Trade barriers are generally a government-imposed restraint on the flow of international goods or services. The most common trade barrier is a tariff. A tariff is a tax on imports and raises the price of imported goods relative to domestic goods (goods produced at home). This discourages its demand and protects domestic producers from their international competition to a certain degree. As a result, each individual country places higher tariffs on goods determined to be import sensitive.
Data from the World Bank shows us that industrial countries are less sensitive to manufactured imports therefore maintain low tariff levels on manufactured goods. However domestic markets, which are sensitive when it comes to agriculture imports, often have higher tariff levels on their foreign agriculture counterparts.
According to the World Bank, the average tariff protection on agriculture goods can be nine times higher than manufacturing goods. The World Bank data suggests that the alleged estimate world gain from taking away existing global trade barriers is in between $250 billion to $550 billion per year. But alas, barriers to trade exist.
We look at three types of trade barriers that you need to know: tariff barriers, non-tariff barriers and other barriers to trade that affect business.
A common duty or tariff is the ad valorem, a tax assessed on merchandise value. In most countries, ad valorem taxes are applied to the value of the merchandise, plus the cost of insurance and freight. As a result, when issuing an invoice to foreign buyers it is important to subject them to these costs.
Specific duties or tariffs are typically those charged by weight, volume length or any other unit (for example, charging 15 cents per square yard on cotton fabric). Compounding duties calls for both ad valorem and an itemised duty on the same product. Alternative duties are those in which the custom official calculates the ad valorem duty and itemised duty and then applies whichever is higher. Also, you need to consider that processing fees and value-added tax (VAT) may be assessed on top of the duties or tariffs typically with an import processing fee, and other ad hoc taxes.
Non-tariff barriers are generally not quantifiable or measurable and as a result are often hidden costs. Typically referred to as “red tape” and include quotas, boycotts, licenses, standards and regulations, local content requirements, restrictions on foreign investment, local government purchasing policies, exchange measures and subsidies. It is important to understand that these types of non-tariff barriers exist and how they affect your business.
Some analysts believe that some markets, such as the European and Japanese markets are investing more of their resources to alleviate importing pressures from the likes of U.S. companies. In a sampling of about 200 overseas competitive projects tracked during an eight-year period, this it was estimated that U.S. firms lost approximately one-half of these due in part to government pressure — a hidden and non-quantifiable barrier to trade.
As an exporter, it’s essential to understand trade barriers that affect your business and consider the resources necessary to overcome the barriers applied to your products and services.