Instruments of foreign trade policy

Trade policy methods are divided into tariff and non-tariff.

A customs tariff is a set of customs duty rates applied to goods crossing the border of a state. Customs duties – a) taxes levied by the state on goods at the time they cross borders for protectionist or fiscal purposes; b) the levy levied on the value of the goods by the customs authorities on import and export.

Customs tariffs perform the following functions:

fiscal – replenishment of the state budget; protectionist – protection of local producers from foreign competition; balancing – preventing the export of goods, domestic prices, which are lower than world prices.

Studies by foreign and domestic economists have shown that the consequence of any customs protection is a decrease in the aggregate welfare of the nation. The use of an import tariff can lead to a deterioration in the terms of foreign trade in each of the trading countries. The import tariff causes an increase in the exchange rate of the country initiating its introduction. As a result, it is possible to reduce the volume of exports and, ultimately, a reduction in export production. Meanwhile, under certain conditions. the use of tariffs may be more effective than economic passivity. It is important to find the optimal import tariff for the state, consumer and producer.

The introduction of a customs tariff on imports meets the interests, first of all, of domestic producers competing with imports. First, they increase their sales as imported goods become more expensive and consumers are forced to repay the growing demand with domestic products. Secondly, they can raise the price of their goods due to an increase in the price of imported goods and get an additional gain.

For the consumer, the very fact of importing an imported product indicates that the consumer will prefer it to the domestic one, but due to the imposition of this product with an import duty, the consumer will be forced to spend a larger amount of money on its purchase, or to purchase it in smaller quantities, or both at the same time. Thus, the customs tariff, restricting imports, leads to a deterioration in consumer opportunities.

Domestic producers competing with importers benefit only if the import duty is sufficient to cause a valid import restriction, i.e. the supply of foreign goods to decrease with the accompanying price increase. The consequence of this rise in price will be the switch of the consumer from imported goods to domestic ones. Since the increase in world (and import) prices due to the introduction of the tariff will entail an increase in prices for domestic goods, resident producers will benefit both by raising prices and by increasing sales. However, producer gains do not cover consumer losses, which reduces society’s cumulative gains. In other words, if we talk only about consumers and producers, the introduction of tariffs will lead to losses, i.e. to a decrease in the total gain of society.

It should also be noted that the income from the tariff itself will not be very large, as it will be partially spent on the development of the tariff itself, documentation, maintenance of the customs service and much more. So, from the introduction of a customs tariff on imports, producers and the state benefit, and consumers lose. There is a redistribution of income from consumers in favor of the state and producers of import-substituting goods.

When classifying customs tariffs, various criteria are used:

according to the object of taxation, duties are divided into: import – are established on goods imported into the country; export – apply to goods exported from the country (rarely used, as a rule, to those goods that are not enough in the country); according to the method of collection, duties are divided into: ad valorem – charged as a percentage of the value of the taxable goods; specific – in the form of a fixed monetary rate per unit of weight, volume; combined (mixed) – a combination of ad valorem and specific duties; by origin, customs duties are divided into: preferential – duties that have lower rates than the usual customs tariff, which are imposed on the basis of multilateral agreements on goods originating from developing countries; conventional (treaty) – established on the basis of bilateral or multilateral agreements, for example, the WTO; autonomous – are introduced on the basis of unilateral decisions of the state authorities of the country; by nature, the following special types of duties are distinguished: seasonal – applied to goods of a seasonal nature (for example, agricultural products); anti-dumping – apply in the case of importation into the territory of the country of goods at a price lower than their normal value in the exporting country, if such imports harm local producers of such goods or prevent the organization and expansion of national production of such goods; compensatory – are imposed on the import of those goods in the production of which subsidies were directly or indirectly used, if their imports are detrimental to the national producers of such goods.

At present, the main obstacle to the development of international trade is non-tariff restrictions. These restrictions create considerable uncertainty in international trade due to their hidden nature, which allows the government to act more uncontrollably. Therefore, the WTO opposes quantitative restrictions in trade and their replacement with tariffs.

