What are Import and Related Terminologies?
| CONCEPT | ANALOGY | EXAMPLE |
| IMPORT | Goods & services brought in one country produced by another either for use/resale to another instead of a domestic purchase. | A shop owner bought a painting from Paris to sell at their shop in the USA. |
| PROTECTIONISM | Government policies restrict international trade to aid domestic industries to improve the domestic economy & also for safety & quality concerns. | US government imposed voluntary export restraints on car imports from Japan to insulate the US auto industry. |
| IMPORT TARIFFS | Taxes charged by custom authorities on import of goods in a country, i.e., Import tax/Custom duty levied at a fixed percentage on the product imported. | Tariffs on cars in the US are 2.5%, whereas tariff on truck imports is 25%. |
| IMPORT QUOTAS | Non Tariff barriers limit the quantity or value of a product that can be imported at a specific time. | The US limits the import of Australian beef, Bahraini tobacco & Dominican peanuts. |
| CUSTOM DUTY (CD) | The tariff imposed on goods when transported across international borders. The purpose is to protect each country’s economy by controlling the flow of goods especially restrictive & prohibited goods in & out of the country. | The budget has reduced basic CD on liquor to 50% from 150%, which would be offset by an agricultural infrastructure cess of 100%, applicable on hard spirits such as whisky, rum, vodka. |
| FREE TRADE | Unrestricted Import & Export of goods and services between countries. Policy where the government doesn’t impose any tariffs, taxes, import duties & export quotas. | The largest multilateral (agreement among three or more countries) is the United States – Mexico – Canada Agreement (USMCA), formerly the North American Free Trade Agreement (NAFTA). |
| Pre-dominant Theories of Free Trade : 1. Mercantilism: Maximizing Revenue through the export of goods and services 2. Comparative Advantage: Country’s ability to produce goods and provide services at a lower cost than other countries. 3. Advantages of Free Trade : • Stimulates Economic growth • Lower prices help consumers • Reduces government spending • Encourages technology transfer | ||
| TRADE WAR | When one country retaliates against another by raising import tariffs or placing restrictions on another country’s imports. | US-China Trade War where the US imposed tariffs on Chinese products |
| While running for presidentship in 2016, Donald Trump, President of the US, expressed his disdain for many trade agreements, promising to bring manufacturing jobs back to the United States from other nations where they had been outsourced, such as India & China. After his election, he embarked on a protectionist campaign. | ||
| EXTERNALITIES | Cost/benefit caused by a producer, not financially incurred or received by that producer. It can be positive or negative & can stem either from the production or consumption of a good/service. | Positive externality: Consuming education causes private benefits. Negative externality: Production of smoke from vehicles causing pollution. |
| WTO (WORLD TRADE ORGANISATION) | Member governments try to sort trade issues they face with each other. WTO has 164 members | WTO has lowered trade barriers & increased trade among member countries |
Detailed Study on Import Tariff
Tariff - Tax on imports imposed by the customs authority coming from a country & exports leaving a country borne by the end consumer.
Tariff impact on expenses of Imported goods -Due to the low cost of labor & capital, import becomes cheaper even after levying the tariff, but additional tariff can sometimes make it expensive; thus, domestic industries benefit from a reduction in the competition since import prices are artificially inflated. This leads to a lower level of supply & higher prices for consumers.
Tariffs & Trade Barriers
- Protecting Domestic Employment :
Intense competition from imported goods may pose a danger to domestic industries. To save costs, these domestic enterprises may fire people or relocate production elsewhere, resulting in more unemployment and a dissatisfied electorate.
E.g., When the USA imports utensils from India, this will cause employment in the industry of the USA. In this situation, tariffs protect the domestic employment of the USA by restricting trade.
2. Protecting Consumers :
The government may levy a tariff on products that could be a risk for the population.
E.g., South Korea may place a tariff on imported beef from the US if it thinks the same could be tainted with a disease.
3. Infant/Emerging Industries :
Companies formed around a new product/idea at an early development stage.
