5. Commercial Policy Instruments – Fundamentals of International Business

CHAPTER 5

Commercial Policy Instruments

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

  • Examine the rationale behind different forms of trade protection
  • Explain the various forms of trade regulation
  • Distinguish between tariff and non-tariff barriers to trade
  • Appreciate the relevance of changing trade situation for the international business manager
  • Understand the direction of foreign trade in India
  • Examine the different avenues of export promotion in the Indian context

US EMBARGO ON KINDER JOY CHOCOLATE

Kinder Joy is a chocolate with a difference. It combines a chocolate and a toy in an airtight egg-shaped plastic container to create a delightful treat for children. The two halves of Kinder Joy egg are separate containers. One contains a toy while the other half is a creamy spread studded with two chocolate cookie balls. The spread is a layer of white chocolate on hazelnut and contains two chocolate balls surrounded by a thin wafer shell covered in chocolate and crunchy chocolate sprinkles. The two halves are sealed to prevent the toy being covered in chocolate, and also contain a small spoon to scoop out the delicious concoction.

This toy inside a confection is embargoed on the US soil. The ban is based on the US Food, Drug and Cosmetic Act of 1938 which banned all candies embedded with ‘non-nutritive objects’, such as toys. The US Food and Drug Administration (FDA) also claims that the surprise toy could be a choking hazard for kids leading to a regular advisory from the US Customs and Border Protection about the illegal import of these cute but dangerous chocolate eggs. The ban is no deterrent for chocolate lovers however, who continue to try and smuggle the Kinder eggs—and often end up paying a fine of up to USD 1,200 per egg.

References: Why are Kinder Surprise Eggs Illegal in the US? http://www.independent.co.uk; Kinder Surprise USA: Why These Eggs Are Banned South Of The Border, http://www.huffingtonpost.ca, last accessed on 12 September 2018.

INTRODUCTION

International trade theory in Chapter 4 discusses the theoretical basis of international trade and the advantages of fair and unrestricted trade to the world economy. In actual fact, it is seen that all countries interfere with international trade in varying degrees. This chapter examines the different rationales for protection adopted by nations and then looks at the different forms that protection can take. It also examines trends in global trade, the direction of foreign trade in India and examines the different measures taken by the government to promote exports in India.

GOVERNMENT INTERVENTION IN TRADE

There are two rationales for government intervention in trade—economic rationale and non-economic rationale.

Economic Rationale

The economic factors for trade intervention are as follows:

Protection to Infant and Domestic Industry

The infant industry argument proposed in 1792 by Alexander Hamilton is the oldest economic reason for trade intervention. According to this argument, domestic industry needs to be protected from foreign competition in the initial stages of its life. This is a period when the firm secures finance, gains mastery over production techniques, trains its labour force, and begins to reap economies of scale. It is argued that in the absence of these measures, it is impossible for the domestic firm to face competition in low-priced goods. This argument was the basis for protection and an inward-looking Indian industrial policy in the initial stages of the development of its industries as was the case for several other developing countries. It has been seen, however, that protection only helped to foster inefficiency as protected industries rarely made the effort to adopt efficient methods of production due to the security they received in a protected environment.

Employment and Industrialization

This argument goes hand in hand with the infant industry argument. It argues that setting up domestic manufacturing units lead to the twin benefits of employment and industrialization in the domestic economy. This, in turn, leads to regional and national growth. After the onset of the recent global crisis of 2008, even the US saw a move to ‘buy American goods’ in the interest of reviving the domestic economy.

Balance of Payments Position

The balance of payments position is a country’s financial statement based on trade and investment flows. Persistent deficits in a country’s balance of payments often force countries to adopt trade restrictions. For example, countries such as India import huge amounts of oil and related products. This often leads to policies such as tied imports, that is, imports which will help in re-export to help its balance of payments position. Although protection is meant to be temporary, in reality, it extends over a long time period, as a firm or industry rarely ever admits that it is not required.

Non-economic Rationale

The non-economic rationale for trade protection are:

Preservation of National Identity and Culture

It has been argued that free trade is a threat to national identity, culture, and institutions. Countries such as Canada and France impose restrictions on foreign media as they consider it a threat to their language and culture. Japan, on the other hand, imposes a high tariff on rice, which is a part of their staple diet and essential to their way of life.

