International Business: Competing in a Global Marketplace
relations between the importing and the exporting countries (strigler, 2011). This paper will be looking at the various tariffs and the non tariff barriers.
A tariff can simply be defined as a duty or a tax that is placed on an imported good by a domestic country. The tariff, in the same manner as the sales tax, is levied as a percentage of the value of the good/goods. The only difference between a tariff and the sales tax is that tariffs are different for every good and they only apply to the imported goods not the domestically produced ones. Use of tariff by government, could only be a popular and old fashioned way of collecting revenues from international economic activities and business. There are four main reasons why governments impose tariffs, namely:
- To protect infant industries from foreign competition
- To protect dumping by the foreign governments into a domestic country’s domestic industry. Dumping comes in when a foreign company charges a price of their product that is below the cost for which it sells in their own domestic markets. This occurs when a foreign government wishes to exhaust the below standard products from their markets.
- Protect inefficient and aging industries from foreign completion
- For raising revenues. Several developing nations impose tariff a form of raising their revenues.
- Forms of tariff
- Import tariff
This is the most common and popular form of tariff. This is a type of tariff that is levied by the government on the commodities that are brought into the country from abroad. This is mostly aimed at discouraging the local consumers from buying the shipped in product and promote their locally produced goods and services. It is the mother government that has the right to determine the products that the import tariff will be levied on and by how much. There are two types of tariff that are employed by the government; the specific and the ad valorem. The type that is levied is the one that determine the tariff value that is to be levied on any product.
This is an infrequent form of tariff that is levied to the companies that export outside the country or abroad. An export tariff is the tax that is placed on goods or products that are exported from the country. The tariffs are placed to create economic barriers to trade by government. They raise the overall prices of products and hence limit their sale and production. On the other hand, export tariffs are placed to increase the cost to sell products abroad. As these tariffs are known to hurt the domestic business, these forms of tariffs are very unpopular. These are applied by the developing countries to protect the developed industries from buying goods at a very low cost and then raise them to gain a lot of profits. At the same time, they are potential revenue for the developing countries.
The revenue tariff
These are forms of tariff that are made to increase government funds. For instance, a country that does not produce oil can place a tariff on importation of bananas and this raises the government revenue. The main reason for revenue tariff is to raise revenues.
Types of tariffs
Tariff can be divided according to their characteristics into three main types
- Specific tariff
This is a fixed amount of money that is levied per unit of a product or good. This is a tax that is levied on imported goods and they are the same in all the products of the same kind. The main advantage of this type of tariff is that it is simple to control and can also impact on some low cost goods. On the other hand, the main drawback of this typ0e of tariff is that it cannot be changed no matter how the quantity of the goods changes.
- Ad valorem tariff
This is the amount of money that is levied on a certain percentage of a good’s value. This could be based either on the country’s area of destination, or the value of the goods at the port of the country of origin. The main advantage of this type of tariff is that it follows the fair and reasonable tariff principle; with the main drawback being that the process of tariff calculation is tedious and complicated.
- The compound tariff
This type of tariff simply means the combination of the other two types i.e the specific and ad valorem tariff. These types of tariffs are levied to the manufactured products that embody raw materials that are also subject to tariffs. In this case, the specific type of tariff neutralizes the cost disadvantage of the domestic manufactures which results from the tariff protection that are granted to the domestic suppliers of the raw materials, with the ad valorem portion of the tariff granting protection to the industry of the finished goods.
Apart from the tariff, there are other countries that utilize other methods to regulate the international trade and protect their domestic industries. These methods are known as the non- tariff barriers. These are methods applied by government to restrict importation but are not in the usual form of tariffs. The main characteristics of these forms of tariff are that they are:
The non- tariff barriers (NTBs) points to the restrictions resulting from conditions, prohibitions and other specific market requirements that hinder importation or product explorations. The NTBs also include improper or unjustified applications of non tariff measures like sanitary and phytosanitary (SPS) measures along with other technical barriers to trade (TBT). The non tariff barriers result from various measures that are taken by the authorities in the form of laws, conditions, regulations, restrictions, the private sector practices or other prohibitions that protect the domestic industries from completion from the foreign companies.
