Why trade barriers need to be reduced

Why trade barriers need to be reduced Over the last thirty years, the environment in which international business operates has become subject to the forces of globalisation and increasing world integration. One might even say that globalisation is the buzzword of economics today. Consequently, to have the world as one, the need to reduce trade barriers between countries arises. To support this view, the WTOs Doha Development Agenda (also known as the Doha Round) states that the non-agricultural market access (NAMA) negotiating groups mandate is to reduce, or as appropriate, eliminate tariffs, including the reduction or elimination of tariff peaks, high tariffs, and tariff escalation, as well as non-tariff barriers, in particular on products of export interest to developing countries. The economic importance of non-tariff measures (NTMs) has thus, become the main concern of many countries around the world. Moreovever, with the steady decrease in worldwide tariffs accomplished in the various rounds of multilateral trade negotiations over the past several decades, the attention of both policy-makers and economists has turned to the role played by non-tariff methods of protection. Especially for the purpose of negotiations, it is important that the impacts of these NTMs be quantified. Yet this has proven difficult. Variation across countries in product prices is due to many factors of which NTMS are just one. In addition, there are many types of NTMs namely quotas, non-automatic licensing, bans, prior authorization for protection of human health, local content requirements, among others which defy the development of a simple uniform method to convert the effect of these quantity controls into tariff-equivalents. However, the World Trade Organisation (WTO) which is an international body with the purpose of promoting free trade by persuading countries to abolish import tariffs and other barriers, has played an important role in the setting up of the non-tariff measures. However, the mushrooming of non-tariff measures globally, may also have adverse effects on the economy of a country and the government has to take appropriate actions to protect trade. 1.0 World Trade Organisation 1.1 What is the WTO? The WTO is the only global international organisation dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters and importers conduct their business, while allowing governments to meet social and environmental objectives. The systems overriding purpose is to help trade flow as freely as possible which partly means removing obstacles. 1.2 Brief History of the WTO The World Trade Organisation became operational in 1995. One of the youngest of the international organisations, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT) established after World War II. GATT and the WTO have helped to create a strong and prosperous trading system contributing to unprecedented growth. The exceptional growth in world trade during the past 50 years is as follows: Merchandise exports grew on average by 6% annually and total trade has increased 22 times from 1950 till 2000. The WTO developed after several rounds of negotiations under GATT. The first rounds dealt mainly with tariff reductions but later, negotiations included other areas such as anti-dumping and non-tariff measures. The last round which led to the WTOs creation was the Uruguay Round. The following table illustrates the different round which took place and the issues which were discussed. 1.3 Functions of the WTO The WTO can be viewed from different angles. Apart from being an organisation for trade liberalisation, it is a forum for governments to negotiate trade agreements. The WTO is also a place for settlement of trade disputes which is rules-based. Hence, the main functions of the WTO are described below: 1.3.1 Administering WTO trade agreements 1.3.2 Forum for trade negotiations The core activity of the WTO is to negotiate between the members on how to decrease trade barriers worldwide. Thus, the WTO provides the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the agreements and a framework for the implementation of the results of such negotiations, as may be decided by the Ministerial Conference. However, it is must be note that although the main objectives of the WTO is to reduce trade barriers between countries and liberalise trade, the WTO will maintain the trade barriers in circumstances like protection of consumers and prevention of diseases. 1.3.3 Handling trade disputes Handling trade disputes is the third important aspect of the work of the WTO. Even trade agreements which have been meticulously negotiated may create conflicts between governments. Hence, the best way to settle these differences is through some neutral procedures based upon a legal framework. This is the reason for which WTO agreements exist. 1.3.4 Monitoring trade policies The WTO agreements are negotiated and signed by the worlds trading nations. These documents provide the legal aspects of international trading. They are mainly contracts, binding governments to keep their trade policies within the agreed limits. Although these agreements are negotiated and signed by governments, the aim is to help producers of goods and services, exporters, and importers conduct their business while also allowing governments to meet social and environmental objectives. The main purpose of this system is to help easy flow of trade and prevent side effects. This is important so as to provide a better economic development of a country. Moreover, these rules need to be transparent and predictable. 1.3.5 Technical assistance and training for developing countries The WTO provides guidance to countries on complex issues. It also provides support and training to developing countries in order to help them to fully integrate the system. 1.3.6 Cooperation with other international organisations Along with other international firms and organiations, the WTO is constantly looking for new measures about how to reduce tariffs and promote equal trading rights among all nations. 