Trade as a Bargaining Tool

Trade protection is often used as a tool to bargain with trading partners. This may be done as measures of passive or actively reciprocal behaviour. For instance, a country may refuse to lower or eliminate its barriers to trade until the other party does the same. On the other hand, a country may withdraw previous concessions or threaten to take retaliatory steps if its trading partner does not respond with similar concessions. As an example, the US government threatened China with stringent trade sanctions to try and get the Chinese to improve their intellectual property laws, which were causing US companies such as Microsoft to lose billions of dollars in trade revenue. The use of trade protection as a bargaining tool can be a double-edged sword, which can lead to trade openness and its attendant benefits if it is successful , but could severely restrict trade if the partner country retaliates through similar measures of protectionism.

Bird’s-eye View

Government intervention in free trade between nations is based on both economic and non-economic rationale. Economic rationale is based on protection to domestic and infant industry, issues of employment and industrialization and a country’s balance of payments position. Non-economic rationale is based on factors like preservation of national identity and culture, protection of consumer and human rights and the use of trade as a bargaining tool.

Protection of Consumer and Human Rights

Trade restrictions are often meant to protect domestic consumers against products that are unsafe and hazardous. The European Union (EU), for instance, has strict guidelines and even imposes barriers against agricultural produce entering its markets. This includes the sale of hormone-treated meats and the produce from genetically modified crops. Countries such as the US have also resorted to measures like not granting the most-favoured-nation (MFN) status to China to protest against its human rights violations.

INSTRUMENTS OF TRADE CONTROL

Government intervention in trade takes the form of tariff and non-tariff barriers.

  1. Tariff barriers are direct official constraints on the import of certain goods and services. Non-tariff barriers are indirect measures of trade control that discriminate against foreign goods in the domestic market.
  2. Tariffs are direct, transparent and non-discretionary measures of control on trade. Non tariff barriers are discretionary in application and less transparent compared to tariffs.
  3. Tariff barriers have a direct effect on prices. Non-tariff barriers may be directed to control either price or quantity of traded goods.
  4. The benefit of imposing a tariff leads to increased tax revenue for the government. Non-tariff barriers lead to price increase and profits which benefit the producer.

Tariff Barriers

A tariff (sometimes called duty) is the most common type of trade control and is a tax that governments levy on a good shipped internationally, over and above taxes levied on domestic goods and services. Tariffs are transparent and are typically set on an ad valorem basis, that is, on the basis of the value of the good or service in question. Governments charge a tariff on a good when it crosses an official boundary, whether it is that of a country, for example Mexico, or a group of countries, like the EU, that have agreed to impose a common tariff on goods entering their bloc.

Tariffs are of different types:

  • Tariffs collected by the exporting country are called an export tariff.
  • Tariff collected by a country through which the goods have passed, is called a transit tariff.
  • Tariff collected by the importing country, it is called an import tariff. The import tariff is by far the most common.
  • A government may also assess a tariff on a per-unit basis, in which case, it is applying a specific duty.
  • A tariff assessed as a percentage of the value of the item is an ad valorem duty. Lastly, a tariff assessed as both a specific duty and an ad valorem duty on the same product, is a compound duty.

Figure 5.1 illustrates how tariff and non-tariff barriers affect both the price and the quantity sold, although in a different order and with a different impact on producers. Both parts (a) and (b) of Figure 5.1 have downward-sloping demand curves (D) and upward-sloping supply curves (S). In other words, the lower the price, the higher the quantity that consumers demand; the higher the price, the more that suppliers make available for sale. The intersection of the S and D curves illustrates the equilibrium price (P1) and quantity sold (Q1), determined by market forces without government interference.

Part (a) shows the impact of the imposition of a tariff on price and quantity in the market. A tariff acts like a tax and raises the price of the commodity in the market from P1 to P2. As a consequence, the amount consumers are willing to buy will fall from Q1 to Q2. The rise in price as a result of imposing a tariff benefits the government, since it is in the nature of tax revenue. It has no benefit for the producer since the increased price does not result in higher profits.

