Sunday, 21 September 2014

A comparative study of trade restriction in selected countries

This paper seeks to make a comparative research analysis of trade restrictions in various countries. Such trade restrictions are concerned with barriers to trade, that certain governments promote in order to safeguard their domestic producers (and sometimes consumers too) against international competitors or trade practices, which the government deems unfit for the internal environment of the economy.
For the purpose of this study, we will consider the case of the Indian subcontinent, which majorly harbours the nation of India, Pakistan, Sri Lanka, Nepal and Bhutan. The paper will study the restrictions to international trade in these countries with a special focus on emphasising the key issues in developing nations; and the relation between these countries with each other, in context of international trade.
Some of the major points, on basis of which this study will analyse the trade restrictions in these economies, are tariffs, import quotas, voluntary export restraints, health and safety regulations and subsidies, among others.
India
India is one of the fastest growing economies in the world; it is the leading among its neighbours and closely competes with China. However, this was not the case in the pre 1990 era when India was viewed as a strict ‘protectionist’ economy; closed in a lot of aspects to the outside world. Post 1990 India had to liberalise more due to necessity however, it showed an immediate change in the country’s growth statistics, such as trade to GDP ratio increased from 15 to 35 percent between 1990 and 2005. This gave the country a status of ‘rapid globaliser’ in the international community. But even as a global approach the country still promotes certain trade restrictions enumerated below:
1.       Agricultural tariffs- India has been an agrarian economy for long (although recent focus is shifting on the expanding service sector). Agricultural tariffs average between 30-40 percent still. This is in place to protect the domestic producers of primary and agrarian goods. Since, a large Indian population of low or moderate means is involved in agriculture it is of importance to protect the livelihood of a major segment of the population. Also, it is a national ideology to be self sufficient at least in the case of food since, the country had faced a disastrous food shortage in recent past.
2.       Retail trade- India is among the few countries which continue to ban foreign investment in retail trade. Considering, for a major chunk of Indian population retail is the means of income after agricultural activities, the government strives to protect the interest of this mass in addition to guard the markets against the monopolistic competition produced by International trade giants. The recent protests regarding the entry of Wal Mart in India bear evidence to the climate for foreign investment in retail sector, in India. (http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/EXTSARREGTOPINTECOTRA/0,,contentMDK:20592520~menuPK:579454~pagePK:34004173~piPK:34003707~theSitePK:579448,00.html)
3.       In relation to Pakistan- India’s foreign trade policies are the most restrictive. The two countries have always been in conflict since the division of India into two nations in 1947. The neighbours share a mutual feeling of distrust and this show in their diplomatic ties and foreign trade policies. For example, India has placed certain quotas on import of certain goods from Pakistan, there are no proper communication facilities between the countries, road, rail and air routes are usually disrupted, visa grants are hard to get for intra country travel, consignments from either country are subjects to stringent checks on their ports among other barriers to free trade.   
4.       Subsidies- Indian government also provides subsidies to some of its sectors, in order to protect them from international competition and encourage them to grow to a level where they become self sufficient. Examples of such sectors can be service and handicrafts.

Bhutan
Bhutan is a landlocked country, surrounded with India on three sides and China on the remaining one. Post India’s independence the country, has maintained strong bilateral relations with India. It has entered into various preferential trade agreements with India which go on to reflect in its preference to Indian goods over other countries’.
Some of the major trade restrictions advocated by Bhutan are listed below:
1.       Third country imports- Since May 2012, Bhutan has placed certain restrictions on import of non essential items from third countries such as Thailand, Hong Kong, Nepal and Japan. This is in wake of protecting its still developing industries which aren’t strong enough to compete with those of developing/developed nations such as China and Japan.
2.       Exclude India- in most trade restrictions. Providing this neighbour preferential treatment. Excepting India in its third country imports ban could also be a necessity due to Bhutan’s lack of a position of dominance against a big and powerful neighbour. Currently Bhutanese traders also do not require an import license to transact with India.
3.       Checking imports- Bhutan has taken to various extreme measures in order to check its foreign trade. Such measures have ranged from cancelling import licenses in order to disable traders from transacting with the outside world, to restrictions on holding foreign currency accounts outside the country and even increasing freight charges on containers to make imported goods unattractive to Bhutanese population. (http://www.asianewsnet.net/news-30182.html)

Sri Lanka
Sri Lanka was one of the first countries to embrace a liberalised economy in 1977-78. This spurred growth and was evidenced by Sri Lanka’s leading exports to the world in terms of primary goods such as tea and rubber, and its increased reliance on its domestic industries for manufactured goods (as these industries became increasingly efficient when subjected to international competition in a moderated way). However, the continuous civil war for a long time and the change in government in 2004, brought about a change in ideology and Sri Lanka went on becoming a ‘protectionist’ economy from a liberal one. The change in ideology encompassed the following changes in policy making:
1.       Increase In tariffs- In February 2001 a 40% surcharge on custom duties was levied as opposed to a previous general reduction of scheduled duties in 2000. This was in wake of protests against liberal trade policies strengthened by a crisis economic condition; followed by an attack by LTTE on Colombo airport in July 2001.
From late 2004 a deliberate move to promote import substitution is being followed for both agriculture and manufacturing industries.
2.       Complex tax structures- Sri Lanka can be cited as an example for having one of the most complex tax structures for imports. Usually a country will have three sorts of taxes levied on imports which are Custom duties, indirect taxes (as VAT) and excise duties. However, Sri Lanka has as many as nine taxes on imports, which makes it increasingly difficult, complex and expensive for importers to transact with other nations.

