It may be argued that the World Trade Organisation (WTO) has significantly helped to reduce the tariffs applicable on a number of products. Nevertheless, there has been a significant mushrooming of Non-Tariff Measures (NTMs) which are seriously hampering trade. Discuss.
Since its establishment in January 1995, the WTO is committed to abolish trade barriers such as import tariffs in order to promote free international trade and consequently create a level playing field for all nations. According to the WTO, this would help to facilitate and accelerate economic growth and prosperity for all countries around the world (WTO, 2008). A way to reduce barriers to international trade is to reduce import tariffs, which are taxes imposed on products when imported into a country. One of the aims of the WTO behind the reduction of tariffs is to promote economic growth in the under developed countries which mainly export agricultural products in the developed nations.
Tariffs can be reduced in a number of ways and examples include:
Single rate - In this case, tariffs are cut to a single rate for all commodities. In practice, such an approach is adopted in regional free trade agreements where the final tariff rate is usually zero or a very low tariff is applicable for trade within the group.
Flat rate percentage reductions - Here, no matter whether the starting tariffs applicable on products or high or low, there is the same percentage reduction for all products.
Uruguay Round Approach - Negotiations during the 1986-94 Uruguay Round on agriculture resulted in an agreement concerning the reduction in tariffs on agricultural products. To be more accurate, the Uruguay Round produced an arrangement whereby developed countries would cut tariffs on agricultural goods by an average of 36% over 6 years (6% per annum) with minimum of 15% on each product for the period.
Harmonising reductions in tariffs - Such measures are mainly designed to make steeper cuts on higher tariffs. This will bring the final tariffs closer together, thus the concept of "harmonising" the tariffs rates.
It must be noted that such reduction in import tariffs are highly beneficial to third world countries which export mostly agricultural products to developed countries. The agricultural industry being the central component of under developed economies, the imposition of import tariffs on agricultural products by developed economies would have acted as a major barrier to free international trade and affected the whole economy of the third world countries.
However, it is worth noting that despite the reductions in tariffs, several NTMs have mushroomed around the world as forms of disguised protectionism, which are seriously hindering free international trade.
Forms of NTMs
Any charge other than import quotas will fall in the category of NTMs. NTMs can take the form of government regulations and policies which are targeted towards the protection of domestic industries. There exist several types of NTMs and examples include:
Import policy barriers
Anti dumping measures and countervailing duties
Export subsidies and domestic support
Government procurement
Lack of appropriate protection to intellectual property rights
Standards, testing, labelling and certification requirements
Services barriers
Quotas
Import Policy Barriers
One of the most frequently utilised NTMs concerns import bans or restrictions on imports made via import licensing requirements. Although Article XI of the GATT require Member States not to impose any prohibition or restriction on imports other than taxes, duties, amongst others, there exist general exceptions which exist in accordance with Article XX of the GATT which allow restrictions on imports to take place. For example, the banana production industry of Ghana has suffered due to the imposition of unfair tariff and trading policies. As such, Ghanaian producers are required to purchase licenses from European importers which are considerable additions to their cost of production. This results in higher prices of Ghanaian bananas on the European market which makes them become uncompetitive in the global economy.
It is also worth noting that Article XVIII (B) of the GATT permits import restrictions to be maintained for reasons pertaining to Balance of Payment (BOP) problems. Currently, there are seven countries which have maintained their import restrictions on grounds of BOP problems and these are India, Pakistan, Philippines, Nigeria, Bangladesh, Tunisia and Sri Lanka.
Anti dumping measures and countervailing duties
Dumping is the term which describes the practice of selling a product in a foreign country for less than the average cost of making the product. Dumping is also said to occur when a business exports a product at a price lower than the price it normally charges on its own home market. Anti dumping and countervailing measures are permitted under WTO Agreements in particular circumstances where the domestic industry may face serious harm from dumped products and/or subsidised imports.
When effectively used, such protectionist measures can be an effective form of NTM and have a significant impact on the exports of the targeted countries involved in dumping practices. Generally anti-dumping measures mean that the importing country levies high or extra import duty on specific product(s) from the country exporting the good(s) so that it brings the price closer to its normal value or that usually charged in the market of the exporting country.
Article VI of the GATT 1994 allows countries to take remedial measures against any forms of dumping. The 'Anti Dumping Agreement' of the WTO allows nations to take actions against dumping where real harm has been is being done to the local industry. However, countries have to prove that dumping goods is taking place on its territory, calculate the extent of dumping in terms of the difference between the export price and the price of the goods in the exporter's home market, and eventually countries have to show that dumping is causing harm or is threatening to do so to their domestic industries.
It is worth noting that not every anti dumping investigation demonstrates that dumping is actually taking place or that it is harming the domestic industries. The real problem lies in the fact that investigation periods can last up to 18 months and during this period of time the exports from the country investigated severely suffer. Anti dumping measures thus can be a serious constraint to trade.
Export subsidies and domestic support
Export subsidies and domestic support are ways through which the free flow of international trade can be distorted. Governments can help their exporters in two distinct ways, namely:
Service subsidy, which may take the form of trade information, feasibility studies, trade shows, amongst others.
Cash subsidy, for example, discount on imported raw materials, duty free importation of industrial equipment, amongst others.
While export subsidies tend to make the goods relatively cheaper for consumers in the importing country, domestic support on the other hand represent a barrier to have access to the domestic market. In general developing countries do not have the necessary resources to subsidise exports or provide domestic support to local industries. Developed nations like members of the EU are fully able to and have been subsidising their agricultural industry through measures such as export refunds along with production support systems, amongst others.