Figure 5.1 Impact of Tariff and Non-tariff Barriers on Price and Quantity

Part (b) shows the impact of a non-tariff barrier on price and quantity. A non-tariff barrier acts as a restriction on supply, giving rise to a new supply curve (S1). The quantity sold falls from Q1 to Q2 as a result of the shift in the supply curve and price rises from P1 to P2. As a result equilibrium in the market is attained at a lower price. The higher equilibrium price of P2 benefits the producer as it leads to an increase in profit.

The major difference in the two forms of trade control is that tariff barriers are in the nature of a tax imposed by the government. They lead to a rise in price of the traded good but the benefit of the price rise leads to increased tax revenue for the government. Non-tariff barriers lead to a shift in the supply curve and the subsequent rise in price helps the producer to attain a higher profit.

Impact of Tariff Barriers

Import tariffs raise the price of imported goods, thereby, giving domestically produced goods a relative price advantage. A tariff may be protective even though there is no domestic production in direct competition. For example, a country that wants its residents to spend less on foreign goods and services may raise the price of some foreign products, even though there are no close domestic substitutes, in order to curtail demand for imports.

Tariffs also serve as a source of government revenue. Generally, import tariffs are of little importance to industrial countries; for example, the EU spends about the same to collect duties as the amount it collects. Tariffs, however, are a major source of revenue in many developing countries. This is because government authorities in developing countries have more control over determining the amounts and types of goods crossing their borders and collecting a tax on them than they do over determining and collecting individual and corporate income taxes. Although revenue tariffs are most commonly collected on imports, many countries that export raw materials charge export tariffs. Transit tariffs were once a major source of revenue for countries, but government treaties have nearly abolished them.

There is often a tariff controversy concerning industrial countries’ treatment of manufactured exports from developing countries that seek to add manufactured value to their exports of raw materials (like making tea bags from tea leaves). Raw materials frequently enter industrial countries free of duty; however, if processed, they are assigned an import tariff.

Since an ad valorem tariff is based on the total value of the product encompassing the raw materials and the processing combined, developing countries argue that the effective tariff on the manufactured portion turns out to be higher than the published tariffrate. For example, a country may charge no duty on tea leaves but may assess a 10 per cent ad valorem tariff on instant tea. If INR 50 for a package of instant tea bags covers INR 25 in tea leaves and INR 25 in processing costs, the duty is effectively on the manufactured portion, because the tea leaves could have entered duty-free. This anomaly further challenges developing countries to find markets for their manufactured products. At the same time, the governments of industrial countries cannot easily remove barriers to imports of developing countries’ manufactured products largely because these imports affect unskilled or unemployed workers who are least equipped to move to new jobs.

Bird’s-eye View

Tariff barriers are direct, transparent and non-discretionary constraints on trade. Tariff barriers act as a tax levied on exports, imports or goods in transit and have a direct effect on the price of goods being traded.

Non-tariff Barriers

There are two kinds of non-tariff barriers, namely, direct price influences and quantity controls.

 

Non-tariff barriers are indirect discretio nary measures of trade control.

Direct Price Influences

The principal forms of direct price influences are:

Subsidies: Direct payments made by the government to domestic companies to encourage exports or to protect them from imports are known as subsidies. They can take the form of cash payments, government participation in ownership, low-cost loans to foreign buyers and exporters, and preferential tax treatment. Governments may offer potential exporters many business development services, such as market information, trade expositions, and foreign contacts. From the standpoint of market efficiency, subsidies are more justifiable than tariffs because they seek to overcome, rather than create, market imperfections. There are also benefits to disseminating information widely because governments can spread the costs of collecting information among many users.

Aid and loans: Governments also give aid and loans to other countries. The assistance is known as tied loans if the funds are for a specific use. Tied aid helps win large contracts for infrastructure, such as telecommunications, railways, and electric-power projects. However, there is growing scepticism about the value of tied aid. Tied aid can slow the development of local suppliers in developing countries, and it can shield suppliers in the donor countries from competition.

 

Subsidies, aids and loans are non-tariff barriers which act as non-price controls.

Countries also use other means to affect prices, including special fees (such as for consular and customs clearance and documentation), requirements that customs deposits be placed in advance of shipment, and minimum price levels at which goods can be sold after they have customs clearance.