Most of Sri Lanka’s moves in context of discouraging trade with the outside world are due to the prolonged civil war in the nation. Factions of society have opposed free trade and other more progressive ones have supported it. There’s no clear opinion in the country about an ideal stand on the issue; as the government is looking towards taxes on trade as fuel to finance its ever growing war expenditure. (http://www.crawfordev.anu.edu.au/acde/asarc/pdf/papers/2011/WP2011_03.pdf)

Nepal
Nepal is a landlocked country in South Asia; surrounded by India on three sides, and People’s Republic of China on the remaining one. Despite its rugged geography, less number of tangible resources, an ineffective post 1950 government and a prolonged civil war, Nepal has shown great promise in the arena of international trade by reducing the number of trade barriers drastically. This has resulted in a trade to GDP ratio of 38 per cent.
1.       Tariff rates- Nepal follows a low tariff rate of an average 11 per cent, encouraging foreign trade, contributing to its economic development.
2.       Accession to WTO- Nepal has recently become a full member of WTO opening up the following prospects for the country:
a)      Agreement to bind most duties and charges at zero and phase them out within 10 years;
b)      Agreement to bind average tariff at 42 percent for the agricultural products and 24 percent for all other products
c)       Agreement to allow up to 80 percent foreign equity participation in 70 services sub-sectors spanning distribution, retail and wholesale services and audio-visual.
3.       Quotas- However the abolition of Multi-Fiber Agreement quotas has already resulted a 40% fall in exports of the garment industry. (http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/EXTSARREGTOPINTECOTRA/0,,contentMDK:20592522~menuPK:579454~pagePK:34004173~piPK:34003707~theSitePK:579448,00.html)



Bangladesh
Bangladesh is rated as one of the most inferior nations in terms of trade restrictions however, recent liberalisation (post 1990) in tariff structure and easing of quotas has lead to an increase of trade-GDP ratio from 18% (1993) to 43% (2008).
1.       Tariff and Quotas- Bangladesh relied heavily on quotas and quantitative restrictions to protect its domestic industries. Approximately 40% of its total tax revenue comes from import taxes. Protective tariffs are currently at 20.1%. A key point of the present tariff structure is the significant application of para-tariff called supplementary duties, which account for about 31% of the average protection.
Some consumer goods, mainly the non-food luxury items, have high protective rates even up to 463% - well beyond the top custom duty rate.
2.       Accession to WTO- Being granted LDC status has opened new vistas for Bangladesh. It has led to rationalisation of tariffs, abolition of quantitative restrictions, moving from a multiple to unified exchange rate determination system, convertible current account and a focus which emphasizes on promoting a rather free trade for the nation.
(http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/EXTSARREGTOPINTECOTRA/0,,contentMDK:20592516~menuPK:579454~pagePK:34004173~piPK:34003707~theSitePK:579448,00.html)
Pakistan
Pakistan’s position in terms of trade restrictions is no different when compared to other countries mentioned in this paper. Its foreign trade relations with India have already been highlighted in this paper (in a sub point under the heading India). However, Pakistan exhibits the following trade barriers in its policies:
1.       Tariff- As all developing nations, Pakistan follows a high tariff rate structure to protect its domestic industries. However, tariff on agriculture are low, due to a perpetual food shortage in the country. This is unusual when compared with other countries of the sub continent which have high agricultural tariffs to protect their primary goods markets.
2.       International Hostility- Pakistan exhibits a hostile behaviour towards a lot of major nations in the world including its neighbours like India, Nepal, Bhutan and Sri Lanka. This is more due to an instable political regime and a conflict of ideologies among powerful factions of the Pakistani society; it has led to disruption of trade with the world for Pakistan.

To conclude, the paper has drawn attention to some of the major issues in developing world (especially those concerning the countries of the Indian subcontinent), which are impeding free trade by the way of trade restrictions initiated by various governments.
Some key issues that have come to light are:
1.       Developing nations in general, use Tariffs and Quotas as a means to protect their domestic industries.
2.       Usual restrictions to free trade have been initiated due to the case of internal turmoil within a nation. Just as in the case of Pakistan or Sri Lanka; where import taxes are viewed as a means to finance war expenditure.
3.       Countries of the subcontinent have bound themselves in various preferential trade agreements with each other; this has been a barrier to entry for rest of the world, into the markets of these nations.
4.       Trade restrictions in the developing world are rarely concerned with health and safety concerns (which are an issue in most western economies). However, exceptions can be seen, just as in the case of Indo-Pak relations where safety issues are prominent to protect both the nations from their hostility towards each other.


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