2.0 Non-tariff measures It is widely recognised that non-tariff measures (NTMs) are more economically harmful to the world trading system and individual countries than tariffs (Bosworth, 1999). While tariffs have been reduced through multilateral trade negotiations, NTMs have emerged as alternative measures to protect domestic industries, particularly in the 1970s and 1980s in response to the drastic tariff reductions in developed countries. Tariff reduction or elimination would become no doubt worthless if alternative trade impeding measures prevent trade liberalisation and deteriorate social welfare. In fact, the WTO is actively identifying and analysing non-tariff measures (NTMs) which are the less apparent restrictions on the free flow of trade. Although the identification and analysis of NTMs has significantly evolved, understanding their nature and trade effects remains a challenge for analysts and policymakers. Moreover, it is important to highlight that the OECD has engaged itself to use the available information in trying to increase free flow trade and implement policies in reducing tariff measures. 2.1 Definition of NTMs Despite increasing concerns on NTM issues becoming a serious impediment to international trade, there is no consensus on a definition of the explicit range of NTMs. NTMs are composed of whichever measures other than tariffs that distort international trade, regardless of whether they are border or internal types of measures. NTMs are defined as policy measures, other than ordinary customs tariffs, that can potentially have an economic effect on international trade in goods, changing quantities traded, or prices or both. The term NTM has been widely used in the GATT and the UNCTAD. Baldwin (1970) defines NTMs as any measure (public or private) that causes internationally traded goods and services, or resources devoted to the production of these goods and services, to be allocated in such a way as to reduce potential real world income. The East African Communitys working definition of NTMs is quantitative restrictions and specific limitations that act as obstacles to trade (World Bank 2008: iii). NTM definitions are generally residually defined: any trade barrier that is not a tariff is a non-tariff barrier. This creates two problems: the rationale for trade barriers is not discussed; and the number of NTMs becomes very high and their nature diverse.Based upon Laird and Vossenaar (1991), NTMs are classified according to the instant impact of the measure. The measures identified are listed below: Measures to control the volume of imports. Measures to control the price of imported goods. Monitoring measures, for example price and volume investigations and surveillance. Production and export measures. Technical barriers. NTMs may serve legitimate social objectives or they may be instruments of protectionism. These two options may even be mixed as a NTM may be designed to serve a legitimate objective, but vested interest may influence to policy process to affect either the design or the implementation of the NTM to their advantage. Import quotas function much like tariffs and are an example of an illegitimate NTM. Food safety standards are an example of a potentially legitimate NTM. The standards are set to safeguard public health and if that is their true function they are legitimate. They may, however, be misused, for instance, by requiring costly test procedures for imports. In that case, they are illegitimate and should be either removed or redesigned or be implemented in a non-discriminatory way. 2.2 Non-tariff measures in WTO trade policies reviews Regulations and other non-tariff barriers are rapidly overtaking tariffs as the main obstacle to trade. The WTO has a unique instrument that could be used to shed much needed light on these measures. The WTO secretariats trade policy reviews (TPRs) contain long sections on the tariffs, subsidies and anti-dumping duties in place in the country under scrutiny. Dealing with these instruments is a gratifying since it is relatively easy to calculate average tariffs, add up subsidies and count anti-dumping measures. Any protectionist intent or harmful effects for the economy are immediately understood by most readers. The WTOs TPRs give short shrift to regulatory trade barriers. Their treatment is generally short, superficial and unsystematic. This take-it-easy approach is becoming increasingly problematic. Tariffs and subsidies are on a long-term downward trajectory (despite the current crisis), whereas non-trade regulation with serious effects on trade is abounding. It is time for the TPRs address this challenge. A starting point would be a well-organised and comprehensive overview of the regulations in place and future legislative intentions. In order to permit comparison across time and countries, this should be complemented with such quantitative and standardised descriptions of regulatory barriers as can be assembled at reasonable cost. If reliable analysis of trade and welfare effects of regulatory barriers is available, it should also be included in the TPRs. The most important aspect, however, should be a thorough and critical examination of policy-making processes. TPRs should report on a list of key policy-making characteristics and compare them to best practice standards. The reviews should, for instance, offer a clear description of how countries arrive at sanitary and phytosanitary (SPS) measures. This could be done by focusing on the procedural provisions that WTO Members take to implement their obligations under the SPS Agreement. In sum, TPRs could be an important tool for tackling excessive trade barriers arising from non-tariff measures without having to go through dispute settlement. It could harness the power of transparency triggering international and domestic pressure to remove unjustifiable barriers and to improve decision-making procedures so that inappropriate measures are not taken in the first place. But this would require giving more authority and resources to the WTO secretariat. Ideally, TPRs on