What are trade barriers

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The world trade organization (WTO) is a global international organization officially established on the 1st January 1995. From 1986 to 1994, the last and largest General GATT (Agreement on Tariffs and Trade) round which was the Uruguay round formally led to the creation of the WTO. The WTO actually consists of 153 members among whom 117 are from developing countries or separate customs territories. Where GATT dealt with trade in goods, WTO on the other hand, dealt with trade in services and by mean of agreements and negotiations they try to ensure fair and free trading between nations. It is therefore consider as being a "round-table" where governments can negotiate and settle trade dispute faced with each other. The documents signed out of these agreements, provide a legal ground- rules for international trade. As a result, each country would be given the assurance that its exports would be treated fairly and consistently in other countries' market too.

But even though, some countries which creating artificial restrictions/trade barrier are making the ideology of having free and fair movement of goods from one country to another difficult to achieve. Such barriers which are usually imposed by the Government of the importing countries aimed to affect the volume of goods import and export, protect domestic industry form competition, promote research and development activities by providing local market for domestic firms and, maintain favorable balance of trade and payments by restricting importation. These trade barriers can further be categories as tariffs barriers and non tariffs barriers.

Tariffs Barriers

Tariffs which can be defined as being taxes imposed on imports commodities when they cross the national boundaries. This tax import duty is imposed by the import country and controlled through price mechanism. By raising the prices of essential goods and making them costly, their demand, sales and importation are therefore being reduced. Such action provides additional revenue to the government, encouraged research and development activities within the country avoid competition and hence grant protection to domestic firms. High tariffs are usually applied on imports as if high tariffs on exportation goods would make them costly in foreign market and hence reduced their demand and exportation. Tariffs can be further categories base on (1) purpose of taxes and (2) the way taxes are imposed on the importing goods;

Purpose of taxes

Base on this aspect, tariffs are further classified into (1) revenue tariffs which focus on raising Government revenue without protecting domestic industries or obstructing importation rate while the (2) protective tariffs aims to protect the domestic industries.

The way they are levied

To protect domestic industries from foreign competition, high taxes are often applied to specific goods from a particular country. For example, Specific tariffs imposed tax per unit base on the characteristics of the merchandise such the weight, volume, length quality. Another method of taxing is the ad valorem tariffs which focus on the percentage value of import such as cost of the product or cost mentioned in the invoice.

Moreover, anti-dumpies and counteracting duties which other types of tariffs which aimed to protect domestic industries form competitions. Anti-dumpies focus on capturing greater market share by selling large quantity of their product at a relatively low price which is not proportionate to their cost of production. In order to counter this unfair competition, Government of those importing countries imposed very high rate to cover the disparity between the export price and normal price or market price. Counteracting duties on the other hand, changed high rate on goods imported from countries whose manufacturer exporter paid subsidy as an incentive for export.

In addition to those duties stated above, importing countries can further manipulate the duty by charging other importation taxes such as import levy which aimed to raise price equally on imports as well as those products manufactured in the domestic country. Temporary import surcharge or licensing fees, stamp duty, sanitary inspection fees, deposits of certain types etc…, are other duties charged to countries base on the importance of the products.

Tariff agreement

In order to sort out this trade barrier cause by manipulation of tariffs on import goods, the WTO after eight successive rounds of the WTO and GATT, came up with the tariffs agreement. This agreement aimed is to regulate the import tariff of goods by focusing on the import taxes on commodities into a country or region. Local producers of goods now benefits from price advantage for import competing goods while taxes on manufacturing goods have been reduced, export subsidies have practically disappeared while quotas have been converted into two-tier tariff schemes where a low tariff is set for the imports of a fixed quantity and a higher one for any import exceeding the initial quantity.

With the implementation of the tariff agreement, developed countries have cut 40% of their tariff on industrial product from an average of 6.3% to 3.8% over a period of 5 years. While the value of imported industrial products which benefit from duty-free treatment should jump from 20% to 40%.

The aim of such agreement is to reduce the high duty rates such that quantity of imports into developed countries with a tariffs rate of more than 15% should decline from 7% to 5%. The portion of developing countries exports whose tariffs, is above 15% in industrial countries should fall from 9% to 5%.

Moreover, now tariff on all agricultural products are bound, meaning theses products tariffs should not be increase above the listed rates. Through a process known as tariffication, those import restriction that did not make part of tariffs such as quotas are converted to tariffs. Through this process it ensures that quantities imported before the agreement could be imported while addition quantity would be changed duty rates.

With this agreement, 92% of the WTO agreed on the fact that import duties and other charges should be eliminate by applying their respective countries commitments equally to members and non-members of the WTO.

Non- tariffs barriers

In order to further reduced and rationalized the tariff structure for trade, as per GATT and WTO, every member should accord MFN treatment to other member countries while importing goods from them. The reason for such practices is to protect those countries form unfair competition and give them an opportunity to develop their domestic industries and trade. With the opportunity and fair change of promoting their industries, more and more countries are adopting the non-tariff measures also known as the non-tariff barriers to regulate their imports.

Apart from those NTB mentioned in figure 1, there are other non-tariff barriers such as:

Product standards

Domestic content requirements

Product standards

In order to enhance society's well-being by avoiding unsafe conditions and environmental degradation, laws and regulation pertaining to product quality in name of health, sanitation, safety and the environment are enforced. But even though these standards aimed to protect the consumer, society and environment, it can also act as a barrier to trade. In order to protect the local producers, Government writes rules which fit local products while keep higher standards for imported products such as making the certification and testing procedures more slowly, costly and even uncertain for foreign products. The US Government for example, in the past found hidden health hazards in the way beef cattle were raised in Argentina while at that time, the EU have banned the importation of beef cattle that have received growth hormones by claiming it dangers for health. But since scientific evidence confirmed that, beef from cattle which have received growth hormones represent no risk to human health, confirm that such act was done with the aim to protect the European beef producers.

These standards do not raise tariff or tax revenues of the importing countries, as these rules make much use of Government resources. In fact, these rules only focus on the well being of people and environment but some countries use these rules as trade barrier in order to promote their local industries.

Domestic content requirement

The domestic content requirement request that products produced and sold in a country should have a minimum level of domestic production such as wages paid to local workers or resources produce in the host country. By so doing, importation on those goods which are not in line with the contents rules would be restricted. For example, in Malaysia, local auto manufacturers are forced to use local resources for manufacturing. Moreover, in Philippines, the Government stipulates that retailers should source 30% of their inventory in the country.

Similarly like product standards, domestic content do not generate revenue, but by enforcing these requirement the Government ensured that the local industries are protected especially in case when the locals products have low demand or costly or produce.