The impact of non tariff measures on international trade
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Published: Mon, 5 Dec 2016
At the very outset, the World Trade Organisation (WTO) having as central aim to free up trade and declaring that ‘ the system’s overriding purpose is to help trade flow as freely as possible’, had following the Doha Development Agenda implemented trade liberalisation measures.
As such, the Doha Round was launched, where the ministers placed the needs and interests of the developing countries at the heart of the Work Programme adopted in the Declaration, they said, “â€¦We shall continue to make positive efforts designed to ensure that developing countries, and especially the least-developed among them, secure a share in the growth of world trade commensurate with the needs of their economic development. In this context, enhanced market access, balanced rules, and well targeted, sustainably financed technical assistance and capacity-building programmes have important roles to play.” Hence, the developing countries expect that the new round of trade negotiations will target tariff peaks, high tariffs, and tariff acceleration that have been restricting them to push the enhancement of their export market share in world markets in general, and particularly, in developed countries.
Furthermore, following the decline of tariff rates resulting from the eight multilateral trade negotiations rounds and trade liberalisation agreements, there has been a rise in the relative importance of Non-Tariff Measures.
Definition of Non-Tariff Measures
Generally, there is no specific definition of the Non-Tariff Measures (NTMs). Yet, NTMs are defined as encompassing any measures (public or private) other than usual tariffs to liberalise international trade flows.
Consequently, in practice, most of the NTMs have been criticised to be impediments to international trade, increasing the price of both imports and import-competing good. Therefore, favouring domestic over foreign supply sources by obliging importers and foreign exporters to charge higher prices or limit the volume of imports.
Types of Non-Tariff Measures
Accordingly, there are various types of Non-Tariffs Measures, for instance, Laird and Vossenaar (1991), have put forward a broad classification of NTMs, identifying five categories, below are an illustration of these NTMs.
Measures to control the volume of imports
These measures constitute prohibitions like quotas, quantitative restraint (QRs) on imports with exports restraint agreement (ERAs), voluntary export restraints (VERs), non-automatic licensing, import authorisation and States trading or sole import monopolies.
Prohibitions may generally or specifically apply to arms and munitions, military equipments except imported to armed forces, drugs except when imported to health authorities or scientific purposes, plants or animals especially, the endangered species. Thus, if certain standards are met with, the imports may be prohibited.
Quotas are restricts the quantity or value of imported goods, which are set for a specific time period and are modified over times.
Non-automatic licensing is more expressly a way to administer conditional prohibitions or quotas.
VERs are usually informal export restraint arrangements (ERAs) between an exporter and an importer whereby the former agrees to restrict, for a certain time period, the exports of certain goods to the market of the imports to shun the imposition of import quotas. They are often industry-to-industry arrangements, but Governments can be involved on a more or less formal basis.
States trading or import monopolies are processes whereby only the government agency has the right to trade or grants that right to a private monopolies.
Measures to control the price of imported goods
These measures can be further subdivided into tariff-type or para-tariff measures and price NTMs.
These comprise of customs surcharges, domestic charges levied on imports, variable levies, anti-dumping duties, countervailing duties, additional charges.
Variables levies are special charges on imports of some goods in order to increase their price of domestic target price.
Anti-dumping duties are charges imposed on goods from specific trading partner or partners to counterbalance the effect of dumping.
Countervailing measures are imposed on goods to offset the effect of bounty or subsidy obtained directly or indirectly on the production.
Other price measures constitute of voluntary export price restraints, government procurement procedures, where a price preference is attributed for domestic products. As such, the computation of the price preference is made to determine the outcome of public tenders for the supply of products to government agencies.
Additionally, other measures under this category raise the cost of imports including deposit requirement (without interest payments), special regulations on foreign exchange and use of credit for importsâ€¦
Monitoring Measures, including price and volume investigations
These measures include automatic licensing and imports surveillance, typically applied to track imports levels preventing import surges.
Moreover, there are price surveillance and investigations, anti-dumping and countervailing investigations. Yet, these are viewed as having a ‘harassing’ of ‘chilling’ effect on imports. Following this line of thought it was argued by Messerlin (1988) that antidumping investigations themselves may cause a reduction in imports.
Production and Exports Measures
Here, measures are taken in assisting or controlling production or exports. As such the principal measures include production and export subsidies and export prohibitions and taxes.
Hence, subsides may apply to support domestic production, particularly, in the agricultural sector or be used as a tool of the industrial policy in developing or developed countries. These bounties may be used for services such as, transport, finance needed for the marketing or production.
Furthermore, export may be banned for reasons of products are deemed harmful or amount to a security risk. Also, export prohibitions and taxes are mainly applied to conserve natural resources like rare tropical timbers.
These barriers fall under the Standard and Certification Category and are applied at the frontier, including technical regulations and standards to be met by imported products to guarantee that these products conform to the same standards as required by the law for products manufactured in the domestic country.
