1) INTRODUCTION

International trade in services has become more important in recent years as

advances in technology have permitted new means of providing services
across borders .While there is little doubt that services trade is an essential
ingredient to economic growth and sustainable development ,it is a widely
accepted that it can only make such positive contributions if appropriately
liberalised and implemented across countries (Copeland and mattoo 200!
."n efficient services sector is crucial for the growth and competitiveness of
an economy.
#ervices have emerged as crucial economics activities for India in recent past
.Its not only provides the bulk of employment and income in India ,services
sector also serves as vital input for producing other goods and services .$he
importance of services is therefore increasingly reflected in the policy agenda%
ranging from liberali&ation to promotional efforts to regulation at national and
international levels.
$his is no surprise that India's share in world trade is relatively low when
compared with other emerging economies such as a china .$he fact is that
India falls behind of china in terns of availability of ade(uate infrastructure
,particularly in those infrastructure facilities which are immensely important for
India's trade%services or otherwise.
)ne precondition of trade led globali&ation process is that trade liberali&ation
has to be actively supported by trade facilitation in order to ma*imi&e the
welfare gain. +alling short of ade(uate trade facilitation would lead to
suboptimal trade ,or in other words the trade potential would remain
unlocked .$herefore properly estimated services trade barriers help support
countries to take necessary policy measures .
In view of the above the ob,ective of this paper is to analy&e the barriers to
trade in services in India .We attempt to achieve this ob,ectives through a
gravity model ,which relates the level of trade between countries to their
physical and economic characteristic. -est part of the paper is arranged as
follows .#ection 2 presents an overview of the India's services trade sector.
1
2) What is a Tariffs barrier?
In a simplest terms a tariffs is a ta*. It adds to the cost of imported goods and
is one of several trade policies that a country can enact.
Why are tariffs and trade barriers used.
$ariffs are often created to protect infant industries and developing
economies, but are also used by more advanced economies with developed
industries. /ere are five of the top reasons tariffs are used0
Trade Barriers:-
$rade barriers are government 1included restriction on international trade.
$he barriers can take many forms. Including the following0
2!$ariffs
2!3on%tariffs to $rade
4!Import 5icenses
6!7*port 5icenses
8!#ubsidies
9!:oluntary 7*port -estraints
;!5ocal Content -e(uirement
!7mbargo
<!Currency =evaluation
20!$rade -estriction
>ost trade barriers work on the same principle0 the imposition of some sort of
cost on trade that raises the price of the traded products. If two or more
nations repeatedly use trade barriers against each other, then a trade war
results. 7conomists generally agree that trade barriers are detrimental and
decrease overall economic efficiency, this can be e*plained by the theory of
comparative advantage. In theory, free trade involves the removal of all such
barriers, e*cept perhaps those considered necessary for health or national
2
security. In practice , however , even those countries promoting free heavily
subsidi&e certain industries, such as agriculture and steel.
$rade barriers are often critici&ed for the effect they have on the developing
world. ?ecause rich country players call most of the shots and set trade
policies, goods such as crops that developing countries are best at producing
still face high barriers. $rade barriers such as ta*es on food imports or
subsidies for farmers in developed economies lead to overproduction and
dumping on world markets, thus lowering prices and hurting poor%country
farmers. $ariffs also tend to be anti%poor, with low rates for commodities and
high rates for labour%intensive processed goods. $he commitment to
development inde* measures the effect that rich country trade policies
actually have on the developing world.
"nother negative aspect of trade barriers is that it would cause a limited
choice of products and would therefore force customers to pay higher prices
and accept inferior (uality.


3
3) Protecti! Do"estic #"$%o&"et
$he levying of tariffs is often highly politici&ed. $he possibility of increased
competition from imported goods can threaten domestic industries. $hese
domestic companies may fire workers or shift production abroad to cut
costs, which means higher unemployment and a less happy electorate.
$he unemployment argument often shifts to domestic industries
complaining about cheap foreign labour, and how poor working conditions
and lack of regulation allow foreign companies to produce goods more
cheaply. In economics, however, countries will continue to produce goods
until they no longer have a comparative advantage (not to be confused
with an absolute advantage!.
Protecti! Cos'"ers
" government may levy a tariff on products that it feels could endanger its
population. +or e*ample, #outh @orea may place a tariff on imported beef
from the Anited #tates if it thinks that the goods could be tainted with
disease.
Ifat Id'stries
$he use of tariffs to protect infant industries can be seen by the Import
#ubstitution Industriali&ation (I#I! strategy employed by many developing
nations. $he government of a developing economy will levy tariffs on
imported goods in industries in which it wants to foster growth. $his
increases the prices of imported goods and creates a domestic market for
domestically produced goods, while protecting those industries from being
forced out by more competitive pricing. It decreases unemployment and
allows developing countries to shift from agricultural products to finished
goods.
4
Criticisms of this sort of protectionist strategy revolve around the cost of
subsidi&ing the development of infant industries. If an industry develops
without competition, it could wind up producing lower (uality goods, and
the subsidies re(uired to keep the state%backed industry afloat could sap
economic growth.
Natioa% (ec'rit&
?arriers are also employed by developed countries to protect certain
industries that are deemed strategically important, such as those
supporting national security. =efence industries are often viewed as vital to
state interests, and often en,oy significant levels of protection. +or
e*ample, while both Western 7urope and the Anited #tates are
industriali&ed, both are very protective of defence%oriented companies.
Reta%iatio
Countries may also set tariffs as a retaliation techni(ue if they think that a
trading partner has not played by the rules. +or e*ample, if +rance
believes that the Anited #tates has allowed its wine producers to call its
domestically produced sparkling wines BChampagneB (a name specific to
the Champagne region of +rance! for too long, it may levy a tariff on
imported meat from the Anited #tates. If the A.#. agrees to crack down on
the improper labeling, +rance is likely to stop its retaliation. -etaliation can
also be employed if a trading partner goes against the governmentCs
foreign policy ob,ectives.