Quantity Controls

Governments use other non-tariff regulations and practices to directly affect the quantity of imports and exports. Principal forms of quantity controls include the following:

Quotas: The quota is the most common type of quantitative import or export restriction, which prohibits or limits the quantity of a product that can be imported or exported in a given year. An import quota prohibits or limits the quantity of a product that can be imported in a given year and an export quota prohibits or limits the quantity of a product that can be exported in a given year. Quotas raise prices just as tariffs do but, since they are defined in physical terms, they directly affect the amount of imports by putting an absolute limit on supply, for example, three million DVD players from a particular country in a given year. Therefore, quotas usually increase the consumer price because there is little incentive to use price competition to increase sales.

 

Quota is the most common quantitative non-tariff barrier to trade and places a restriction on the quantity that can be exported or imported.

A notable difference between tariffs and quotas is their direct effect on revenues. Tariffs generate revenue for the government. Quotas generate revenues for those companies which are able to obtain a portion of the limited supply of the product by selling it in the domestic market.

A country may establish export quotas to assure domestic consumers of a sufficient supply of goods at a low price, to prevent depletion of natural resources, or to attempt to raise export processes by restricting supply in foreign markets. To restrict supply, some countries band together in various commodity agreements, such as those for coffee and petroleum, which then restrict and regulate exports from the member countries. The typical goal of an export quota is to raise prices for importing countries.

Sometimes, governments allocate quotas among countries based on political or market conditions. This choice can create problems because goods from one country might be trans-shipped, or deflected to another country to take advantage of the latter’s unused quota. Prior to the ending of the Multi Fibre Arrangement (MFA) in 2004, this method was used to bring in USD 2 billion in illegal clothing imports from China to the US annually.

Sometimes, goods are subject to tariff rate quotas, according to which, a certain quantity of goods enter the country duty-free or at a low rate. However, there is a very high duty for subsequent imports. For example, since January 2006, the EU allows tariff-free imports of 775,000 tonnes of bananas annually from the Caribbean and African countries, but beyond that limit, all imports are subject to a duty of 176 euros per ton. Since the EU imports bananas from Central and South America as well, the tariff effectively subsidizes the banana export from the African and Caribbean nations and penalizes the producers from Central and South America.

Voluntary Export Restraint

A voluntary export restraint (VER) is a generic term used to describe all bilateral agreements that restrict exports. It is voluntary because a country has a formal right to eliminate or modify it at any time. For example, in the 1980s, the US convinced the Japanese government to ‘voluntarily’ limit their exports of automobiles to the US to no more than 1.85 million vehicles per year. Therefore, like a quota, a VER limits the quantity of trade between countries and, therefore, raises the prices of imported goods to consumers. It was estimated by the US Federal Trade Commission (FTC) that US consumers overpaid nearly USD 5 billion for Japanese automobiles between 1981 and 1985 due to the automobile industry VER. Procedurally, VERs have unique advantages. A VER is much easier to switch off than an import quota. In addition, the appearance of a ‘voluntary’ choice by a particular country to constrain its exports to another country does less political damage to the participating countries than an import quota does.

 

VER are bilateral agreements that restrict trade between countries.

Orderly Marketing Arrangements

This is a kind of VER consisting of formal agreements between governments to restrict international competition and keep a part of the domestic market for local producers. The MFA, which began in 1973 and regulated about 80 per cent of the world market in textiles and apparel exports, is an example of this. However, under the provisions of the 1994 GATT negotiations, all textile quotas under the MFA expired on 1 January 2005.

Embargo

An embargo is a specific quota that prohibits all forms of trade. Countries or groups of countries may place embargoes on either imports or exports, on entire categouries of products regardless of destination, on specific products to specific countries, or on all products to given countries. Governments often impose embargoes as a tool to achieve political goals.

‘Buy Local’ Legislation

Another form of quantitative trade control is the ‘buy local’ legislation. Very often, government purchases, which form a large part of total national expenditures, are from domestic producers only. In the US, for example, ‘buy American’ legislation requires government procurement agencies to favour domestic goods. Sometimes, governments specify a domestic content restriction, that is, a certain percentage of the product must be of local origin. Sometimes, they favour domestic producers by establishing floor price mechanisms for competing foreign goods. For example, a government agency may buy a foreign-made product only if the price is at some predetermined margin below that of a domestic competitor. Many countries prescribe a minimum percentage of domestic content that a given product must have for it to be sold legally in their country.