Hence, they constitute of health, sanitary, phytosanitary and safety regulations, marking and packaging requirements, mandatory labeling product standards, production standards and the like. These technical barriers either increase the price of imports or prohibit non-complying imports.
On the other hand, Certification consists of Quarantine, General Certification, testing, inspection and among others.
Moreover, in addition to the above NTMs category, there is also the Domestic Governance, other form of NTMs which include:
Government Assistance, examples are, production and export assistance.
Public Procurement issues, examples are General Preferences, Tending systems, Contract conditions
Investment Restrictions, examples are foreign equity restrictions, performance requirements/incentives, Trade balancing
Distribution Restriction, examples are whole restrictions, retail restrictions
Transportation Restriction, examples are restrictive airport regulations, restrictive seaport regulations
Intellectual property rights protection, examples are Copyright, Patent and Trademark
Law enforcement issues, examples are lack of legal infrastructure, inadequate efforts on trade integrity
Negative Impacts of Non-Tariff Measures on Trade
Generally, Non-Tariff Measures (NTMs) are applied for legitimate reasons.
Yet, the question that can be posed is, do NTMs really met the purpose of the WTO in freeing up international trade or have instead been hampering the flow of trade among countries.
As such, the answer to this question is clear that the imposition of most of the NTMs were found to be rather a barrier to trade. Hence, contrary to what was argued in the Doha Round regarding the advantages of adopting trade liberalisation measures that is, NTMs, to enhance trade particularly in developing countries, are now viewed as impediments to trade.
Consequently, there are some specific types of NTMs that directly impact on imports of countries, like the para-tariff measures, variables levies, dumping/countervailing duties (investigation and undertakings), import surcharges and deposits, imports surveillance, non-automatic licenses, some price control measures and voluntary export restraints, these NTMs are viewed as having the pronounced restricting impacts on imports. In addition, it was argued by Messerlin (1988) that countervailing investigations may themselves cause a reduction in imports.
Also, a survey was carried out to spot and understand the negative impact of NTMs and was found that an initial finding of the ongoing survey indicate that NTMs effects varies from countries, for instance, in Burkina Faso 70% of interviewed companies reported that NTMs strongly affect their daily operations, compared to only 24% in Hong Kong (China).
Besides, the survey also put forward from the perspective of an individual company, how NTMs can prove to be barriers to trade, for example, companies may not know about the requirements and the regulations may be so stringent the company cannot abide by them without making significant modification to its production processes or the cost to comply with these measures may be prohibitive, where companies have to test its products in third party country or be forced to show and translate some health certificates which cause delays and expensive compliance processes. Hence, these procedural obstructions include restrictions from administrative burden to time delays to lack of legal protection in home country, export destination and transit countries.
Furthermore, it is analysed by Walkenhorst P. that in April 2000 there were around 1708 business complaints about the non-tariff measures in good sectors. As such, ‘Complaints by EU businesses referred to NTMs in 46 different countries, with about 39% of NTM complaints concerning high-income countries and 61% developing countries. More than 40% of all NTMs were encountered by exporters trying to sell into East Asian and Pacific markets, followed by complaints about market access in Eastern Europe and Central Asia (23%) and North America (14%). Machinery, food products, and chemicals are the sectors in which NTM-complaints are most prevalent. However, the absolute number of complaints is an imperfect measure of importance of NTMs across sectors, as the latter vary in economic size. If the number of complaints is related to sectoral export value, the agriculture and food sectors turn out to be the ones with the largest number of NTM-complaints in relative terms, followed by mining and textile. In other words, exporters of natural resource related products seem relatively frequently confronted with NTMs.’
As such, in China, it was found that application of some NTMs have not proved fruitful to the country. Following this line of thought, it was advanced by Kirsten et al (1996) that, ‘for many foreign companies, the biggest barrier to the China market is not high tariffs as much as NTMs, including licensing requirements, import quotas, and certification requirements. Some 300 NTMs remain, thwarting foreign exporters, though 176 NTMs were phased out on December 31, 1995. Both import licenses and quotas were lifted on engine-equipped motor vehicle chassis, for example. Licensing requirements were removed on vehicle bodies, air conditioners, and copy machines, while import quotas were abolished on certain integrated circuits, alcoholic beverages, chemical products, antibiotics, and photographic films. Extrudation machines and mineral casting devices, too, saw their import controls lifted.’
Furthermore, another constraint of NTMs affecting imports are that most of the time, the import requirements set differ among countries, hence, causing further obstructions for both importers and exporters to deal at international level. Following this line of thought, it can be argued that the differences in import requirements between importing countries affect the competitiveness of exporters, where the latter must have the capacity of complying with the regulations and standards at global level. Yet, differing standards and regulations are very often costly. Hence, below is an illustration of how differing NTMs may hamper trade.