5
)) T&$es of Tariffs ad No-Tariff Barriers
$here are several types of tariffs and barriers that a government can employ0
#pecific tariffs
"d valorem tariffs
5icenses
Import (uotas
:oluntary e*port restraints
5ocal content re(uirements
Tariff Barriers to Trade :-
($ecific Tariffs
" fi*ed fee levied on one unit of an imported good is referred to as a specific
tariff. $his tariff can vary according to the type of good imported. +or e*ample,
a country could levy a D28 tariff on each pair of shoes imported, but levy a
D400 tariff on each computer imported.
*d +a%ore" Tariffs
$he phrase ad valorem is 5atin for Baccording to valueB, and this type of tariff
is levied on a good based on a percentage of that goodCs value. "n e*ample
of an ad valorem tariff would be a 28E tariff levied by Fapan on A.#.
automobiles. $he 28E is a price increase on the value of the automobile, so a
D20,000 vehicle now costs D22,800 to Fapanese consumers. $his price
increase protects domestic producers from being undercut, but also keeps
prices artificially high for Fapanese car shoppers.
No-tariff Barriers to Trade:-
6
,iceses
" license is granted to a business by the government, and allows the business
to import a certain type of good into the country. +or e*ample, there could be
a restriction on imported cheese, and licenses would be granted to certain
companies allowing them to act as importers. $his creates a restriction on
competition, and increases prices faced by consumers.
I"$ort -'otas
"n import (uota is a restriction placed on the amount of a particular good that
can be imported. $his sort of barrier is often associated with the issuance of
licenses. +or e*ample, a country may place a (uota on the volume of
imported citrus fruit that is allowed.
+o%'tar& #.$ort Restraits /+#R)
$his type of trade barrier is BvoluntaryB in that it is created by the e*porting
country rather than the importing one. " voluntary e*port restraint is usually
levied at the behest of the importing country, and could be accompanied by a
reciprocal :7-. +or e*ample, ?ra&il could place a :7- on the e*portation of
sugar to Canada, based on a re(uest by Canada. Canada could then place a
:7- on the e*portation of coal to ?ra&il. $his increases the price of both coal
and sugar, but protects the domestic industries.
,oca% Cotet Re0'ire"et
Instead of placing a (uota on the number of goods that can be imported, the
government can re(uire that a certain percentage of a good be made
domestically. $he restriction can be a percentage of the good itself, or a
percentage of the value of the good. +or e*ample, a restriction on the import
of computers might say that 28E of the pieces used to make the computer
are made domestically, or can say that 28E of the value of the good must
come from domestically produced components.
1) Who Beefits?
7
$he benefits of tariffs are uneven. ?ecause a tariff is a ta*, the government
will see increased revenue as imports enter the domestic market. =omestic
industries also benefit from a reduction in competition, since import prices are
artificially inflated. Anfortunately for consumers % both individual consumers
and businesses % higher import prices mean higher prices for goods. If the
price of steel is inflated due to tariffs, individual consumers pay more for
products using steel, and businesses pay more for steel that they use to make
goods. In short, tariffs and trade barriers tend to be pro%producer and anti%
consumer.
$he effect of tariffs and trade barriers on businesses, consumers and the
government shifts over time. In the short run, higher prices for goods can
reduce consumption by individual consumers and by businesses. =uring this
time period, businesses will profit and the government will see an increase in
revenue from duties. In the long term, businesses may see a decline in
efficiency due to a lack of competition, and may also see a reduction in profits
due to the emergence of substitutes for their products. +or the government,
the long%term effect of subsidies is an increase in the demand for public
services, since increased prices, especially in foodstuffs, leave less
disposable income.
2o3 Do Tariffs *ffect Prices?
$ariffs increase the prices of imported goods. ?ecause of this, domestic
producers are not forced to reduce their prices from increased competition,
and domestic consumers are left paying higher prices as a result. $ariffs also
reduce efficiencies by allowing companies that would not e*ist in a more
competitive market to remain open.
8
+igure 2 illustrates the effects of world trade without the presence of a tariff. In
the graph, =# means domestic supply and == means domestic demand. $he
price of goods at home is found at price G, while the world price is found at GH.
"t a lower price, domestic consumers will consume Iw worth of goods, but
because the home country can only produce up to Id, it must import Iw%Id
worth of goods.
+igure 2. Grice without the influence of
a tariff
+igure 2. Grice under the effects of a tariff
When a tariff or other price%increasing policy is put in place, the effect is to
increase prices and limit the volume of imports. In +igure 2, price increases
from the non%tariff GH to GC. ?ecause price has increased, more domestic
companies are willing to produce the good, so Id moves right. $his also shifts
Iw left. $he overall effect is a reduction in imports, increased domestic
production and higher consumer prices. ($o learn more about the movement
of e(uilibrium due to changes in supply and demand, read Anderstanding
#upply%#ide 7conomics.!
9
Tariffs ad 4oder Trade
$he role tariffs play in international trade has declined in modern times. )ne
of the primary reasons for the decline is the introduction of international
organi&ations designed to improve free trade, such as the World $rade
)rgani&ation (W$)!. #uch organi&ations make it more difficult for a country to
levy tariffs and ta*es on imported goods, and can reduce the likelihood of
retaliatory ta*es. ?ecause of this, countries have shifted to non%tariff barriers,
such as (uotas and e*port restraints. )rgani&ations like the W$) attempt to
reduce production and consumption distortions created by tariffs. $hese
distortions are the result of domestic producers making goods due to inflated
prices, and consumers purchasing fewer goods because prices have
increased. ($o learn about the W$)Cs efforts, read What Is $he World $rade
)rgani&ation.!
#ince the 2<40s, many developed countries have reduced tariffs and trade
barriers, which has improved global integration and brought about
globali&ation. >ultilateral agreements between governments increase the
likelihood of tariff reduction, while enforcement on binding agreements
reduces uncertainty.
