as deflators and when applied to undistorted prices are to produce the same trade volume (mercantilist index) or same real income (for trade restrictiveness index) as the initial set of trade distortions (Anderson & Neary, 1996; Anderson & Neary, 1999). Application of this method, however, yields problem of collection of necessary prices and differentiation of the impact of NTM from other changes.

To summarize all measures are good enough for measurement of general NTMs level in a country. However, criteria, benefits and drawbacks of the different methods must be cared when choosing for specific countries.

Conclusion

GATT takes on a particular and modest approach to handling NTMs. That approach developed over time, and with the formation of the WTO, the handling of NTMs evolved further still.  Tariffs for goods production were decreased during the eight rounds of negotiations in the WTO and the General Agreement on Tariffs and Trade (GATT). After reducing of tariffs, the principle of protectionism demanded the introduction of new NTMs such as technical barriers to trade (TBT).

Increasing consumer demand for secure and environment friendly products also have had their impact on increasing popularity of TBT. Many NTMs are administered by WTO agreements, which originated in the Uruguay Round, as well as GATT articles. NTMs in the field of services have become as significant as in the field of usual trade. The requirement to protect sensitive to import industries, as well as a wide range of trade restrictions, available to the governments of industrialized countries, forcing them to resort to use the NTM, and putting serious obstacles to international trade and world economic growth. Thus, NTMs can be referred as a new of protection which has replaced tariffs as an old form of protection.


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