One concrete example to demonstrate the disruptive effects of export subsidies on international trade involves the EU and the subsidisation of sugar exports. In 2007, the EU was the second largest exporter of sugar in the world, mostly due to its export subsidies on sugar. Sugar farmers from developing economies like Mozambique cannot on a level playing field with the EU on the global sugar market despite lower production costs. This is due to the fact that subsidies provided by the EU artificially lower the world price of sugar. Consequently, export subsidies offered by developed economies seriously hinder economic development in developing nations.
Government procurement
Very often, governments and the organisations they manage are the largest buyers of goods of all types in their respective economies. Governments face the political pressure to privilege domestic suppliers over foreign competitors. Government procurement in favour of domestic firms can act as a non-tariff barrier which hampers free international trade. Japan, for example, makes use of particular purchasing policies in the public sector which are not transparent which leaves doubts concerning potential protectionist measures in favour of domestic suppliers. Examples also include countries such as the United Arab Emirates and Saudi Arabia who adopt "buy-national" policies, thus giving a preference to local businesses in the purchases of the government.
Government procurement can be a serious barrier to free trade because governments protect potentially inefficient firms rather than purchasing their equipment from international firms which may carry out production at a lower cost and sell the same products which the government has bought from the domestic suppliers at lower prices. Government procurement creates distortions in international trade as trade is no longer based on competition and efficient allocation of resources does not take place as trade is no longer founded on the principles of the theory of comparative advantage.
Lack of appropriate protection to intellectual property rights
The lack of adequate protection to intellectual property rights in certain countries can seriously hurt the export of some countries. One example concerns the piracy of Indian movies and music along with computer software which is widely practised in Gulf countries. As a result, the pirated versions being available at a cheaper price, the sale of original Indian versions would greatly suffer as a result of inadequate regulatory framework to protect intellectual property rights.
Standards, testing, labelling and certification requirements
Criteria such as certification requirements, standards, testing, labelling and Primafacie Standards are usually required by countries in order to ensure that quality goods are entering their domestic markets. However, many nations use these "quality criterion" as protectionist measures to favour their local industries. The Agreement on the Application of Sanitary & Phytosanitary Measures (SPM) along with the Agreement on Technical Barriers to Trade (TBT) specifically deal with the trade related measures pertaining to the protection of human, animal or plant life or health, the protection of the environment and to ensure quality of goods.
In the USA, the Consumer Product Safety Commission (CPSC) and the Food and Drug Authority (FDA) are responsible to ensure that good quality products penetrate the domestic market. They thus have the power to recall products which do not adhere to specific standards from the market. Examples include the issue of import alerts concerning Indian fresh and frozen shrimps on grounds of presence of Salmonella and also Indian mangoes due to the presence of fruit flies and weevils (small beetles that feed on plants and plant products).
Services barriers
Examples of services barriers for businesses include the requirement to obtain local registration, to have a specific legal structure, to have a local agent in the host country, the need to meet specific financial criteria, restrictive local employment regulations and discriminatory taxes on cross-border services. Concrete examples include the restrictive visa regime adopted and maintained by the USA which severely restrains the services exports of India and restriction on the issue of specific licences to the foreign professionals in service areas like accounting, architecture, engineering and legal services amongst others in Thailand.
Quotas
Import quotas limit the quantity or value of goods entering a country. In other words, import quotas are fairly straight-forward quantitative limitations on imports and may be expressed as either in individual units imported or as a total value of imports.
Foreign markets entry alternatives
With the prevalence of NTBs in international trade, businesses have to decide how to avoid such barriers which generally makes them uncompetitive in foreign markets. Businesses engaged in international trade have thus to look for ways to enter the foreign markets so that the effects of NTBs on their transactions would be minimal or non-existent. Such alternative approaches are referred to as entry strategies. The choice of an alternative entry strategy would depend on the nature and level of protectionism which are likely to be encountered. Alternative entry strategies include:
Indirect exporting
Licensing
Joint Ventures
Wholly Owned Subsidiaries
Indirect exporting
Indirect exporting generally involves the involvement of a middleman who is responsible to handle the exporting activities. Middlemen, such as export brokers, who have experience in dealing with specific countries in terms of trading, are usually very much aware about the existence of NTBs in particular countries and they are also knowledgeable about whether such trade barriers can be avoided or not, and if so, how. Thus, the use of middlemen for exporting purposes can be an effective means to counter the effects of NTBs in international trade.
Licensing
Licensing refers to the granting of official and legal permission by a licensor to licensee to use intellectual property rights such as patents, trademarks or technology under specific defined conditions, which includes the payment of royalty fees. This particular entry strategy requires very little cash investment by the owner of the intellectual property. Licensing can help in dealing with problems associated with lack of appropriate protection pertaining to intellectual property rights. The reason being that licensing allows consumers to acquire authorised rather than illegal products using the licensor's brand name.
It is evident that licensing may help to counter the effect of a specific NTB but countries with currency restrictions may make the repatriation of royalty earnings difficult and also the licensor may create future competitors in the same markets.
Joint Ventures
Joint ventures allow foreign firms to establish an overseas presence most commonly through equity fusions with businesses from the host countries. In order to be successful, partners in the joint venture should have clearly defined roles and responsibilities and the free rider problem should be avoided. One reason behind the formation of joint ventures as far as international trade is to deal with NTBs such as import restraints and issues pertaining to foreign business ownership.