 

‘Buy local’ legislations are non-tariff barriers which compel local producers to buy domestic products.

Testing Standards

Countries often have various classifications, labelling, and testing standards to protect the health and safety of its citizens. For exporting firms, however, these are a source of complex and discriminatory barriers to free trade. The purpose of these is often to promote the sale of domestic products and complicate the sales of foreign products.

An example of these is product labels, which need to indicate their source of manufacture.

This adds to the firm’s production cost, since it may also need to be translated into different languages for different markets. Further, since raw materials, components, design, and labour increasingly come from various countries; most products today are of mixed origin.

For example, provisions in the US stipulate that any cloth substantially altered (for instance, woven) in another country must identify that country on its label. Consequently, designers like Ferragamo, Gucci, and Versace must declare ‘made in China’ on the label of garments that contain silk from China.

The purpose of testing standards is to protect the safety or health of the domestic population. However, some foreign companies argue that testing standards are just another means to protect domestic producers. For example, the EU standards keep some US and Canadian products out of the European market such as genetically engineered corn and canola oil. Interestingly, France which is a member of the EU, grows and sells a small amount of genetically engineered corn.

Specific Permission Requirements

The requirement to obtain permission from government authorities in order to conduct trade transactions is known as a licence. Procedures for this vary between countries and sometimes require the firm to submit samples to the authorities. This procedure can restrict imports or exports directly by denying permission and indirectly because of the cost, time, and uncertainty involved in the process.

 

A licence or specific permission requirement is an approval by the government for the trade of specific commodities between countries.

Foreign exchange controls similarly limit the availability of foreign exchange for trade and investment. It requires an importer of a given product to apply to a government agency to secure the foreign currency to pay for the product. As with an import licence, failure to grant the exchange, not to mention the time and expense of completing forms and awaiting replies, obstructs foreign trade.

Administrative Delays

Government policies such as customs rules often discriminate against trade practices. These are intentional administrative delays such as the Chinese requirement of different rates of duty for different products depending on the port of entry and an arbitrary determination of the value of goods. Other examples are the requirement of the Australian government that all television commercials be shot in the country itself even for foreign media companies.

Reciprocal Requirements or Countertrade

The exchange of merchandise for other goods or services is called an offset of countertrade transaction. Governments sometimes require exporters to take actual merchandise in lieu of money or to promise to buy merchandise or services in place of cash payment in the country to which they export. This requirement is common in the aerospace and defence industries, sometimes because the importer does not have enough foreign currency. For example, Russia’s commercial airline, Aeroflot, has exchanged Russian crude oil for Airbus aircraft. More frequently, however, reciprocal requirements are made between countries with ample access to foreign currency that want to secure jobs or technology as part of the transaction. For example, McDonnell Douglas Corporation sold helicopters to the British government but had to equip them with Rolls-Royce engines (made in the United Kingdom) as well as transfer much of the technology and production work to the United Kingdom. These sorts of barter transactions are called countertrade or offsets.

Bird’s-eye View

Non-tariff barriers are indirect discretionary measures of trade control which have an effect on both price and quantity of goods and services being traded.

ANALYSIS OF INDIA’S FOREIGN TRADE

An analysis of foreign trade covers three major aspects—volume, composition, and direction.

Volume of trade is the monetary value of goods and services being exported and imported. Composition of trade refers to the goods and services being exported and imported and is indicative of the structure and level of an economy’s development. Direction of trade is indicative of the geographical dispersion or concentration of markets for exports and sources of supply of its imports.

Volume of India’s Foreign Trade

In the pre-reform period, prior to 1990, export growth was stagnant in the 1950s. It picked up and grew at an average rate of 3.6 per cent per annum in the 1960s. However, India’s share in world exports declined from 1.4 per cent during the 1950s to 0.9 per cent during the 1960s.

The seventies witnessed a jump to 18 per cent per annum in the growth rate as a result of various export promotion and subsidization measures. This, however, could not be sustained in the first half of the 1980s and Indian exports showed a sharp decline even as world exports turned negative. In the second half of the 1980s, exports grew at 17.8 per cent per annum; the improvement in export competitiveness being attributed to a major depreciation of the exchange rate and increased export subsidies, along with some initial industrial deregulation and liberalization of capital goods imports.