non-tariff measures would be published as a separate report. If the WTO addresses the transparency challenge, it can facilitate unilateral liberalisation and prepare a better starting ground for future multilateral negotiations. While enhanced treatment of non-tariff measures needs special attention, a broader change is required. TPRs should be transformed from a diplomatic exercise in Geneva into a transparency instrument that involves the stakeholders in the country under review. This implies that the process of writing reviews should become open to public scrutiny and allow for improved stakeholder participation. Such changes would facilitate greater analytical depth and critical rigour, and they would instil a sense of domestic ownership. A further step would be to present and discuss the TPRs in the country under review. Success with this enabling long-term agenda could give meaning and energy to the WTO. It might even go some way in compensating for the damage to the prestige of the WTO resulting from the Doha quagmire. 3.0 Classification of Non-Tariffs measures There are several types of non-tariff measures imposed by trading countries. According to the typology of NTMs drawn up by the United Nations Conference on Trade and Development (UNCTAD), these include non-tariff charges, quantitative restrictions, government participation in trade and similar restrictive policies, customs procedures and administrative policies, and finally, technical standards (UNCTAD 1994). These measures increase the cost of production for companies serving in foreign markets, raising entry barriers with higher up-front costs and diminishing the ability of firms to compete in the process. The costs depend on the stringency of measures adopted, the required speed of implementation, the nature of the supply chain and the technical measures already in place in the exporters domestic market (OECD 2001). Thus, middle-income developing countries that already have relatively stringent technical and health standards, for example, might not experience a very high cost of adjustment vis-Ã  -vis the NTMs adopted in developed export markets. Studies that examine the extent of NTM application in different countries often employ a classification system to distinguish among the myriad measures. One classification is the UNCTADs Coding System of Trade Control Measures. This system segregates NTMs into: price control measures; finance measures; automatic licensing measures; quantity control measures; monopolistic measures; and technical measures. Sanitary and phytosanitary standards (SPS), as well as technical barriers to trade (TBT), fall under the last group (technical measures), and are often found under the subcategories on product characteristics requirements and testing, and inspection and quarantine requirements. The World Trade Organization (WTO), for its part, maintains the Negotiating Group on Market Access for Non-agricultural Products (NAMA) Inventory of Non-tariff Measures. This list groups NTMs into: government participation in trade and restrictive practices tolerated by the government; customs and administrative entry procedures; technical barriers to trade; sanitary and phytosanitary measures; specific limitations; and charges on imports. The final source for the core NTMs Database is the World Trade Organizations TPR. Measures are compiled from those mentioned in the Trade Policies and Practices by Measure section of the TPR. Within this section, most nontariff measures are summarised in the introduction followed by a more detailed description of the types of measures and the products affected. Donnelly and Manifold (2006) examined the United States Trade Representatives National Trade Estimate Report on Foreign Trade Barriers, the European Unions Market Access Database, and the WTOs Trade Policy Reviews to compile a list of non-tariff measures reported by 53 countries. Because these three sources do not use a standard classification system, the authors made their own list of 15 categories. These are: anticompetitive practices/competition policy; intellectual property rights; corruption; investment-related measures; customs procedures; sanitary and phytosanitary measures; export-related measures; services; standards, testing, certification and labeling; government procurement; import licensing; state-trading; import prohibitions; taxes; and import quotas. 3.1 Analysis of the NTMs 3.1.1 Anticompetitive practices/competition policy These measures allocate exclusive or special preferences or privileges to one or more limited group of economic operators. Hence, certain agencies may benefits from the exclusive importation of a range of products. An example will be the importation of salt and tobacco which are reserved for the respective state trading companies. Another example is that crude petroleum is imported exclusively be the government. Moreover, for some products, the imported need to transact with the national service as some product need to insured by the government and it should also require the use of national transport like ships, etc. 3.1.2 Measures to increase price of imports Measures used to implement the control of prices of imported articles in order to support the domestic price of certain products when the import price of these goods are lower; establish the domestic price of certain products because of price fluctuation in domestic markets, or price instability in a foreign market; and counteract the damage resulting from the occurrence of unfair foreign trade practices. It includes the use of reference price mechanisms, variable levies, antidumping duties and countervailing measures. Tariff-type measures such as tariff quotas and seasonal tariffs also are usually intended to increase import prices under given circumstances. Voluntary export price restraints fall under this broad category of intent. Important components under this heading are mainly: Administrative pricing Voluntary export price restraints Variable charges Antidumping measures Countervailing measures Safeguard duties Seasonal duties 3.1.3 