Consequently, NTMs adopted in the Moroccan agricultural exports to EU are shipping sanitary measures, including the control of diseases, agrochemicals and other preservatives. Yet, it is generally argued that most problems are faced by Sanitary and Phytosanitary (SPS) measures which set the Maximum Residual Levels (MRL) of these preservatives to be used while exporting. However, the difficulties of the impediment become apparent when acknowledging that MRL differs among countries and changes from year to year. Additionally, exporters have to provide evidence that the products are according to the MRL specifications. Thus, MRL data should be obtained from certified laboratories, which is expensive. Also, products have to be equally up to the quality standards beyond the countries’ public standards related to shape, colour, surface characteristics and product texture like the firmness and freshness.
On the other hand, certain NTMs are found to be rather broad in nature like Certification, Standards testing, thus, too wide NTMs restrict imports since usually imported products are found to be not in accordance with the level of class established by the countries. Therefore, the question that surfaces is what repercussion the new certification requirements would have on the small-scale producer-exporters in developing countries?
As a consequence, either, they abandon the market or adapt to these regulations, which may lead to a rise in price of the products thereby being less competent to trade. Hence abiding by these stringent rules becomes a complex situation for importers as well as exporters. As such, below is an example of how broad NTMs affect Tunisia.
Here, the main obstacles faced by the Tunisian exporters are the cost and complexity of abiding by the certification and traceability requirements of private and public institutions. As such, the producers are refusing to change their production system to comply with these measures which are in turn increasing prices since the number of producers providing raw materials to exporters are reducing. Also, there is a short of qualified laboratories to analyse SPS requirements, thus, exporters are unable to guarantees their deliveries to European market. Consequently, the negative effects of these NTMs are increasing prices of direct and indirect costs in production and exports from Tunisia and worse, small firms are disappearing to the advantage of bigger companies.
Nevertheless, NTMs are often criticised as a ways of national protection to elude trade liberalisation resulting from decline of tariffsâ€¦ NTMs may be justified under the provisions or the exceptions provided under the various multilateral agreements governing international trade. On the other hand, certain NTMs are not justified under any of these legal provisions are usually termed as non tariff barriers (NTBs). Unjustified NTMs can deform the prices and quantities of goods and services traded at international level. For all exporters and importers, predominantly in developing and least developing countries, such conditions have disproportionably high adverse outcomes on their ability to supply markets; it impacts on their competitiveness and on their ability to actually enter markets.
Moreover, regulations and standards are normally established in the rulings of domestic agri-food production. As such, they have a significant impact on import conditions of these goods. Generally, they address issues on information problems and externalities linked with the societal concerns. Yet, in determining the agri-food trade system, standards and regulations may cause conflicts between importing and exporting countries, as import regulations always impact on exporters’ possibilities to engage in trade.
Furthermore, the use of some NTMs are found to be rather hindering flow of trade due to being too strict, wide allowing countries to set quality level of imports to the highest possible standards, thus, these issues prohibits importations of a number of products, hence, causing significant impacts on trade. As such, below is an example showing how NTMs applied in India are considerably hampering the flow of agricultural imports.
It has been argued that the application of Sanitary and Phytosanitary (SPS) measures have substantive and implementation deficiencies arising from different factors such as, the lack of transparency process for issuing SPS measures, low level of expertise on part of Indian government bureaucracy issuing standards, which may lead to inadvertent consequences like overly broad restrictions or blurred benchmarks and unequal enforcement of SPS standards on domestic and foreign sources. For instance, SPS measures turn to be visibly less restrictive when Indian government determines that market shortages need imports. Due to these drawbacks, the Indian SPS measures create complexity for US exporters in forming consistent and extensive business relationships with Indian customers.
In addition, the level of phytosanitary measures that India enforces on agricultural imports is found to be beyond the generally accepted international standards for those goods. Also, the Indian government does not offer a scientifically based and widely accepted justification for the heightened level established. For example, India has set a strict tolerance limit for the presence of weed seed in wheat shipments. However, the US producers have been unsuccessful in abiding by this rule since economically they cannot reach this limit; thus, they failed to prove to the Indian government that wheat imports meeting the US tolerance limits would cause no harm to Indian agriculture.
Also, adoption of the State Trading NTMs in India can be argued to be discriminatory vis-à-vis the private Indian importers. Hence, trade is distorted when Indian government enhances the preeminent function of State Trading Enterprises (STEs) in agricultural trade, in addition with their ability to advance government objectives, by granting STEs preferential treatment in the tariff rates applicable to their imports in comparison to private sector Indian importer. For example, there can be fifty percent tariff on private sector wheat imports versus zero percent duty on STE wheat imports.
Ultimately, it can be deduced that NTMs which are too broad in nature, stringent and discriminatory may critically obstruct both the imports and exports of product at international level.