The Botto" ,ie
+ree trade benefits consumers through increased choice and reduced prices,
but because the global economy brings with it uncertainty, many governments
impose tariffs and other trade barriers to protect industry. $here is a delicate
balance between the pursuit of efficiencies and the governmentCs need to
ensure low unemployment.
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5) Three Reasos Wh& Tariffs *re Preferab%e to -'otas
2. Tariffs 6eerate Re7e'e for the 6o7er"et0
If the A.#. government puts a 20E tariffs on imported Indian
cricket bats they will collect D20 million dollars if D80 million worth of Indian
cricket bats are imported in a year. $hat may sound like small change for a
government, but given the millions of different goods which are imported
into a country, the numbers start to add up. $he Grogressive Golicy
Institute has found that the Anited #tates collects 20 billion dollars a year
in tariff revenue. $his is revenue that would be lost to the government
unless their import (uota system charged a licensing fee on importers.
2. I"$ort -'otas Ca ,ead to *d"iistrati7e Corr'$tio0
#uppose that there is currently no restriction on importing Indian
cricket bats and 40,000 are sold in the A.#. each year. +or some reason
the Anited #tates decides that they only want 8,000 Indian cricket bats
sold per year. $hey could set an import (uota at 8,000 to achieve this
ob,ective. $he problem is0 /ow do they decide which 8,000 bats get in and
which 28,000 do not. $he government now has to tell some importer that
their cricket bats will be let into the country and tell some other importer
than his will not be. $his gives the customs officials a lot of power as they
can now give access to favoured corporations and deny access to those
who are not favoured. $his can cause a serious corruption problem in
countries with import (uotas as the importers chosen to meet the (uota
are the ones who can provide the most favours to the customs officers.
" tariff system can achieve the same ob,ective without the
possibility of corruption. $he tariff is set at a level which causes the price of
the cricket bats to rise ,ust enough so that the demand for cricket bats falls
to 8,000 per year. "lthough tariffs control the price of a good, they
11
indirectly control the (uantity sold of that good due to the interaction of
supply and demand.
4. I"$ort -'otas *re 4ore ,i8e%& to Ca'se ("'!!%i!0
?oth tariffs and import (uotas will cause smuggling if they are
set at unreasonable levels. If the tariff on cricket bats is set at <8E then itCs
likely that people will try to sneak the bats into the country illegally, ,ust as
they would if the import (uota is only a small fraction of the demand for the
product. #o governments have to set the tariff or the import (uota at a
reasonable level. ?ut what if the demand changes. #uppose cricket
becomes a big fad in the Anited #tates and everybody and their neighbour
wants to buy an Indian cricket bat. "n import (uota of 8,000 might be
reasonable if the demand for the product would otherwise be 9,000.
)vernight, though, the demand has now ,umped to 90,000. With an import
(uota there will be massive shortages and smuggling in cricket bats will
become (uite profitable. " tariff does not have these problems. " tariff
does not provide a firm limit on the number of products that enter. #o if the
demand goes up, the number of bats sold will go up, and the government
will collect more revenue. )f course, this can also be used as an argument
against tariffs as the government cannot ensure that the number of imports
will stay below a certain level.
12
9) Differece bet3ee tariff ad o-tariff barriers?
$he purpose of both tariff and non tariff barriers is same that is to
impose restriction on import but they differ in approach and manner.
$ariff barriers ensure revenue for a government but non tariff barriers
do not bring any revenue. Import 5icenses and Import (uotas are some
of the non tariff barriers.
3on tariff barriers are country specific and often based upon flimsy
grounds that can serve to sour relations between countries whereas
tariff barriers are more transparent in nature.
13
:)T&$es of No-tariff barriers
No-tariff barriers to trade
3on%tariff barriers to trade (3$?s! are trade barriers that restrict imports but
are not in the usual form of a tariff. #ome common e*amples of 3$?Cs are
anti%dumping measures and countervailing duties, which, although called non%
tariff barriers, have the effect of tariffs once they are enacted.
$heir use has risen sharply after the W$) rules led to a very significant
reduction in tariff use. #ome non%tariff trade barriers are e*pressly permitted in
very limited circumstances, when they are deemed necessary to protect
health, safety, sanitation, or depletable natural resources. In other forms, they
are critici&ed as a means to evade free trade rules such as those of the World
$rade )rgani&ation (W$)!, the 7uropean Anion (7A!, or 3orth "merican +ree
$rade "greement (3"+$"! that restrict the use of tariffs.
#ome of non%tariff barriers are not directly related to foreign economic
regulations but nevertheless have a significant impact on foreign%economic
activity and foreign trade between countries.
$rade between countries is referred to trade in goods, services and factors of
production. 3on%tariff barriers to trade include import (uotas, special licenses,
unreasonable standards for the (uality of goods, bureaucratic delays at
customs, e*port restrictions, limiting the activities of state trading, e*port
subsidies, countervailing duties, technical barriers to trade, sanitary and
phyto%sanitary measures, rules of origin, etc. #ometimes in this list they
include macroeconomic measures affecting trade.
14
Six Types of Non-Tariff Barriers to Trade
2. #pecific 5imitations on $rade0
2. Import 5icensing re(uirements
2. Groportion restrictions of foreign to domestic goods
4. >inimum import price limits
6. +ree
8. 7mbargoes
2. Customs and "dministrative 7ntry Grocedures0
2. :aluation systems
2. "nti%dumping practices
4. $ariff classifications
6. =ocumentation re(uirements
8. +ees
4. #tandards0
2. #tandard disparities
2. Intergovernmental acceptances of testing methods and
standards
4. Gackaging, labeling, and marking
6. Jovernment Garticipation in $rade0
2. Jovernment procurement policies
2. 7*port subsidies
4. Countervailing duties
6. =omestic assistance programs
8. Charges on imports0
2. Grior import deposit subsidies
2. "dministrative fees
4. #pecial supplementary duties
6. Import credit discrimination
8. :ariable levies
9. ?order ta*es
9. )thers0
2. :oluntary e*port restraints
2. )rderly marketing agreement's
15
Examples of Non-Tariff Barriers to Trade:-
Import bans
Jeneral or product%specific (uotas
-ules of )rigin
Iuality conditions imposed by the importing country on the e*porting
countries
#anitary and phytosanitary conditions
Gackaging conditions
5abeling conditions
Groduct standards
Comple* regulatory environment
=etermination of eligibility of an e*porting country by the importing
country
=etermination of eligibility of an e*porting establishment (firm,
company! by the importing country.
