Tariff Barriers

A tariff barrier is a levy collected on goods when they enter a domestic tariff area (DTA)
through customs. Tariff refers to the duties imposed on internationally traded commodities
when they cross national boundaries and may be in the form of heavy taxes or custom
duties (operated through a price mechanism) on imports, so as to discourage their entry into
the home country for marketing purposes.
Tariffs enhance the price of the imported goods, thereby restricting their sales as well as
their import. Governments impose tariffs only on imports and not on exports as they are
interested in export promotion. Only a few exported items of any country are taxed.
The aim of a tariff is thus to raise the prices of imported goods in domestic markets, reduce
their demand and thereby discourage their imports. Tariff barriers are major determinant
factor to build or get away from the business. In India, over the past ten years the prime
import duty has been reduced to 15% from 100% on many consumer durables and
electrical items.

Classification of Tariffs
On the basis of origin and destination of the goods crossing national boundaries
Export duty: An export duty is a tax levied by the country of origin, on a commodity
designated for use in other countries. The majority of finished goods do not attract
export duty. Such duties are normally imposed on the primary products in order to
conserve them for domestic industries. In India, export duty is levied on oilseeds,
coffee and onions.
Import duty: An import duty is a tax imposed on a commodity originating in another
country by the country for which the product is designated. The purpose of heavy
import duties is to earn revenue, to make imports costly and to provide protection to
domestic industries. Countries impose heavy import duties to restrict imports and
thereby remove the deficit in the balance of trade and balance of payment.
Transit duty: A transit duty is a tax imposed on a commodity when it crosses the
national frontier between the originating country and the country which it is cosigned

to. African and Latin American nations impose such transit duties at any point of
time. Sri Lanka is another country enjoying such benefits from Indian companies.

On the basis of quantification of tariffs

Specific duty: A specific duty is a flat sum collected on physical unit of the
commodity imported. Here, the rate of the duty is fixed and is collected on each unit
imported. For example, Rs. 800 on each TV set or washing machine or Rs. 3000 per
metric ton on cold rolled steel coils.
Ad-valorem duty: This duty is imposed at a fixed percentage on the value of a
commodity imported. Here the value of the commodity on the invoice is taken as the
base for calculation of the duty, e.g., 3% ad-valorem duty on the C&F value of the
goods imported. In the ad-valorem duty, the percentage of the duty is decided but the
actual amount of the duty changes as per the FOB value of a product.
Compound duty: A tariff is referred to as compound duty when the commodity is
subject to both specific and ad-valorem duty.

On the basis of the purpose they serve

Revenue tariff: It aims at collecting substantial revenue for the government, but
does not really obstruct the flow of imported goods. Here, the duty is imposed on
items of mass consumption, but the rate of duty is low.
Protective tariff: Protective tariff aims at giving protection to home industries by
restricting or eliminating competition. Protective tariffs are usually high so as to
reduce imports. However, if the protective duties are too high, it may hurt consumers,
as imports will stop, leading to shortages in the consumer market.
Anti-dumping duty: Dumping is the commercial practice of selling goods in foreign
markets at a price below their normal cost or even below their marginal cost so as to
capture foreign markets. Many countries follow dumping practices. It is international
practice which has a do or die instinct associated with the companys policy. It is
harmful to less developed countries where the cost of production is high.

 Countervailing duty: Such duties are similar to anti-dumping duties but are not so
severe. Countervailing duties are imposed to nullify the benefits offered, through
cash assistance or subsidies, by the foreign country to its manufacturers. The rate of
such duty will be proportional to the extent of cash assistance or subsidy granted.

On the basis of trade relations

Single column tariff: Under this system tariff rates are fixed for various commodities
and the same rates are made applicable to imports from all other countries.
Double column tariff: Under this system two rates of duty are fixed on all or some
commodities. The lower rate is made applicable to a friendly country or to a country
with which the importing country has a bilateral trade agreement. The higher rate is
applicable to all other countries.
Triple column tariff: Here, three different rates of duties are fixed. They are general
tariff, international tariff and preferential tariff. The first two categories have minimum
variance but the preferential tariff is substantially lower than the general tariff and is
applicable to friendly countries where there is a bilateral relationship.
Mutual understanding of products and tariffs is concluded through a cartel. It is also
called preferential tariff.

Benefits of tariff to the home country

1. Imports from abroad are discourage or even eliminated to a considerable extent.
2. Protection is given to the home industries and manufacturing sector. This facilitates an
increase in domestic production.
3. Consumption of foreign goods is reduced to a minimum and the attraction for imported
goods is brought down.
4. Tariff brings in substantial revenue to the government. In addition it also creates
employment opportunities within the country, by promoting domestic industries.
5. Tariffs aim to reduce the deficit in the balance of trade and balance of payment of a
country.