The post-reform period was characterized by a more supportive industrial policy, a more liberal import policy, and a more realistic exchange rate policy including the move towards greater currency convertibility. During this period, exports grew at an average annual rate of more than 25 per cent in rupee terms.

India’s exports grew at 13 per cent per annum during 1993–97, and declined in 1998 due to the Asian crisis. The period 2002–08 saw a growth recovery of 20 per cent per annum, followed by a decline in 2009–10 and 2012–13 due to the shocks of the Euro zone crisis and global slowdown.1

India’s merchandise exports (on customs basis) had reached the level of USD 314.4 billion in 2013–14. Following the global trend of declining export growth, India’s exports continued to decline during 2014–15 and 2015–16, by 1.3 per cent and 15.5 per cent respectively. The trend continued in the first half of 2016–17, with a decline of -1.3 per cent, but recovered in the second half of 2016–17, as exports valued at USD 275.9 billion resulted in an overall growth of 5.2 per cent for the year 2016–17.

India’s trade deficit (on custom basis) which had registered continuous decline since 2014–15, widened to USD 74.5 billion in H1 of 2017–18 from USD 43.4 billion in H1 of 2016–17. India’s trade deficit was USD 108.5 billion in 2016.

India’s total imports have also increased from INR 6.08 billion in 1950–51 to 13.2 trillion in 2009–10. There has been an increasing trend in imports from the 1950s as a result of government policy till the 1990s. The government’s import control policy included policies, such as licensing, quotas, and tariff measures. In the post-liberalization period, there has been widespread liberalization of imports with the removal of quantitative restrictions; the lowering of tariffs leading to an increase in imports. Besides policy liberalization, expansion in the manufacturing sector has led to increasing demand of machinery, raw materials, intermediates, and accessories. This has been accompanied by expansion in transport and infrastructure and the increasing domestic demand for fuel, fertilizers and other commodities.

India’s imports grew at rates of 6.5 per cent to 8.5 per cent of GDP in the first 30 years of planning, and 8 per cent to 14 per cent in the next 25 years, and at a remarkable rate of 22 per cent of GDP since 2004–05.

Merchandise imports also fell from a high of USD 490.7 billion in 2012-13 to USD 381.0 billion in 2015–16, This was followed by a small increase of 0.9 per cent to USD 384.4 billion in 2016–17. The increase in the value of imports in 2016–17, was due to rise in the prices of crude oil and increased imports of gold and silver.2

Hence, India has had a consistent trade deficit as imports have exceeded exports in all years except 1972–73 and 1976–77. India’s trade deficit which was on a continuous decline since 2014–15, showed an increase in 2016–17. The trade deficit was valued at USD 108.5 billion in 2016–17, increased by 46.4 per cent in 2017–18, moving up to USD 114.9 billion.3

Net invisibles surplus fell from USD 118.1 billion in 2014-15 to USD 107.9 billion in 2015–16 and USD 97.1 billion in 2016–17.

Composition of India’s Foreign Trade

Tea, jute manufactures and cotton goods were India’s principal export earners till 1965–66, earning 45–50 per cent of total revenue. Besides these, leather, iron ore, cashew, and manufactured tobacco were also important items of export.

The export basket has done a complete turnaround since 1965–66 reflecting the growth and industrialization of the economy and its commitment to self-reliance. Important additions to the export basket include engineering goods, leather manufactures, cotton apparel, pearls and precious stones, chemicals and allied products, and woollen products. In other words, non-traditional exports constitute 70 per cent of the total export basket. However, high-technology exports constitute only 5 per cent of total manufactures, and 40 per cent of all manufactured exports consist of textiles, garments, gems, and jewellery. This is the result of the natural competitive advantage that India has in the form of its low-cost labour. However, in order to benefit from world trade, Indian exports must diversify and change towards higher value-added products and products with a higher technology content.