E.g., Artificial intelligence
II have to face barriers like insufficient funding, government restrictions, competition from established companies. Hence developing countries use ISI (Import Substitution Industrialisation) strategy to protect themselves & to decrease dependence on developed countries. The government of a developing economy will levy tariffs on imported goods in industries. This is because it wants to foster growth, thereby increasing the price of imported goods & creating a domestic market. Though ISI policy was implemented in the US, Africa & Asia, it was rejected after the rise of global market-driven liberalization.
4. National Security :
Developed countries employ barriers to protect strategically important industries, e.g., those in the interest of national security.
5. Retaliation :
Countries may set tariffs as a technique to retaliate if they think that a trading partner has gone against the rules or the government’s foreign policy objectives.
Common Types of Tarrifs
- SPECIFIC TARIFFS :
Fixed Fee levied on 1 unit of an imported good; it varies good to good
For Eg, a country could levy a $30 tariff on shoes whereas a $250 tariff on laptop
2. AD VALOREM TARIFFS :
Ad Valorem calculates in proportion to the estimated value of the goods.
Calculated at a fixed percentage of the assessed commercial value of the good.
For Eg, if a product has a commercial value of $10,000 and an AVTR of 10%, we would pay $1000 in tariff rate charges.
Non-Tariff Barriers
- LICENSES
The government grants a license to the business for the import of certain goods.
E.g., License for import of an agricultural product like fruits, vegetables
2. IMPORT QUOTAS
Limit on the quantity of import of a particular commodity in a given period.
- Tariff: Import allowed up to specified quantity either duty-free or at a low rate of duty.
- Unilateral: The country places an absolute limit on the import of commodities in a given period.
- Bilateral: Quota set through negotiation between importing & exporting country
- Mixing: Mix of domestic production along with imported goods.
- Import Licensing: Importers required to obtain a license for importing any quantity of goods within specified quotas; generally distributed among established importers
4. VOLUNTARY EXPORT RESTRAINTS
Created by the exporting country since they prefer to impose their restrictions than risk sustaining terms from tariffs/quotas.
5. LOCAL CONTENT REQUIREMENT
The government requires the production of a good domestically up to a certain percentage of the value of the good instead of placing an import quota.
Impact of Covid 19 on India's Import & Export:
- India announced its 1st nationwide lockdown in March 2020, leading to an economic slowdown. Most affected sectors – Service, manufacturing, travel & tourism, etc
- GDP fell by more than 9% in the succeeding quarter, market crisis & a rise in unemployment. Import of Crude petroleum & other products -27.72% ; Transport Equipment -25.26% ; Fertilizers , Crude & manufactured -11.57%
- Export of Petroleum products most affected, decline 32% compared to the previous year
BRIEF ON USTR (UNITED STATES TRADE REPRESENTATIVE) :
USTR is a kind of agency of the United States federal government responsible for developing & promoting American trade policy.
Current News; Source: Global Economy, Press Trust of India: 27.03.21 ;
US Trade body proposes Retaliatory Trade actions against India & other countries that have imposed or are considering equalization levy/digital service tax (up to 25% additional tariff ad valorem in India) on E-Commerce companies.
It has published notices seeking public comments on proposed trade actions against six countries. USTR proposed to impose retaliatory tariffs on Indian shrimps, basmati rice, gold & silver items, bamboo products, pearls, precious stones, etc., in response to the 2% equalization levy.
Common Mistakes
- Undercapitalization, i.e., when a company does not have sufficient capital to conduct normal business operations and payment of creditors, insufficient generation of cash flow, inability to access debt and equity forms of financing
- Lack of knowledge regarding Import & Export rules & regulations
- Inadequate Insurance of goods bought and supplied
- Casual approach towards verification of the legitimacy of supplier and buyer of the product
- Lack of product research and Import barriers
- Not updated with current exchange rates/change in tariff rate etc
Context and Applications
This topic is significant in the professional exams for both undergraduate and graduate courses
- BA in Economics
- BS in Economics
- Masters in Economics
- MBA
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