Import prohibitions Quantity control measures are aimed at restraining the quantity of goods that can be imported, regardless of whether they come from different sources or one specific supplier. These measures can take the form of restrictive licensing, fixing of a predetermined quota or through prohibitions The export restraint agreements consist of voluntary export restraints. This mainly covers the measure employed for the administration of bilateral agreements under the Multi- Fibre Arrangement and, more recently, the WTO Agreement on Textiles and Clothing and it also promotes an Orderly Marketing Agreements. An import licence is not granted automatically. The licence may either be issued on a discretionary basis or may require specific criteria to be met before it is granted. The uses of the products need also to be specified. E.g. Licence to import steel is granted only if it is used for the construction of a bridge. Non economic licences can also be granted for religious, moral, cultural or even political reasons. E.g. Imports of alcoholic beverages are permitted only by hotels and restaurants. A quota is a restriction of importation of specified products through the setting of a maximum quantity or value authorized for import. We have different types of quotas; Global quota Global Quotas are established on the basis of the total quantity or value of imports of specific products. It is classified in 2 sub section; i.e. Unallocated quotas which uses the system of fist come first serve (e.g. Imports of wheat is subject to a maximum limit of 20 million tons per year from any country) and Quotas allocated to exporting countries whereby the quotas are pre-allocated among exporters (e.g. Imports of wheat is subject to a maximum limit of 20 million tons per year allocated to exporting countries according to the average export performance of the past three years). Bilateral quotas Bilateral quotas are for a specific exporting country. E.g. a maximum of 10 million tons of sugar may be imported from a certain Country. Seasonal quotas Seasonal quotas are established for a given period of the year, usually set for certain agricultural goods when domestic harvest is in abundance. An example will be quota for import of strawberries is established for imports from March to June each year. Quotas linked with purchase of local goods It is the percentages bought by the local importer. Quotas for non-economic reasons Non economic quotas enclose religious, moral or cultural and political aspects of the quota. Tariff Rate Quotas It is a system of multiple tariff rates applicable to a same product: the lower rates apply up to a certain value or volume of imports, and the higher rates are charged on imports which exceed this amount. Quotas linked with domestic production Compulsory linkage of imports (of materials or parts) with local production Example: Import of coal is limited to the amount used in the previous year in the production of electricity. Other criteria like prohibition, suspension and different types agreement of certain products are also included under this heading. 3.1.4 Taxes other than customs tariff Tax Measures, other than tariffs measures that increase the cost of imports in a similar manner, i.e. by fixed percentage or by a fixed amount. Customs Surcharges, Service charges like (Custom inspection, processing and servicing fees and Merchandise handling or storing fees), and additional taxes are the different types of tax that a certain type of products need to abide. 3.1.5 Finance measures Financial measures are intended to regulate the access to and cost of foreign exchange for imports and define the terms of payment. They can also contribute to increase import cost just like tariff measure. Advance payment whereby a sum of money is paid at the time the deal has been sealed and multiple exchange rate falls under this category. 3.1.6 Trade-related investment measures This section can be divided into Local content measures and trade balancing measures. Local content measures Requirement to use certain minimum levels of locally made component, restricting the level of imported components. E.g. Imports of clothing is allowed only if more than 50% of the materials used are originating from the importing country. Trade balancing measures Measures limiting the purchase or use of imported products by an enterprise to an amount related to the volume or value of local products that it exports. E.g. A company may import materials and other products only up to 80% of its export earning of the previous year. 3.1.7 Export related measures Subsidies may be directly applied to output or value added, or they may be indirectly applied, i.e. paid to material or other inputs into the production process. They may arise from payments or the non-collection of taxes that would otherwise be due. Restrictions by mean of taxes or prohibitions may also be imposed on production or exports. 4.0 Consequences of NTMs 4.1 Problems caused by the mushrooming of NTMs Bora (2003) identified three main consequences of the mushrooming the NTMs. The overall level of trade is lower than it should have been. Internationally prices are not at the levels dictated by the law of one price. The elasticity of trade flows to price changes is dampened. The first two points are basic to the economists rationale for trade, namely increasing efficiency. The last point, namely the dampened responsiveness of trade flows to price changes, is of major interest. Three issues have been identified and there are: The first issue is that, our global economy today has external imbalances of unprecedented size in absolute terms. The preferred means to resolve these imbalances is through exchange rate flexibility. At the same time, it is commonly observed that exchange rates tend to overshoot as the adjustment process unfolds. A dampening of trade elasticities would logically work to slow or weaken the adjustment of external imbalances. Accordingly, imbalances might persist for longer periods and potentially reach larger dimensions while the exchange rate