Question

. As a student of international business management critically discuss the 7 major instruments of trade policy and their impact on local businesses.

Answer 1

Trade policy is a collection of rules and regulations which pertain to trade. Trade policy helps a nation's international trade run more smoothly, by setting clear standards and goals which can be understood by potential trading partners. In many parts of the world, groups of nations work together to create mutually beneficial trade policies.

Trade policy uses seven main instruments:

1.    Tariffs
2.    Subsidies
3.    Import Quotas
4.    Voluntary Export Restraints
5.    Local content requirements
6.    Administration policy
7.    Anti-dumping duties.

1) Tariff:

An import tariff is a tax collected on imported goods. Generally speaking, a tariff is any tax or fee collected by a government. However, the term is much commonly applied to a tax on imported goods. There are two basic ways in which tariffs may be levied:
1. specific tariffs &
2. Ad valorem tariffs.

1. Specific tariffs:
Are levied as a fixed charge for each unit of a good imported.

2. Ad Valorem Tariffs:
Are levied as a proportion of the value of the imported goods.

A tariff raises the cost of imported products. In most cases, tariffs are put in place to protect domestic producers from foreign competition.

2) Subsidies:

A subsidy is a government payment to a domestic producer. Subsidies take many forms including cash grants, low-interest, tax breaks, and government equity participation in domestic and government producers in two ways:
   
1. They help producers compete against imports and
2. Subsidies help them gain export markets.

The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result of them.

3) Import Quotas:

An import is a direct restriction on the quantity of some good that may be imported into a country. This restriction is usually enforced by issuing import licenses to a group of individuals or firms.
Import quotas are limitations on the number of goods that can be imported into the country during a specified period. An import quota is typically set below the free trade level of imports. In this case, it is called a binding quota. If a quota is set at or above the free trade level of imports then it is referred to as a non-binding quote.
Goods that are illegal within a country effectively have a quota set equal to zero. Thus many countries have a zero quota on narcotics and other illicit drugs.
There are two basic types of quotas: absolute quotas and tariff-rate quotas. Absolute quotas limit the number of imports to a specified level during a specified period.
Tariff-rate quotas allow a specified quantity of goods to be imported at a reduced tariff rate during the specified quota period.

4) Voluntary Export Restraints (VERs):

A voluntary export restraint is a restriction set by a government on the number of goods that can be exported out of a country during a specified period. Often the word voluntary is placed in quotes because these restraints are typically implemented upon the insistence of the importing nations.
Typically VERs arise when the import-competing industries seek protection from a surge of imports from particular exporting countries. VERs are then offered by the exporter to appease the importing country and to avoid the effects of possible trade restraints on the part of the importer.

Example: one of the most famous examples is the limitation on auto exports to the United States enforced by Japanese automobile producer in 1981.


5) Local Content Requirements:

A local content requirement is a requirement that some specific fraction of a good is produced domestically. The requirement may be expressed either in physical terms (75% of parts for this product must be produced locally) or in value terms (75% of the value of this product must be produced locally). It also tends to benefit producers and not customers. They have been used mainly in developing and developed countries.

6) Administrative Policies:

Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country. In addition to the formal instruments of trade policy, govt. of all types sometimes uses informal or administrative policies to restrict imports & boost exports. Some would agree that the Japanese are the masters of this kind of trade barrier.
As with all instruments of trade, administrative instruments benefit producers and hurt consumers, who are derived access to possibly superior foreign products.

7) Anti-dumping policies:

In the context of international trade, dumping is defined as selling goods in a foreign market at below their costs of production, or as selling goods in a foreign market at below their “fair” market value. “Fair” market value of a good is normally judged to be greater than the costs of producing that good.

IMPACT ON LOCAL BUSINESSES
Trade barriers such as tariffs raise prices and reduce available quantities of goods and services for businesses and consumers, which results in lower-income, reduced employment, and lower economic output. The effects of each tariff will be lower GDP, wages, and employment in the long run.