There are three main forms of non- tariff barriers. These include:
- Import quotas
- Voluntary export restraints
- The import quota
This is a type of trade restriction by authority that sets a physical limit of goods that can be shipped into any country’s borders in a given time period (Arthur and Sheffrin, 2013). There are three main forms of import quotas: import licenses, the selective imports and the global quota. The import license is a document that is issued by the authorities authorizing a certain amount of products to be shipped into the country. The global quota is a quota that is set by a country to control the total imports of products from abroad. This type of barrier restricts the quantity of any country’s import from the foreign countries every year and only restricts specific quantity of goods. the selective quotas came from the global quotas to avoid the problems that comes with the global quotas system.
The voluntary export restraints (VER)
The voluntary export restraint places a limit on the quantity of products that can be exported outside the country in a given period of time. The VER is based on two conditions. The first is targeted on protecting the domestic producers so as to help them reduce international market completion. Secondly, a country being an import country has to negotiate with the exporting country on the matter of market sharing then the export country can limit the quantity of goods that are exported into that country (Rosendorﬀ, 2006).
This is the assistance that is paid by the government to the business or an economic sector. Most of the subsidies are extended to the producers or distributors as subventions into the industry so as to prevent a decline in that industry or also an increase in the prices of their products or to encourage them hire more laborers. The government may also employ subsidies to help a certain company to become more competitive. The first type of subsidies is referred to as the domestic subsidy used for imports. Subsidies can also reduce the production cost and eventually cause increase in supply of that product. This type is the export subsidy which targets at reducing the production cost to increase the quantity exported.
Similarities between the tariff and non tariff barriersThey both have the same aim of protecting the infant domestic industries, regulating and adjusting the industrial structures, balancing the international payments and also increasing the government revenues. By applying both the tariff and non tariff barriers, the countries are able to develop their economies.
Differences between tariff and non tariff barriersThe non tariff barriers are said to be more flexible and relative than the tariff barriers. In setting up the regulations, the tariff regulations are more complicated to set up. Also, the non- tariff barriers are more effective for import restrictions than the tariffs. The non- tariff barriers are said to be more discriminative and imperceptible than the tariffs. In case of the stability, the tariff regulation laws are more tangible and stable. The non- tariff regulations are in variety and can be modified at a specific time for specific reasons but it is very hard to modify the tariff laws.
When a foreign country enters a border and sell their products at a very low price, people see this as an advantage because they can easily acquire these products. Undermining the fact that if this product was also produced or manufactured in the country, then the home country not only loses the revenues from the sale of that product, but can also produce economic impacts that can run for years and more deeper. The companies will no longer have demand to produce the same product and will also cut on their employees. To eliminate the occurrence of such situations, the tariff and non-tariff barriers are utilized.
Both of these two, the tariff and the non- tariff barriers have great influence on the international trade. Usages of both these barriers strain both the world economic growth and the international trade. The non- tariff barriers can be termed as the new form of protection with the tariff being the old fashioned form.
Even though both these tariff and non- tariff barrier help protect the infant industries and raise revenues for the government, they are on daily basis hurting the world economy. When no tariff is placed by any country on the imported goods, it is called free trade. Free trade 9is considered to bring higher economic growth potentials. There other types of economist who believe that removal of the tariff will be permitting free trade that will in the other hand force the nations to depend in the global economy rather than increasing the stability of the domestic markets.
It was just recently when almost all the world countries joined the world trade, the countries should be cautious on this since a change in any country’s trade policy triggers a chain reaction in the global economy. It is very vital for a country to know and plan how to arrange the tariff and non- tariff policies and use them wisely.
Rosendorﬀ, B.P. (2006), “Voluntary export restraints, antidumping procedure and domes-tic politics”, American Economic Review, 86, 3, 544-61.
Stigler, G. J. (2011), “The theory of economic regulation”, Bell Journal of Economics, 2, 3-21.
Sullivan, Arthur & Sheffrin, Steven M. (2013). Economics: Principles in action. Pearson Prentice Hall.
Hill (2004). International Business: Competing in a Global Marketplace. 5th ed. New York: McGraw-Hill.