Noticeable changes have taken place in India’s export basket between 2000–01 and 2013–14. Share of petroleum, crude and products has surged almost five times to account for 20.1 per cent of total exports, catapulted by its 33.5 per cent growth (CAGR). The percentage share of primary products has reduced marginally from 16 per cent to 15.6 per cent over the period. In case of manufacturing goods, there has been a fall of 15.1 per cent, mainly on account of decline in export to major destinations like the US. Despite the overall decline in the share of manufactured goods, its two important components—engineering goods and chemicals—registered an increase of 19 per cent (CAGR) and 13 per cent (CAGR), respectively.4 India’s export basket has been dominated by eight sectors between 2000–01 and 2013–14. These are petroleum products, gems and jewellery, textiles, chemicals and related products, agriculture and allied sector, transport equipment, base metals and machinery. They had a share of 86.4 per cent in total exports in 2014–15.5

In 2017–18 the top exports which contributed 37 per cent to the total export basket were petroleum products, gems and jewellery, drug formulations and biologicals and iron and steel. All the top export sectors experienced positive growth of varying degrees, engineering goods and petroleum saw the highest growth, followed by moderate growth in chemicals and related products, and textiles and allied products; but there was negative growth in the gems and jewellery sector.6

Indian imports mainly consist of consumer goods, raw materials and intermediates, and capital goods. There has been a radical change in their composition over the years. Consumer goods made up 26 per cent of imports in 1950–51, but constituted barely 2 per cent of the import bill in 2009–10. Raw materials and intermediates had a share of 53.6 per cent in 1950–51 but increased to 84.3 per cent in 2009–10. Lastly, capital goods made up 20 per cent of the import bill in 1950–51, but had a share of 13.4 per cent in 2009–10.

The share of capital goods declined in 2013–14. Registering a negative growth of 14.7 per cent, they made up 11.9 per cent of total imports.7

Fuel (petroleum, oil and lubricants [POL]) and gold have traditionally been important items of import. While the value of POL imports increased marginally by 0.7 per cent in 2013–14 to account for 37 per cent of total imports, gold import declined from 1078 tonnes in 2011–12 to 1037 tonnes in 2012–13 and further to 664 tonnes in 2013–14 on the back of several measures taken by the government.8

Imports into India declined by 0.5 per cent to USD 448.0 billion in 2014–15 as compared to USD 450.2 billion in 2013–14. Petroleum, crude and products, chemicals and related products, gold, electronic goods and machinery accounted for 62.5 per cent of India’s total imports in 2014–15.9

The top imports of 2017–18 were petroleum, gold and precious jewellery, telecom instruments, and coal, coke and briquettes, with a combined contribution of 43 per cent to total imports. Merchandise imports registered a mild increase of 0.9 per cent to USD 384.4 billion in 2016–17. Sector-wise, imports of petroleum, oil and lubricants (POL) increased by 4.8 per cent in 2016–17 and 24.2 per cent in 2017–18 mainly due to an increase in international crude oil price.10

Almost all imports registered a negative growth in 2016–17, except electronic goods, ores and minerals and agriculture and allied products. Total imports of capital goods imports registered a marginal growth, except the transport equipments subcategory which registered high growth. In 2017–18 all major sectors registered positive growth with the capital goods imports, which are needed for industrial activity, registering a 11.3 per cent growth.11

The changes in the composition of India’s foreign trade reflect the structural changes in its economy in the past six decades. It has changed from being an exporter of primary commodities and an importer of manufactured goods to being an exporter of manufactured goods and an importer of intermediates and capital goods. Taking into account the low-export intensity of its manufacturing sector, it has a long way to go before its exports can drive its growth.

Direction of India’s Foreign Trade

The US and the United Kingdom have been the traditional export destinations of Indian exports with a combined share of more than 40 per cent during 1950–51. The duo continued to absorb nearly a quarter of India’s exports in the late 1990s and in the first half of 2000 before their combined share fell to 16 per cent in 2013–14.12 Declining volume of trade with these economies, especially with the United Kingdom, was associated with three economies—the US, the UAE and China—becoming India’s top three trading partners since 2005. Together, these three economies accounted for 32 per cent of India’s exports in 2004–05. In 2013–14, their combined share was 27 per cent.13

The direction of Indian imports is largely influenced by the nature of its development. As a large part, initial development was tied to aid imports originating in the aid giving countries.

