Protectionism: Trade policy refers to policy adopted by a country with reference to exports and imports. Trade policy can be free trade policy or protective trade policy. A free trade policy is one, which does not impose any restriction on the exchange of goods and services between different countries. A free trade policy involves complete absence of tariffs, quotas, exchange restrictions, taxes and subsidies on production, factor use and consumption. A protective trade policy or protectionism is a policy pursued by a country to maintain a system of trade restrictions with the objective of protecting the domestic economy from the competition of foreign products.
Protectionism constituted an important plant in most of the countries upto 1980. Protectionism is an inward looking trade policy, which stresses the need for a country to evolve its own style of development with restrictions on the movement of goods, services, and people in and out of the country. A country may adopt following two types of protective measures:
- Tariff and Non-Tariff Barriers.
Subsidies: Subsidies refers to direct or indirect financial assistance from governments to various firms for making them competitive. The basic purpose of subsidies is to make domestic products cheaper or more profitable so that domestic firms may sell them abroad. Subsidies may be paid directly to the producers to compensate them for losses incurred from selling abroad. The result of subsidies is that the demand for imported products reduces and export surplus is generated.
Tariff and Non-Tariff Barriers: A tariff is a price-based policy to restrict trade by changing the price of import paid by the importer. The government charges on import tariff i.e. tax on imported goods. Tariffs consist of
- Basic custom duties mostly ad valorem applied to the c.i.f. price of the import.
- An auxiliary duty applied to the c.i.f. price.
- Additional duties equivalent to exercise taxes imposed on locally produced products applied to the c.i.f. price plus the basic customs duty and auxiliary duty.
After Geneva Round, there has been a substantial reduction in import tariffs on industrial products. But tariff on agricultural products still remain high. Non-tariff barriers are non-price based policies to restrict trade. The use of non-tariff measures has increased in recent years. Non-tariff barriers are numerous. Recently, United States of America has decided to ban import of carpets from India on the ground that child labor is used in the Indian carpet industry to which the human rights organizations have been serious objections. Further, in the past on many occasions, consignments have been returned by USA on the ground that the goods pose health hazards to the citizen of the country. Following are some important grounds to impose non-tariff barriers:
- Human rights.
- Damage to environment.
- Health considerations.
- Injury to domestic industries.
- Labeling standards.
Following are the various non-tariff barriers:
- Outright ban on imports.
- Monitoring of prices and volume of imports.
- Voluntary export restraints.
Non-tariff barriers affect not only sectors that are labor intensive, but also other sectors of export interest to developing countries such as steel, steel products, machine-tools, electronics etc. In 1987 GATT listed 135 major export restraint arrangements of various types. The number of such export restraint arrangements has been increasing. Majority of the export restraint arrangements are operating against the developing For example, Indian textiles, food items, clothing and agricultural commodities attract a number of non-tariff barriers in the European Union.