"dditional trade documents like Certificate of )rigin, Certificate of
"uthenticity etc.
)ccupational safety and health regulation
7mployment law
Import licenses
#tate subsidies, procurement, trading, state ownership
7*port subsidies
+i*ation of a minimum import price
Groduct classification
Iuota shares
+oreign e*change market controls and multiplicity
Inade(uate infrastructure
B?uy nationalB policy
)ver%valued currency
Intellectual property laws (patents, copyrights!
-estrictive licenses
#easonal import regimes
Corrupt andKor lengthy customs procedures.
16
Types of Non-Tariff Barriers
$here are several different variants of division of non%tariff barriers. #ome
scholars divide between internal ta*es, administrative barriers, health and
sanitary regulations and government procurement policies. )thers divide non%
tariff barriers into more categories such as specific limitations on trade,
customs and administrative entry procedures, standards, government
participation in trade, charges on import, and other categories.
$he first category includes methods to directly import restrictions for
protection of certain sectors of national industries0 licensing and allocation of
import (uotas, antidumping and countervailing duties, import deposits, so%
called voluntary e*port restraints, countervailing duties, the system of
minimum import prices, etc. Ander second category follow methods that are
not directly aimed at restricting foreign trade and more related to the
administrative bureaucracy, whose actions, however, restrict trade, for
e*ample0 customs procedures, technical standards and norms, sanitary and
veterinary standards, re(uirements for labeling and packaging, bottling, etc.
$he third category consists of methods that are not directly aimed at
restricting the import or promoting the e*port, but the effects of which often
lead to this result.
$he non%tariff barriers can include wide variety of restrictions to trade. /ere
are some e*ample of the popular 3$?'s .
17
;) ,IC#N(#(
$he most common instruments of direct regulation of imports (and
sometimes e*port! are licenses and (uotas. "lmost all industriali&ed countries
apply these non%tariff methods. $he license system re(uires that a state
(through specially authori&ed office! issues permits for foreign trade
transactions of import and e*port commodities included in the lists of licensed
merchandises. Groduct licensing can take many forms and procedures. $he
main types of licenses are general license that permits unrestricted
importation or e*portation of goods included in the lists for a certain period of
timeL and one%time license for a certain product importer (e*porter! to import
(or e*port!. )ne%time license indicates a (uantity of goods, its cost, its country
of origin (or destination!, and in some cases also customs point through which
import (or e*port! of goods should be carried out. $he use of licensing
systems as an instrument for foreign trade regulation is based on a number of
international level standards agreements. In particular, these agreements
include some provisions of the Jeneral "greement on $ariffs and $rade and
the "greement on Import 5icensing Grocedures, concluded under the J"$$
(J"$$!.
18
1<)-'otas
5icensing of foreign trade is closely related to (uantitative
restrictions 1 (uotas % on imports and e*ports of certain goods. " (uota is a
limitation in value or in physical terms, imposed on import and e*port of
certain goods for a certain period of time. $his category includes global
(uotas in respect to specific countries, seasonal (uotas, and so%called
BvoluntaryB e*port restraints. Iuantitative controls on foreign trade
transactions carried out through one%time license.
Iuantitative restriction on imports and e*ports is a direct
administrative form of government regulation of foreign trade. 5icenses and
(uotas limit the independence of enterprises with a regard to entering foreign
markets, narrowing the range of countries, which may be entered into
transaction for certain commodities, regulate the number and range of goods
permitted for import and e*port. /owever, the system of licensing and (uota
imports and e*ports, establishing firm control over foreign trade in certain
goods, in many cases turns out to be more fle*ible and effective than
economic instruments of foreign trade regulation. $his can be e*plained by
the fact, that licensing and (uota systems are an important instrument of trade
regulation of the vast ma,ority of the world.
$he conse(uence of this trade barrier is normally reflected in the
consumers' loss because of higher prices and limited selection of goods as
well as in the companies that employ the imported materials in the production
process, increasing their costs. "n import (uota can be unilateral, levied by
the country without negotiations with e*porting country, and bilateral or
multilateral, when it is imposed after negotiations and agreement with
e*porting country. "n e*port (uota is a restricted amount of goods that can
leave the country. $here are different reasons for imposing of e*port (uota by
the country, which can be the guarantee of the supply of the products that are
in shortage in the domestic market, manipulation of the prices on the
international level, and the control of goods strategically important for the
19
country. In some cases, the importing countries re(uest e*porting countries to
impose voluntary e*port restraints.
*!ree"et o a =7o%'tar&= e.$ort restrait
In the past decade, a widespread practice of concluding agreements
on the BvoluntaryB e*port restrictions and the establishment of import minimum
prices imposed by leading Western nations upon weaker in economical or
political sense e*porters. $he specifics of these types of restrictions is the
establishment of unconventional techni(ues when the trade barriers of
importing country, are introduced at the border of the e*porting and not
importing country. $hus, the agreement on BvoluntaryB e*port restraints is
imposed on the e*porter under the threat of sanctions to limit the e*port of
certain goods in the importing country. #imilarly, the establishment of
minimum import prices should be strictly observed by the e*porting firms in
contracts with the importers of the country that has set such prices. In the
case of reduction of e*port prices below the minimum level, the importing
country imposes anti%dumping duty, which could lead to withdrawal from the
market. M:oluntaryB e*port agreements affect trade in te*tiles, footwear, dairy
products, consumer electronics, cars, machine tools, etc.