The US was the principal supplier with a more than 35 per cent share in 1965–66, which has subsequently declined to 7 per cent at present. Other important suppliers are the United Kingdom, Belgium, Canada, France, Germany, and Japan. The Organization of the Petroleum Exporting Countries (OPEC) have also emerged as important importers, along with China, which had a 11.3 per cent share in the Indian import bill in 2009–10. The top regional destinations in 2013–04 were the European Union, Africa and North America.14

During 2013–14, there was good growth of exports to North America (9.1 per cent) and Africa (7.2 per cent), but low growth to EU 27 (2.2 per cent), as a result of slowdown in the European Union.15 The US was the principal supplier with more than 35 per cent share in 1965–66, which has subsequently declined to 5 per cent in 2013–14.16 The top three trading partners together made up 23 per cent of India’s import bill for the same period.

The top regional destinations in 2013–14 were West and North East Asia with share of 49 per cent followed by European Union (11 per cent), ASEAN Region (9 per cent) and Latin America (6 per cent).17

A significant development has been the increase in Africa’s export share in India’s total exports from 6.7 per cent in 2004–05 to 10.6 per cent in 2016–17.

India’s top five export destinations in 2017–18 were US (16.06 per cent), UAE (10.14 per cent), Hong Kong (5.22 per cent), China (3.98 per cent) and Singapore (3.72 per cent) with a cumulative share of 49 per cent. In a regional context, the share of Asia accounted for 49.39 per cent of India’s total exports followed by the US and Europe with shares of 21.09 per cent and 19.24 per cent respectively. Within Europe the share of the EU countries was 17.07 per cent.

Asia accounted for 60.49 per cent of India’s total import during the period 2017–18 (Apr– Oct), followed by Europe (14.78 per cent) and the US (11.81 per cent). China (16.86 per cent) had the highest share, followed by the US (5.47 per cent), the UAE (5.01 per cent), Saudi Arabia (4.65 per cent) and Switzerland (4.38 per cent).

CHAPTER SUMMARY
  • There are different rationales for protection adopted by nations and different forms that the protection takes.
  • Government intervention in trade can broadly be classified as tariff and non-tariff barriers, both of which have a distorting effect on the price and quantity determined by the free forces of the market.
  • Tariff barriers are direct official constraints on the import of certain goods and services that are non-discretionary in application.
  • Non-tariff barriers are indirect measures that discriminate against foreign goods in the domestic market or otherwise distort and constrain trade and have a discretionary application.
  • Non-tariff barriers may take the form of either price or quantity controls.
  • Foreign trade in India is a regulated activity aimed at the conservation of scarce foreign exchange for necessary imports and achieving self-reliance in the production of as many goods as possible.
  • India’s trade policy can be divided into five phases culminating in the new trade policy of 1991.
  • An analysis of foreign trade covers three major aspects—volume, composition and direction.
KEY TERMS
  • Tariff barriers
  • Non-tariff barriers
  • Subsidies
  • Quota
  • Voluntary export restraint
  • Embargo
  • Licence
DISCUSSION QUESTIONS
  1. Distinguish between tariff and non-tariff barriers to trade between nations.
  2. What is the basic rationale of trade intervention by the government? Using various examples, explain the effect of different kinds of intervention.
  3. Write short notes on:
    1. Subsidy
    2. Quota
    3. Voluntary export restraint
    4. Embargo
    5. Buy local legislation
  4. Write a short note on the trends and patterns of foreign trade in India.
  5. Clearly explain the impact of tariff barriers on trade.
  6. Using diagrams explain the differences between the effects of price and quantity as a result of non-tariff barriers on trade.
EXAMINATION QUESTIONS
  1. What are barriers to trade? Distinguish between the effects of tariff and non-tariff barriers on trade between nations. (15)

    [B.Com (Hons.), 2008, 2009, 2010, 2014]

  2. Comment on the trends in India’s foreign trade in the last decade. (8)

    [B.Com (Hons.), 2014]

  3. Explain various commercial policy instruments used by various governments to regulate foreign trade. (15)

    [B.Com (Hons.), 2015]

  4. ‘By using a tariff, a country can turn the terms of trade in its favour’. Examine the significance of tariffs in this context. (7)

    [B.Com (Hons.), 2018]

  5. What are the barriers to trade? Explain various commercial policy instruments used by countries to regulate foreign trade. (15)

    [B.Com 2018]

  6. Give a brief account of the types of non-tariff barriers and their impact on international business. (8)

    [B.Com (Hons.), 2017]