CA > Foundation > Paper 4 – Skim Notes

Unit 2 : The Instruments of Trade Policy

Overview

  • Define trade policy and its objectives
  • Differentiate types of trade policy measures
  • Evaluate tariffs as a trade policy instrument
  • Describe trigger price mechanisms for domestic industry protection
  • Outline Non-Tariff Measures (NTMs) adopted by countries

Key Topics

Introduction to Trade Policy

  • Trade policy includes all government measures to regulate imports and exports.
  • Free trade allows market forces to set prices with minimal interference.
  • Protectionism aims to shield domestic industries through tariffs and quotas.
  • Trade liberalization reduces barriers to foreign competition.
  • India has increased its engagement in Free Trade Agreements (FTAs) since 2021.

Deep Dive

  • Economic growth and job creation are benefits of free trade.
  • Trade policies shape international negotiations and obligations countries must adhere to.
  • Policy measures are not always based on economic merit, leading to inefficiencies.

Tariffs

  • Tariffs are taxes imposed on imported and exported goods.
  • They can raise government revenue and protect domestic industries.
  • Specific tariffs charge a fixed amount per unit, while ad valorem tariffs charge a percentage of value.
  • Types of tariffs include mixed tariffs, compound tariffs, and most-favoured nation tariffs.
  • Tariffs can create trade distortions but also increase domestic production.

Deep Dive

  • Historical evolution of tariff systems reveals shifts in economic strategy.
  • Tariffs can lead to retaliation from trading partners.
  • Economic theories often support tariffs as temporary measures for domestic support.

Non-Tariff Measures (NTMs)

  • NTMs are regulations other than tariffs that affect international trade.
  • They include technical measures for product quality and safety.
  • Non-technical measures can influence pricing and availability of goods.
  • NTMs can be classified into import-related and export-related measures.
  • The distinction between NTMs and NTBs (non-tariff barriers) is crucial for understanding their impact.

Deep Dive

  • Examples of NTMs reveal their double-edged nature, promoting welfare but also protecting domestic markets.
  • Legal frameworks like the TBT and SPS agreements guide legitimate use of NTMs.
  • Companies may face challenges in compliance with varying international standards.

Trigger Price Mechanisms

  • Used to protect domestic industries from unfair foreign pricing.
  • Anti-dumping and countervailing duties serve as responses to trade distortions.
  • Tariffs are imposed when imports are priced below fair market value.
  • Effective monitoring and regulations are key to implementing these mechanisms.
  • Economic justification is vital for the use of protective tariffs.

Deep Dive

  • Real-world examples of anti-dumping duties illustrate the importance of fair competition.
  • The impact of countervailing duties on domestic market dynamics can be significant.
  • Internal policy assessments often reveal the tension between consumer protection and producer support.

Export-Related Measures

  • Governments may impose bans or taxes on specific exports during shortages.
  • Export taxes can decrease domestic prices while raising international prices.
  • Export subsidies incentivize domestic producers to sell abroad at competitive prices.
  • Voluntary export restraints (VERs) limit exported quantities to avoid trade disputes.
  • Effective negotiation and compliance play critical roles in managing export measures.

Deep Dive

  • Export subsidies can significantly impact global trade relationships and market dynamics.
  • Emerging economies increasingly adapt these measures to foster growth.
  • Political pressures often shape the implementation of export-related measures, sometimes compromising economic efficiency.

Summary

The unit explores the various instruments of trade policy, detailing the significance of tariffs and non-tariff measures in shaping international trade. It outlines the shift in India’s trade strategy towards a more engaged approach in FTAs, and how different tariff types like specific, ad valorem, and mixed tariffs are employed to regulate market access. The analysis of NTMs sheds light on their increasing prevalence and challenges faced by exporters in a globalized economy. Trigger price mechanisms are essential for protecting domestic industries against unfair trade practices, while export measures illustrate the complexities related to managing international trade dynamics. Together, these concepts emphasize the critical role of government policy in influencing trade relations and market conditions.