Groblems arise when the (uotas are distributed between countries
because it is necessary to ensure that products from one country are not
diverted in violation of (uotas set out in second country. Import (uotas are not
necessarily designed to protect domestic producers. +or e*ample, Fapan,
maintains (uotas on many agricultural products it does not produce. Iuotas
on imports is a leverage when negotiating the sales of Fapanese e*ports, as
well as avoiding e*cessive dependence on any other country in respect of
necessary food, supplies of which may decrease in case of bad weather or
political conditions.
7*port (uotas can be set in order to provide domestic consumers
with sufficient stocks of goods at low prices, to prevent the depletion of natural
resources, as well as to increase e*port prices by restricting supply to foreign
markets. #uch restrictions (through agreements on various types of goods!
20
allow producing countries to use (uotas for such commodities as coffee and
oilL as the result, prices for these products increased in importing countries.
-'ota ca be of the fo%%o3i! t&$es:-
tariff rate (uota
global (uota
discriminating (uota
export quota.
#"bar!o
7mbargo is a specific type of (uotas prohibiting the trade. "s well as (uotas,
embargoes may be imposed on imports or e*ports of particular goods,
regardless of destination, in respect of certain goods supplied to specific
countries, or in respect of all goods shipped to certain countries. "lthough the
embargo is usually introduced for political purposes, the conse(uences, in
essence, could be economic.
(tadards
#tandards take a special place among non%tariff barriers. Countries usually
impose standards on classification, labeling and testing of products in order to
be able to sell domestic products, but also to block sales of products of
foreign manufacture. $hese standards are sometimes entered under the
prete*t of protecting the safety and health of local populations.
*d"iistrati7e ad b'rea'cratic de%a&s at the etrace
"mong the methods of non%tariff regulation should be mentioned
administrative and bureaucratic delays at the entrance, which increase
uncertainty and the cost of maintaining inventory.
I"$ort de$osits
21
"nother e*ample of foreign trade regulations is import deposits. Import
deposits is a form of deposit, which the importer must pay the bank for a
definite period of time (non%interest bearing deposit! in an amount e(ual to all
or part of the cost of imported goods.
"t the national level, administrative regulation of capital movements is carried
out mainly within a framework of bilateral agreements, which include a clear
definition of the legal regime, the procedure for the admission of investments
and investors. It is determined by mode (fair and e(uitable, national, most%
favored%nation!, order of nationali&ation and compensation, transfer profits
and capital repatriation and dispute resolution.
>orei! e.cha!e restrictios ad forei! e.cha!e cotro%s
+oreign e*change restrictions and foreign e*change controls occupy a special
place among the non%tariff regulatory instruments of foreign economic activity.
+oreign e*change restrictions constitute the regulation of transactions of
residents and nonresidents with currency and other currency values. "lso an
important part of the mechanism of control of foreign economic activity is the
establishment of the national currency against foreign currencies.
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11) The Transition from Tariffs to Non-tariff Barriers
)ne of the reasons why industriali&ed countries have moved from
tariffs to 3$?s is the fact that developed countries have sources of income
other than tariffs. /istorically, in the formation of nation%states, governments
had to get funding. $hey received it through the introduction of tariffs. $his
e*plains the fact that most developing countries still rely on tariffs as a way to
finance their spending. =eveloped countries can afford not to depend on
tariffs, at the same time developing 3$?s as a possible way of international
trade regulation. $he second reason for the transition to 3$?s is that these
tariffs can be used to support weak industries or compensation of industries,
which have been affected negatively by the reduction of tariffs. $he third
reason for the popularity of 3$?s is the ability of interest groups to influence
the process in the absence of opportunities to obtain government support for
the tariffs.
Non-tariff barriers today
With the e*ception of e*port subsidies and (uotas, 3$?s are most similar to
the tariffs. $ariffs for goods production were reduced during the eight rounds
of negotiations in the W$) and the Jeneral "greement on $ariffs and $rade
(J"$$!. "fter lowering of tariffs, the principle of protectionism demanded the
introduction of new 3$?s such as technical barriers to trade ($?$!. "ccording
to statements made at Anited 3ations Conference on $rade and =evelopment
(A3C$"=, 2008!, the use of 3$?s, based on the amount and control of price
levels has decreased significantly from 68E in 2<<6 to 28E in 2006, while
use of other 3$?s increased from 88E in 2<<6 to 8E in 2006.
Increasing consumer demand for safe and environment friendly products also
have had their impact on increasing popularity of $?$. >any 3$?s are
governed by W$) agreements, which originated in the Aruguay -ound (the
23
$?$ "greement, #G# >easures "greement, the "greement on $e*tiles and
Clothing!, as well as J"$$ articles. 3$?s in the field of services have become
as important as in the field of usual trade.
>ost of the 3$? can be defined as protectionist measures, unless they are
related to difficulties in the market, such as e*ternalities and information
asymmetries between consumers and producers of goods. "n e*ample of this
is safety standards and labeling re(uirements.
$he need to protect sensitive to import industries, as well as a wide range of
trade restrictions, available to the governments of industriali&ed countries,
forcing them to resort to use the 3$?, and putting serious obstacles to
international trade and world economic growth. $hus, 3$?s can be referred
as a new of protection which has replaced tariffs as an old form of protection.
24
12) 2o3 to Re"o7e Trade Barriers

)ver the years, the >inistry of +oreign "ffairs has helped many companies to
remove trade and investment barriers. $herefore, we are well e(uipped and
prepared to help your company.
Glease read more about the work and e*perience of the >inistry of +oreign
"ffairs in removing trade barriers.
Information about matters that are notified to the 7A will be accessible to the
general public and will 1 in an anonymous form 1 be available wholly or partly
in the 7A register on the Internet.