The most common non-tariff restrictions include the following measures:

quantitative restrictions and similar administrative measures (import quotas, export restrictions, licensing, voluntary export restrictions, currency restrictions and other currency and financial control measures, prohibitions, internal requirements for the mandatory use of national goods in the production of finished products); restrictive practices at the level of government; subsidies and other subsidies to exporters, a preferred system of public procurement, and discriminatory tax, financial, exchange rate, balance-of-payments and exchange-rate policies that favour or inhibit individual trade flows; Customs procedures and formalities when they exceed normal and generally accepted standards, which makes them an additional barrier to trade, in particular a complicated customs valuation procedure, a fuzzy system of customs classification, where they delay customs clearance or make it possible to interpret and apply them arbitrarily; technical barriers to trade (sanitary and veterinary norms and standards, where they impede the export or import of goods or directly discriminate against foreign goods, industrial and safety standards, requirements for packaging and labelling of goods, including trademarks, environmental norms and requirements).

The most common form of non-tariff restrictions is the quota. Quotas are a restriction in the quantity or value of the volume of products allowed to be imported into the country (import quota) or exported from the country (export quota) for a certain period. The State shall exercise quotas by issuing licences for the import or export of a limited quantity of products and at the same time prohibit unlicensed trade. A quota has the same effect on welfare as a tariff. The difference is that when using the quota, this income can go to importers in whole (if the license is issued free of charge) or partially (if the licenses are sold). Quotas have their advantages and disadvantages. First, the quota guarantees the restriction of imports to a certain amount. Secondly, it is a more flexible instrument of foreign trade policy. Thirdly, through the selective distribution of quotas, the state provides support to certain enterprises. The negative effects include its contribution to the monopolization of the economy due to the restriction of price competition, as well as arbitrary, and therefore often inefficient distribution of licenses (with the possibility of corruption).

The next common non-tariff instrument is “voluntary export restrictions”. In this case, the exporting countries themselves undertake to limit exports to this country. In fact, voluntary export restrictions are the same quota, only set not by the importer, but by the exporter.

To protect national producers, the state can not only restrict imports, but also encourage exports. One of the forms of such stimulation is export subsidies, which are benefits provided by the state to exporters to expand the export of goods abroad. Due to this, exporters can sell their products in the foreign market cheaper than in the domestic market. It becomes profitable for producers who receive a subsidy to sell goods on the foreign market. To do this, they need to reduce prices.

But since this price reduction is covered by a subsidy, exports increase. The increase in exports reduces the number of goods in the domestic market. Domestic prices are rising, followed by domestic supply and demand. Consumers suffer losses, and producers receive additional benefits. At the same time, it is necessary to take into account the size of the subsidy for the country as a whole. In the end, the country’s wealth losses will be greater than profits.

Dumping is a common form of competition. In this case, the exporter sells the goods on the market at a price lower than the one at which he would sell in the domestic market of his country. Dumping can be a consequence of the foreign trade policy of the state, if the exporter receives a subsidy, or it can be the result of price discrimination, when the exporting firm, which is a monopolist, achieves maximum income in the foreign market by lowering prices and increasing sales.

Economic sanctions are the most severe form of restricting foreign trade. An example of them is a trade embargo, i.e. a ban on the import or export of goods into the country. Embargoes are usually imposed for political reasons. This can already be seen from the fact that the embargo is detrimental to both the country imposing the embargo and the country against which it is imposed. From a political point of view, the application of an embargo justifies itself if the country imposing it can reduce its exports relatively painlessly, and the country against which the embargo is imposed is heavily dependent on foreign trade. At the same time, sanctions should be unexpected and large-scale.

Currently, non-tariff restrictions on foreign trade are common in all countries of the world. They are not treated by governments, exporters and importers in different countries. However, no country in the world has abandoned their use, and does not set this task for the near future.