Non -tariff Barriers

Along with tariff barriers, non-tariff barriers are imposed by countries in order to restrict free
trade at a global level. Non-tariff barriers are quantitative restrictions as they directly restrict
the entry of foreign goods over and above a specific limit fixed by the government. Other
forms of non-tariff barriers are licenses, exchange control, complicated documentations,
technical certifications etc. Non-tariff barriers are useful for reducing the total quantity of
goods that are imported from abroad, but they do not affect the price of imported goods.
However, the net effects of tariffs and non-tariff barriers are more or less the same. The
impact of non-tariff barriers is more direct and faster.
Types of non-tariff barriers
1. Quota system: The quota system is an important non-tariff barrier. Under this system,
the quantity of a commodity permitted to be imported from various countries during a
given period is fixed in advance. Such quotas are usually administered by requiring
importers to have licenses to import a particular commodity. Imports are not allowed over
and above a specific limit. This suggests that tariffs restrict imports indirectly while
quotas restrict imports directly. Developing countries may use quotas in place of tariffs.
The quota system acts as a barrier to international trade as it restricts the flow of goods
in an artificial manner. There are different types of quota and a country can introduce
any type of quota as per the need of the situation. The types of quotas are:
Tariff quota: A tariff quota combines the features of the tariff as well as the quantity.
Here, the imports of a commodity up to a specified volume are allowed duty free or at a
special low rate of duty. Imports in excess of this limit are subject to a higher rate of duty.
Unilateral quota: In a unilateral quota system, a country fixes its own ceiling on the
import of a particular item.
Bilateral quota: In a bilateral quota, the quantity to be imported is decided in advance,
but it is the result of negotiations between the country importing the goods and the
country exporting them.
Mixing quota: Under a mixing quota, the producers are obliged to utilize a certain
percentage of domestic raw materials in manufacturing the finished products.

2. Import Licensing: Import licensing is an alternative to the quota system. It is useful for
restricting the total quantity to be imported. In this system, imports are allowed under
license. Importers have to approach the licensing authorities for permission to import
certain commodities. Foreign exchange for imports is provided against the license. Such
import licenses are the practice in many countries. This method is used to control the
quantity of imports. Import licensing may be used separately or along with the quota
system.
3. Consular formalities: Some importing countries impose strict rules regarding the
consular documents necessary to import goods. Such documents include import
certificate, certificates of origin and certified consular invoices. Penalties are imposed for
non-compliance of such documentation formalities. The purpose of consular formalities
to restrict imports to some extent and prevent free imports of commodities that are not
necessary.
4. Preferential treatment through trading blocs: Some countries form regional groups
and offer special concessions and preference to member countries. As a result trade is
developed among the member countries and allows advantages to all member
countries. On the other hand, it can cause a considerable loss to non member countries,
as a trading bloc acts as a trade barrier. Even trade agreements and joint commissions
are used as trade barriers as they restrict free movement of goods at the international
level.
5. Customs regulations: Customs regulations and administrative regulations are very
complicated in many countries. There are a number of Commodities Act, pertaining to
the movement of drugs, medicines, minerals, bullion etc. Restrictions under such acts
are useful to curtail imports. Tax administration also acts as barrier to free marketing
amongst countries.
6. State trading: State trading refers to import-export activities conducted by the
government or a government agency. Stat trading is useful to restrict imports, as the final
decision is taken by the government. Such state trading acts as a barrier, restricting the
freedom of private parties.
7. Foreign exchange regulations: Countries impose various restrictions on the use f the
foreign exchange earned through exports. Such restrictions have the following
objectives.
a) To restrict the demand for foreign exchange and to use the foreign exchange
reserves in the best possible manner.
b) To check the flow of capital.

c) To maintain the value of exchange rates. Under such regulations the foreign
exchange earned should be surrendered to the government. The government
provides foreign exchange to the businessmen as per priorities that are fixed
periodically.
8. Health and safety measures: Many countries have specific rules regarding health and
safety regulations, which are mainly applicable to raw materials and food items. Imports
are not allowed if the regulations are not followed properly.
9. Miscellaneous non-tariff barriers: Such barriers include prior import duties such as
deposits, embargoes and import restrictions due to environmental regulations, provision
of subsidies to domestic industry, canalization of imports of some commodities and
technical and administrative regulations. All such measures act as non-tariff barriers as
they restrict the free flow of goods and services between countries.