swings needed to correct those imbalances would be of even greater amplitude. Turning the argument around, increasing the responsiveness of trade flows to prices would cause more rapid external adjustment of imbalances to exchange rate corrections and thus reduce the chance of large imbalances arising in the first place. Without going so far as to make judgments concerning the quantitative significance of NTMs in the current problems of global a djustment, a proliferation of such measures might well be a contributing factor. Second, a slower response of trade flows to prices is effectively the same as a reduction in similarity of domestic and foreign goods and services. That is, there is an implicit reduction of the cross-price elasticity of imports vis-Ã  -vis domestically produced goods. In turn, this means that price competition from imports is lower than it otherwise would be. NTMs that reduce the elasticity of imports thus not only convey protection to domestic producers from imports, they create increased monopolistic pricing power domestically, with implications for domestic policy. For example, in response to trade liberalization, governments appear to have been willing to see greater domestic industrial consolidation in the belief this would promote export competitiveness, implicitly counting on competition in the domestic market being provided by trade. But if proliferating NTMs reduce the competition flowing from trade, we get the worst of all worlds which are limited domestic competition and ineffective trade competition. This is perhaps one of the factors prompting civil society response to globalization which targets growing corporate power. The third issue is that the gains from trade liberalization derive from the responsiveness of imports to changes in relative prices through tariff reductions, a dampened price response will lead to disappointing results from trade liberalization compared to expectations which are calibrated according to assumed stronger responses. 4.2 Consequence of UNCTAD and WTO decisions on NTMs It is inevitable that there is a certain arbitrariness in such a classification. For example, most measures, including technical barriers, have price and quantity effects. A glossary of individual non-tariff measures, derived from Laird and Yeats (1990), and based on the above five broad categories of NTMs. OECD (1994), dealing only with agriculture, lists some 150 measures or bodies administering country-specific schemes. In the UNCTAD classification these would fall within the more limited, but more general, list of individual measures, since many are simply national descriptions for a widely used basic measure. Typically, the objectives or motives for using NTMs range from the long-term desire to promote certain social and economic objectives, including broad economic, industrial or regional development, to shorter term purposes such as balance of payments (BOP) support or action to protect a specific sector from import surges or from dumped or subsidized imports. Price or volume control measures or subsidies have been used In any type of liberalization simulation, it may be important to look realistically at the likelihood of such measures being removed. It is unlikely that Governments will remove permanent controls on technical barriers to trade or on trade in arms, drugs, pornography and so forth, although technical barriers may become more harmonized. However, support for industrial development can be achieved in more open economies supported by improved macroeconomic management and realistic exchange rates. Furthermore, Governments seem attached to support for specific sectors (sometimes in key political constituencies) by means of hidden subsidies through government procurement and technology development (e.g. aircraft), but so far international disciplines on the use of such measures remain relatively weak. As a consequence, even after the Uruguay Round, there are still important peaks in sectoral protection in most countries, sometimes in the same sector, for example textiles and clothing. It is important to realize that GATT (including GATT 1994, negotiated in the Uruguay Round) does not ban the use of all NTMs. Laird and Vossenaar (1991) argue that after the Preamble and the first three articles of the GATT, which deal with the overall objectives of GATT, most-favoured-nation (MFN) treatment, tariff reductions and national treatment, one enters the realm of exceptions and sets of rules which deal at least as much with how and when protection may be imposed, especially by means of non-tariff measures, as they do with liberalization. The Tokyo Round and Uruguay Round Agreements are a further extension of this idea, although the Uruguay Round results should see a reduction in the use of some important NTMs. For example, ERAs, the MFA, export subsidies and farm production support. 4.3 NTM problems faced by Indonesian Exporters Indonesia may face NTM problems with countries like US, Japan and European countries, which are their main destination for trading. The products selected will be: Agricultural product (mainly palm oil and fisheries) Textile and garment product Wood product (mainly plywood) Electronic (parts) Exporting to the US Footwear and garment product, Furniture Parts thereof; Electronics and Parts and Natural Rubber Latex; among other are the most common commodities exported to the US. However the Indonasian exporters have been facing major problem due to the non tariff measure. In 2002, the US restricted the import of shrimps as the argued that not the proper method of harvesting was used and the sanction was imposed against the background of sea turtle conservation and shrimp import. In the year 2004, Several Asian countries shrimp commodities had been charged with US antidumping regulation. In steel and rubber products, the US government to collect antidumping fine from foreign competitors and disburse them to the affected US firms. This was protested by Indonesia and other countries in WTO panel meeting in 2002. Indonesia assumed that such trade policy