Non-Tariff Barriers to Trade

There are two categories of nontariff barriers to trade: direct price influences and quantity controls. Direct price influences are similar to tariffs in that they raise the prices of goods in order to limit trade. Subsidies are perhaps the most well-known type of direct price influence. Subsidies are used to protect domestic industries and keep them competitive. The government makes a direct payment to their domestic companies to give them assistance for selling abroad. Countries also offer their domestic industries tools such as market information and foreign contacts. Aid and loans are another form of direct price influence. This occurs when a government gives aid to another country, usually in the form of tied aid, which requires the country to spend the funds in the donor country. A third form of direct price influence is customs valuation. This occurs when customs agents are instructed to use discretionary power to value goods too high, which may require them to pay a higher ad valorem tariff and increase overall price.

The most common quantity control used is the quota. Import quotas prohibit the quantity of a product that can be imported in a given year. This puts a ceiling on the supply of foreign made products, and therefore restricts trade. The voluntary export restraint (VER) is when one country asks a foreign country to “voluntarily” restrict its exports into their country. This is really not voluntary at all, as the importing country will impose tougher trade restrictions if the foreign country does not limit its exports. An embargo is a type of quota in which a country prohibits all trade from a particular country or on a particular product. Another type of quantity control is standards and labels. Countries can impose tougher standards for product safety which will prohibit imports from foreign countries. Other forms of quantity controls include specific permission requirements, administrative delays, reciprocal requirements, and “buy local” legislation.

Written by Carl Phelps, Research Associate for GLOBAL ID, LLC.
www.identifyglobal.com

Exporting May Not be the Best Option

There are several situations in which exporting may not be the most feasible form of entering a foreign market. If it is cheaper to produce the product abroad then it is more cost-effective to establish a manufacturing facility in the foreign market. This will be a more productive way to serve that market and its surrounding export markets. If the transportation costs of exporting to the foreign market are a high percentage of the manufacturing costs, then exporting won’t be very efficient. Keep in mind that the farther the market is from the home country, the higher the transportation costs and transportation costs can vary a lot depending on the product. If the product needs to be altered to better serve this foreign market, an additional investment might be needed. It may be more efficient to make this investment in the foreign market to save on transportation costs. Also, trade barriers play a huge role in deterring exports to foreign markets. If the market is large enough, it might be worthwhile to invest directly in these countries in order to bypass the trade restrictions. These are several situations in which exporting may not be the appropriate option for pursuing international business, however there are many factors that go into such an important decision.

Written by Carl Phelps, Research Associate for GLOBAL ID

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