Positive Impacts of Non-Tariff Measures on Trade
Conversely, since tariff measures are constantly being cut such as, customs under multilateral and regional agreements, there is now an increasing role of Non-tariff measures.
NTMs do not only negatively impact on trade, but some NTMs are also viewed as being crucial and beneficial to trading. Also, the majority of NTMs aim to protect health (human, plants and animals) and in addition some NTMs may promote and establish trust among trading partners.
Accordingly, NTMs like Sanitary and Phytosanitary (SPS) measures, though, contain some drawbacks as discussed above, but are still very important in promoting sound trading internationally, where defected, low quality products are banned, hence resulting in the enhancement of consumers’ safety. Theses NTMs ensure that the imported goods meet the domestic requirements and enable countries to protect themselves from the imports of noxious and contaminated products.
Furthermore, the Sanitary and Phytosanitary measures allow countries to enforce trade restrictions for health and safety reasons based on scientific risk assessments. As such, following the use of antibiotics in shrimps, countries impose sturdy controls on shrimp’s imports. Hence two methods were applied, whereby some countries such as the EU countries impose stringent equivalence-based imports system where only countries that have set the uniformity of their food safety procedures with European ones can export to the EU. On the other hand, only certified producers who showed the equality of their safety standards and controls with European ones were given the right to export to EU market. Other countries like Japan or Canada adopt a risk analysis method to ensure the food safety of their seafood imports.
Moreover, NTMs like Intellectual Property Rights (IPR) protections are regarded as playing an integral part in the international trade. In this empirical world, use of patents, trademarks and copyrights, geographical indications, industrial designs are of utmost importance in further enhancing trade. Also, its effective use of knowledge contributes greatly in making the national economic prosper.
Consequently, most of NTMs are viewed as impeding trade, yet, country having an adequate and effective Intellectual Property Protection, are instead regarded as a plus to trade at international level. As such, Intellectual Property is on priority list of the Indonesian government, since Indonesia form part among the countries with the weakest IP protection, the government wants to persuade the US, their biggest trading partner that Indonesia has a strong IP protection. The main reason behind enforcing powerful protection on intellectual property by Indonesian government is to avoid tariffs trade that could obstruct its economic growth and to curtail foreign investment. Thus, what can be deduced is that in order to be competitive to trade globally, countries must make provisions for strong IP protection. Hence, it can be argued not all NTMs have adverse effect on trade but there are some like IP protections that rather underpin international trade and also motivate firms to be more involved in research and development projects, since they are secured and receive strong protections.
Also, NTMs can also be argued to be a way of avoiding terrorism acts within countries, for instance, NTMs like import prohibitions or other measures controlling the volume of imports may ban imports of arms, munitions except to army forces. As such, these NTMs play a major role in promoting the security of the countries and its citizens.
Eventually, it can be argued that not all NTMs in all sector hamper trade, instead there are some NTMs that have high contribution in further enhancing the integrity and smoothing trades at global level.
Ways to diminish the negative impact of Non-Tariff Measures on trade
Since, certain NTMs are seriously causing obstruction to trade, one of the solution to evade these impediments are to decrease the number of NTMs acting as barriers to trade. Thus, by removing NTMs most likely to hinder trade, transacting globally will be further boosted and improved.
Hence, according to an economic analysis carried out over the NTMs in EU-US Trade and Investment, it has examined the extent to which NTMs can realistically be reduced (“actionability” of NTMs) on the basis of survey results, views from industry associations and expert opinions.
The main conclusion is that there are substantial economic benefits to be reaped from reducing the trade costs of transatlantic regulatory divergences. The headline figures are as follows:
For the EU, removing all actionable NTMs would translate into an increase in GDP (â‚¬122 billion per year) and exports (+2.1%). Sector-wise EU benefits would come mainly from gains in motor vehicles, chemicals, pharmaceuticals, food and electrical machinery.
€ For the US, benefits from removing actionable NTMs are estimated at â‚¬41 billion per year for GDP and 6.1% for exports. US benefits would mainly accrue to the electrical machinery, chemicals, pharmaceuticals, financial services and insurance sectors.
Moreover, NTMs that are regarded as being too broad like Certification or Standards testing must have a specific acceptable level of quality established globally where all countries have to abide, in this way; countries will be refrained from setting a level that is above the quality set for international trade and thus be prevented from prohibiting imports of products.
In guise of conclusion, it can be argued that non-tariff measures have both positive and negative impact on international trade, where NTMs can be used as tools for consumer protection and regulation of domestic markets but on the other hand, viewed as obstacles to trade. Consequently, the challenge is to apply these measures without imposing barrier to trade, that is, NTMs is crucial for trading as long as trade is not hampered by these measures. Hence, it is clear that more work still need to be done to limit the consequences of NTMs on tradeâ€¦
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