>or e.$orters: Re$orti! trade barriers
"ll =anish e*port companies feel the benefits of actions against trade barriers.
$he first step is to report a barrier by use of the notification form.
$he procedure for reporting a trade barrier is described under register a trade
barrier.
Ander all circumstances, it is crucial that the report concerns a concrete
barrier that a =anish company has e*perienced in an e*port market.
The ro%e of the co"$a& after re$orti!
"fter a report has been sent to the $rade Council, a company need not take
any further actions.
When the $rade Council receives a report, the sender will receive an initial
receipt. When the trade barrier is reported to the 7A, the sender will receive a
25
final receipt with a reference number, which can be used for follow%up
en(uiries. /andling of a report can be time%consuming, and therefore some
time may pass between reporting and the final receipt.
" copy of the report can, if desired, be sent to the relevant industrial
organi&ation. $he organisations can therefore be involved with the case
through their relevant activities.
$he $rade Council will on the basis of the report analyse the problem and
develop a strategy for removing the barrier. If there is a need for further
information in the course of handling a report, the $rade Council will in some
instances contact the reporting company.
$he $rade Council will also inform the reporter on progress in their case.
"gain, this can be a time%consuming process, and companies are thus always
welcome to ask us about for a status update on the handling of their case.
In certain circumstances can the removal of a trade barrier take so long, that it
may be appropriate for the company to focus on other e*port markets and
later return to the specific market in light of how far progress of the barrier
removal has come.
If the company is willing and able to, it may contribute to the process, for
e*ample with new information or more in%depth information about the nature
and si&e of the problem or possible solutions.
It is still however also possible, if the company prefers, to leave any further
work to the $rade Council, which will work further in collaboration with other
=anish public authorities and industry organi&ations.
-eporting of a trade barrier is free of charge for companies. If the $rade
Council in the course of handling the case become aware of the possibility to
assist the company with additional services, which re(uire payment, the
company may receive an offer about these services. Gaid services will
however not be delivered, unless the company first accepts an offer in writing.
26
('bse0'et case had%i! i De"ar8
When the $rade Council receives a report of a trade barrier, a preliminary
evaluation of the report will be undertaken0
"re all relevant details included, or are there (ueries that re(uire
further e*planation.
/ow does the report relate to other reportsL is this a new report of an
already known barrier.
"re there other 7A countries that may also have an interest in this
case.
$he report will then be registered, so that information on trade barriers in
other countries that affect =anish e*ports, can be used in =anish public
authorities' work in removing barriers to trade.
"t the same time, the barrier will be reported to the 7A Commission with a
view to handling the case via 7A channels. In relation to the 7A, the >inistry
of +oreign "ffairs will stand as the reporter of the trade barrier, and specific
company details will not be given to the Commission.
Company details will only be used in con,unction with meetings, visits and
other similar activities taken by =anish ministers or civil servants where
commercial factors are involved.
5ikewise, =anish overseas representations may only use details of reported
trade barriers in their trade policy work.
+inally, reports from =anish companies will form the basis of =anish efforts in
relation to a common 7A trade policy. +or e*ample, =anish ambassadors
together with representatives from the other 7A countries and the
Commission, take part in local M>arket "ccess $eamsN, which improves the
input in the formulation of the 7A's trade barrier efforts. #imilarly, =anish
participants in meetings of the 7A's M>arket "ccess "dvisory CommitteeN in
?russels may use report details as a basis for influencing the 7A's priorities
for which trade barriers should be removed in other markets. $he 7A
27
procedure is described in greater detail in the section on Msubse(uent
handling in the 7AN.
It should be underlined, that details of the reporting company will not be given
further to the either the Commission of authorities in other countries.
('bse0'et case had%i! b& the #U
$he $rade Council reports the trade barriers that =anish e*porters have
encountered to the 7A.
$he 7A Commission has established a special database 1 M>arket "ccess
=atabaseN (>"=?! 1 where all the barriers with 7A trade partners are
registered. $he database portrays a collective picture of the problems that
7uropean e*porters have with regard to market access in the individual
markets. )ne can search after registered barriers in the database according
to country, sector or barrier type.
" special market access committee 1 M>arket "ccess "dvisory CommitteeN
(>""C! 1 meets every month in ?russels to discuss (uestions on market
access. " dedicated working group is set up under the Committee, which
discusses sector%specific (uestions.
In the countries where the 7A has key e*port interests, dedicated M>arket
"ccess $eamsN (>"$! have been formed. -epresentatives for all 7A countries
take part in the individual teams, which are led by representatives of the
Commission. >"$ meets regularly in the individual countries to discuss the
market access problems that 7uropean companies e*perience in the market
in (uestion. )n the basis of these discussions, the Commission reports back
to ?russels. 5ikewise, meetings with public authorities in markets in (uestion
are taken so as to solve concrete problems.
$he Commission and the 7A presidency meet regularly with the 7A's trade
partners to solve market access problems. $hat can be via bilateral
negotiations, or that can be in the course of cooperation in the World $rade
)rganisation (W$)!.
28
*%read& re!istered barriers
)n the 7A Commission's dedicated homepage for market access, one can
find a overview of already registered trade barriers%
"s part of the 7A's market access strategy, the Commission acting upon a
=anish initiative, set in motion a system where all member state and the
Commission in cooperation identify the key market access barriers in selected
markets. ?arriers that have been identified until now for further attention are
listed.
#.$eriece
)ver the years, the >inistry of +oreign "ffairsKthe $rade Council has assisted
many =anish companies in fighting protectionist measures and has therefore
much e*perience in removing trade and investment barriers on e*port
markets.
$he removal of trade and investment barriers is, conse(uently, a well%known
product of the $rade Council of =enmark which is contacted on a daily basis
by companies asking for 'diplomatic assistance' in solving problems that the
companies are not able to solve themselves on the e*port markets.
