Tariff and Non-Tariff Barriers

Tariff and Non-tariff Barriers

When foreign countries can enter a home country and sell product for less than the people usually see this as a great trade opportunity. However, if that product is manufactured in the home country then the home country not only loses revenue from sales on that product but the economic impacts can run even deeper. With no need to manufacture that product companies will no longer need to purchase the raw materials or hire the employees necessary to maintain the demand. To eliminate this from occurring or to impose a type of trade restriction on a foreign country tariffs and nontariffs are utilized. General Agreement on Tariffs and Trade (GATT) was succeeded by the World Trade Organization monitors tariffs and promotes free trade (Hill, 2004.)

Tariffs is a tax applied to an import and is one of the oldest trade policies in effect (Hill, 2004.) This tax is generally revenue for the charging country’s government. There are two types of tariffs; they are specific and ad valorem tariffs. A specific tariff applies or levies a set tax to a certain import. If a specific tax of fifty cents were applied to wine then the government would gain 50 cents from every bottle coming into the United States without regard to whether the wine was a 200-dollar bottle of the finest wine or a bottle of two-dollar wine headed for skid row. An ad valorem tax is applied at a fixed percentage of the value of the import (Saranovic, 2006.) Now if there were a 1.5% tax levied against the wines then three dollars would be gained in tariff revenue on each 200-dollar bottle of wine and only three cents on the two-dollar bottle.

Nontariff barriers are restrictions imposed upon countries such as voluntary export restrictions, antidumping and subsidies, quotas (Hill, 2004.) The first nontariff barrier is voluntary export restrictions (VER) is when a country limits the number of product being exported to a certain country in order to gain favor or to diffuse a situation in which trade tensions are running high. A second type of barrier is a quota. Unlike the voluntary export restriction a quota is very direct. Quotas like VERs increase the price for the consumer on the imported product. Quotas not only increase the price of imported products but it can also affect the price of domestically manufactured products. If the product that is under the quota criteria is used to manufacture the domestic item then it too in turn will cost more to manufacture and this cost is then translated in the price to the consumer.

The third type of nontariff barrier is antidumping. Dumping is when a country sells a product in a foreign country for less than it would sell in its own country (Understanding the WT0, 2006.) When products are introduced to a market in this manner it will do harm to the local businesses. GATT and WTO legislation support antidumping when it can be shown that the local economy has suffered a loss.

The last type of nontariff is a subsidy. A subsidy is a payment to a domestic industry by their government (Marchese,2006.) Subsidies aide the domestic businesses by enabling them to compete against foreign markets in their home country and by helping them export so that they can compete in the global trade system as well. Agricultural businesses are the most common industries that receive subsidies. When growing up in Montana, subsidies were often a matter of topic and debate. The amount of discussion held on subsidies made it seem too common and very prevalent. Surprisingly the United States gross farm receipts were only 22 percent subsidies, while Japan’s was 62 percent of their gross farm receipts at the beginning of the 21st century (Hill, 2004.) Subsidies benefit domestic industries by making them more competitive but the cost is picked up by taxes paid into the government by the citizens of that country. If taxes are raised higher