$he >inistry of +oreign "ffairs has been e*tremely successful in resolving
cases worth millions, even billions of kroner. Cases range from disputes in
connection with the collection of outstanding amounts to inade(uate market
access in not very accessible e*port markets with, for e*ample,
comprehensive regulation, bureaucracy, corruption and government control.
$he point of departure for these successful results is the huge internal and
e*ternal global network of the >inistry of +oreign "ffairs. $herefore, due to its
market position as a political organisation with a commercial understanding,
the $rade Council of =enmark commands uni(ue competencies and
(ualifications for being companies' preferred Nproblem shooterN in the e*port
markets.
29
Commercial and political solutions of great value to customers are provided
on a daily basis. $his work is performed bilaterally through =enmark's
>issions abroad as well as multilaterally through the 7A Commission and the
W$).
$he 7A CommissionCs website presents some of the cases that =enmark
contributes to solving through active work on the 7A Commission's >arket
"ccess "dvisory Committee in ?russels and through the Commission's local
>arket "ccess $eams on the markets.
30
13) (er7ices o trade barriers a o7er7ie3
India has seen a gradual structural shift towards the services sector in the
past decades, with services comprising a growing share of J=G and
employment. $oday, services sector in India represents an essential
component of competitive, knowledge based economies, accounting for 8;.2
percent of J=G in 200<%202. India's services e*port currently constitutes
about 49.9 percent of the country's total e*port.2 Oet, a large part of India's
services sector is untapped and rarely e*plored in the international market.
$rade in services in India has been growing rapidly since beginning of the last
decade, following significant domestic liberali&ation on one hand, and access
to a growing overseas market for services, on the other. ?y not only growing
more rapidly than the country's merchandise e*ports, India's services e*port
grew much faster than that recorded by the world during the past decade and
a half. =ue to such rapid growth in services e*ports, India has succeeded in
raising its penetration in global markets more rapidly for services than for
goods. +or e*ample, India's global e*ports of services in 200%0< stood at
over A#D 202 billion4. In 200, India's share in world services e*port was
around 2.9; percent, compared with a 2.22 percent share in world
merchandise trade . +rom a low level of A#D 20.;2 billion in 2<<2, India's
services trade volume increased to A#D 28<.804 billion in 200, thus
witnessed 0.64 percent per annum growth rate. "t the same time, services
trade and corresponding e*ports and imports in India have witnessed faster
growth in the last decade compared to 2<<0s . ?urgeoning services trade
sector thus reflects India's versatile services sector.
Within the services trade sector, a number of sectors have performed
significantly better than others. #ervices e*port from India has grown faster
than imports in the last decade, thus widening the positive balance of trade. In
particular, in areas where the sector has been liberalised, e*port has grown
more rapidly. +or e*ample, computer and information technology services,
which increased from A#D 6.;4 billion in 2000 to A#D 6<.4 billion in 200,
grew by over 22 percent per annum during 2000 and 200 . In 200, this
31
sector has contributed about 6; percent of India's total services e*port . $he
strong demand over the past few years in developed economies has placed
India among the fastest growing information technology market in the world.
With 22 percent share in India's services e*port, travel and transportation
services come ne*t. In import side, about 6 percent of India's total import in
200 was contributed by transportation services. India's import of
transportation services outweighs its e*port heavily. $herefore, transportation
and computer and information technology services are two prominent sectors
in India's services trade. In a static sense, much of India's e*port earning from
computer and information technology services has been wiped out by India's
import of transportation services. #ervices competitiveness will thus depend
how India successfully develops these two sectors.
India's Pservices revolution' has been supported by deregulation of services
sectors (Jhani and @haras, 2020!. Jrowing openness and integration has
helped India's services e*port. $elecommunications has been substantially
opened up to competition. 3ewer sectors such as information technology (I$!
and I$%enabled services (?usiness Grocess )utsourcing, @nowledge Grocess
)utsourcing, and ?usiness $ransformation #ervices! are largely open.
@nowledge%based segments have been prominent among the faster growing
services sectors, assisted by technological advances and a low%cost educated
workforce with good 7nglish language capabilities. $he challenge for India is
(uality e*pansion of services e*port. ?eing traded invisible, it faces many
complicated barriers. -emoval of these barriers through liberalisation, and
complementary policy reforms can lead to both sectoral and economy%wide
improvements in performance and generate pro%poor growth. $his in fact
motivates us to assess the barriers to India's services e*port in this study.
32
1))6ra7it& Data o #coo"ics
$rade costs matter, but difficult to measure ("nderson and van Wincoop,
2006!. "ny attempt to measurement trade costs needs consistent observable
data, which in many cases are not available. $o overcome this limitation,
"nderson and van Wincoop (2004! derive a theoretically consistent gravity
model to infer unobservable trade costs directly from observable trade flows.
In this study, we consider a world of 3orth countries and a continuum of
differentiated services. We assume that countries speciali&e in a range of
services and that consumers have constant elasticity of substitution (C7#!
preferences. Ander the simplifying assumptions of a one%sector economy with
consumers holding constant elasticity of substitution preferences, and
common elasticity among all homogenous goods. $he gravity model for using
panel data of e*ports from economy i to economy , (Qi,! takes the following
shape0
We use the aforesaid augmented gravity model to analy&e the trade flows,
and the coefficients thus obtained are then used to assess services trade
barriers under various scenarios. $he augmented gravity model considers a
panel data for the years 2000 to 2009. $he data for the gravity model are
collected from several secondary sources and taken in bilateral pair.
$he primary sources of services trade data used in this analysis is #tatistics
on International $rade in #ervices assembled by the )7C= (2004!. $his
covers imports and e*ports of services between 2; )7C= countries and up to
88 non%)7C= partner countries. $he collection of the data is based on
>anual on #tatistics of International $rade in #ervices guidelines, which
e*tend the International >onetary +und balance of payments methodology to
account more fully for service transactions. )ur methodological approach
imposes the assumption that the error terms are normally distributed, however
this assumption is often violated in large datasets where the error term is
33
heteroskedastic . We thus use robust standard errors without specifying a
cluster group in all the regressions.
$he relationships can not be interpreted as causal until we rule out the
possibility of endogeneity in e(uations (8!. $o address this problem, we use a
dynamic /ausman % $aylor estimation to analy&e changes across countries
and over time. -ecogni&ing the nature of trading flows between countries as
relationships that develop and change over time has resulted in an increasing
use of panel data approaches to the estimation of gravity models. $his
method is chosen in this study. $he use of different panel data methods, such
as random, fi*ed effects or /ausman% $aylor estimators, allows for various
assumptions regarding trade flows to be analy&ed and tested. In particular, in
panel data analysis of gravity models possible heterogeneity and endogeneity
issues can be e*amined by isolating country pair effects (factors that influence
trade between two countries!. "s 7gger and 3elson (2009! show, this allows
the analysis of what they describe as between country pair effects (the cross
sectional element! and within country pair effects (the time series element!.
$he e(uation (8! has been estimated using the )rdinary 5east #(uares ()5#!
panel data model and /ausman%$aylor model (/$>! with the dependent
variable of services e*port between India and its partner countries. " cross%
section model does not e*plain the variance in bilateral trade flows when we
have time%specific impact on trade flows. #ince there are significant and
systematic variations of e*port patterns across trade partners, a satisfactory
model of bilateral e*ports should e*plain substantial heterogeneity of e*ports
at the country level. We therefore use panel data since it can better e*plain
the relevant relationships between trade flows and trade barriers over time
when we have both time%variant and time%invariant e*ogenous variables. We
use individual country effects interchangeably in the model. /$> fits panel%
data random%effects models in which some of the covariates are correlated
with the unobserved individual%level random effect. $he estimators, originally
proposed by /ausman and $aylor (2<2! and "memiya and >aCurdy (2<9!,
are based on instrumental variables. "lthough the estimators implemented in
34
/$> use the method of instrumental variables, each command is designed
for different problems. $he /$> estimators that are implemented assume that
some of the e*planatory variables are correlated with the individual%level
random effects but that none of the e*planatory variables are correlated with
the idiosyncratic error.
It is also worth noting that the fi*ed effects approach does not allow for
estimating coefficients on time invariant variables such as distance or
common language dummies, though the consistent estimation of such effects
are e(ually important in many situations. Cheng and Wall (2002! simply
suggest to estimate the regression of the (estimated! individual effects on
individual%specific variables by the )5#, though this approach clearly ignores
the potential correlation between individual specific variables and
(unobserved! individual effects such that the resulting estimates are likely to
be severely biased. In order to properly address this issue we need to employ
the /$> estimation techni(ue. >ost recent empirical studies also emphasise
the importance of e*plicitly allowing for the presence of time specific effects in
order to capture business cycle effects or to deal with globali&ation issues.
"ccording to Cheng and Wall (2008!, )5# suffers from heterogeneity bias in
gravity model conte*t. $rade between any pair of countries is likely to be
influenced by certain country%specific unobserved information (country
effects!. /owever, these country effects are appeared to be correlated with
e*planatory variables, thus making the )5# as biased. $he e*planatory
variables are considered to be endogenous as they are correlated with the
error term. $o overcome these shortcoming, according to 7gger (2002, 2008!,
/$> is the most appropriate estimator for trade in goods and services. $he
/$> employs an instrumental variable approach that uses information
solely from within the dataset to eliminate the correlation between e*planatory
variables and the unobserved individual effects that undermines the
appropriateness of the random effects model in the gravity model conte*t. $he
/$> is increasingly applied in gravity models of trade in goods and services.
$his also resolves the endogeneity problem.
35
11)Do Barriers 4atter? #sti"ated 6ra7it& 4ode% Res'%ts
$he (uality and performance of services trade sectors differ markedly across
countries, and more prominently between developed and developing
countries. $hese variations stem from differences in the (uality and cost of
infrastructure services as well as differences in policies, procedures, and
institutions. #urely, they have a significant effect on trade competitiveness and
market access. While there is strong anecdotal evidence that the lack of
ade(uate trade infrastructure might have altered the trade potential due to rise
in trade cost, we try to asses the effect of trade facilitation K trade costs
elements on bilateral trade with the help of an augmented gravity model.
"ny restriction imposed on the free flow of trade is a trade barrier. $rade
barrier can either be tariff barrier ( the levy of ordinary negotiated duties in
accordance with "rticle II of the J"$$ ! or non%tariff barriers, which are any
trade barrier other than tariff barriers.
)ne of the most common non%tariff barrier is the prohibition or restrictions on
imports maintained through import licensing re(uirement. $hough India has
eliminated its import licensing re(uirement for most consumer good, certain
products face licensing related trade barriers. +or e*ample, the Indian
government re(uires a special import license for motorcycles and vehicles
that is very restrictive.
36
15)Coc%'sio
$he benefits of tariffs are uneven. ?ecause a tariffs is a ta*, the government
will see increased revenue as imports enter the domestic markets. =omestic
industries also benefit from a reduction in C)> partition, since import prices
are artificially inflated.
Anfortunately for consumers both individual consumer and businesses% higher
import prices mean higher prices for goods.
If the price of inflation due to tariffs individual consumer pay more for products
using steel, and businesses pay more for steel than they use to make goods.
In short, tariffs and trade barriers tend to be pro%producer and anti%consumer.
$he effects of tariffs and trade barriers on businesses, consumers and the
government shifts over time.
In the short run, higher prices for goods can reduce consumption by individual
consumer and by businesses. =uring this time duties, in the long terms
businesses may see a decline in efficiency due to a lack of competition, and
may also see a reduction in profits due to the emergences of substitutes for.
37
Bib%io!ra$h&
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