A Study on Influence of Tariff Barrier on Indian Economy

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PROJECT REPORT ON
“A Study on Influence of Tariff Barrier on Indian Economy”
Submitted to
University of Mumbai
In Partial Fulfillment of the Requirement
For
M.Com (Accountancy) Semester I
In the subject
Economics
By
Name of the student : - Vivek ShriramMahajan
Roll No. : - 14 -7288
Name and address of the college
K. V. Pendharkar College
Of Arts, Science & Commerce
Dombivli (E), 421203
NOVEMBER 2014

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DECLARATION
I VIVEK SHRIRAM MAHAJAN Roll No. 14 – 7288, the student of
M.Com (Accountancy) Semester I (2014), K. V. Pendharkar College,
Dombivli, Affiliated to University of Mumbai, hereby declare that the
project for the subject Strategic Management of Project report on “A Study
On Influence Of Non Tariff Barrier On Indian Economy” submitted by
me to University of Mumbai, for semester I examination is based on actual
work carried by me.
I further state that this work is original and not submitted anywhere else for
any examination.
Place : Dombivli
Date:
Signature of the Student
Name: - Vivek Shriram Mahajan
Roll No: - 14 -7288

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ACKNOWLEDGEMENT
It is a pleasure to thank all those who made this project work
possible.
I Thank the Almighty God for his blessings in completing this task.
The successful completion of this project is possible only due to
support and cooperation of my teachers, relatives, friends and well-
wishers. I would like to extend my sincere gratitude to all of them.
I am highly indebted to Principal A.K.Ranade, Co-ordinater
P.V.Limaye, and my subject teacher Ms. Neha Salagare for their
encouragement, guidance and support.
I also take this opportunity to express sense of gratitude to my
parents for their support and co-operation in completing this
project.
Finally I would express my gratitude to all those who directly and
indirectly helped me in completing this project.
Name of the student
Vivek Shriram Mahajan

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Table of Contents:
CHAPTER No Topic Page no
CHAPTER 1 Introduction
Introduction to Subject………………………..
Introduction to Tariff Barrier…………
5
6
CHAPTER 2 Types of Tariff & Non Tariff Barrier
Types of Tariff Barriers…………………………..
Types of Non Tariff Barriers......................................
9
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CHAPTER 3 Effecton Agricultural Product
Import ………………………………………
Export …………………………………...…..
23
25
CHAPTER 4 India’s Industrial Performance
Protection and India’s Industrial Performance 36
CHAPTER 5 Conclusion
Conclusion………………………………….. 41
Bibliography…………………………………………. 42

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CHAPTER 1: Introduction
Introduction to Subject
The commercial policy plays an important role in economic growth and development of
the country. Many of the countries of the World sometimes use free trade policy as well
as protectionist commercial policy. The countries participating in the international trade
are geographically and politically independent countries. These countries pursue their
own trade policies independently from the point of view of their own economic
development.
Tariffs are the most common kind of barrier to trade; indeed, one of the purposes of the
WTO is to enable Member countries to negotiate mutual tariff reductions. Before we
consider the legal framework that provides the discipline regarding tariffs, we must
understand the definition of tariffs, their functions, and their component elements (rates,
classifications, and valuations).
International trade increases the number of goods that domestic consumers can choose
from, decreases the cost of those goods through increased competition, and allows
domestic industries to ship their products abroad. While all of these seem beneficial, free
trade isn't widely accepted as completely beneficial to all parties. This article will
examine why this is the case, and look at how countries react to the variety of factors that
attempt to influence trade.
The commercial policy or trade policy is meant, “All measures regarding all
international economic transactions between the reporting country and the foreign
countries.” International trade involves the trade between two or more countries.
Commercial policies are of two types:
1. Free trade policy: A free trade policy is a type of trade policy which does not places
any restriction on the movement of goods and services between countries. According to
Adam Smith Free Trade is an international trade policy which draws no distinctions
between the domestic goods and the foreign goods. It is a policy which doesn‘t give any
special favour to domestic goods or doesn‘t impose extra duties on foreign goods.
2. Protection: means safeguarding the home country by erecting a strong tariff wall to
fortify the domestic infant industries from the attack of the foreign sophisticated goods
and simultaneously giving some concessions, bounties, subsidies, tax holidays etc, to
domestic industries. It includes import substitution and export promotion as well.

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Introduction to Tariff Barrier
Traditionally trade was regulated through bilateral treaties between two nations. For
centuries under the belief in mercantilism most nations had high tariffs and many
restrictions on international trade. Free and fair international trade is an ideal situation as
free trade is beneficial to all participating countries. However, various types of
barriers/restrictions are imposed by different countries on international marketing
activities. Such imposed or artificial restrictions on import and exports are called Trade
barriers which are unfair and harmful to the growth of free trade among the nations. The
trade barriers can be broadly divided into two broad groups.
 Tariff Barriers.
 Non-Tariff barriers.
 Tariff Barriers:
Tariff is an important method to prevent imports in any particular nation. In simplest
terms, a tariff is a tax. A tax imposed on imported goods and services. Tariffs are used to
restrict trade, as they increase the price of imported goods and services, making them
more expensive to consumers. They are one of several tools available to shape trade
policy. Tariffs are available in the form of export as well as import tariffs.
Governments may impose tariffs to raise revenue or to protect domestic industries from
foreign competition, since consumers will generally purchase cheaper foreign produced
goods. Tariffs can lead to less efficient domestic industries, and can lead to trade wars as
exporting countries reciprocate with their own tariffs on imported goods.
 General Definitions of Tariff:
 “A tariff is a tax imposed on the import or export of goods.”
 A tariff refers to “Import duties‖ charged at the time goods are imported.”
 Tariff barriers represent taxes on imports of commodities into a country and are
among the oldest form of government intervention in the economic activity.
 Tariffs are a kind of specialized tax that affects goods imported to, or exported
from, a country.

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 The main causes of imposing trade barriers are as follows:
 For protecting the domestic industries from foreign competition.
 For protecting domestic employment.
 For promoting development and research.
 For the purpose of National Security
 For conserving the foreign exchange resources of the country.
 For guarding the domestic industries against dumping.
 For making the Balance of Payment position favorable.
 For raising the revenue for the Government.

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Introduction to Non Tariff Barrier
The issue of non-tariff barriers crops up because of the glearing defects of tariffs. As is
already seen in the previous modules, "Tariffs" that at the imposition of tariff leads to
bringing about gains to the tariff Imposing country but at the same time it reduces the
volume of trade. At the highest of the high tariff the losses will be more than the gains.
Moreover, Tariff produces indirect effect through raising of the price of the tariff
imposed goods. Therefore tariffs should be within limits which should lead to
minimization of losses and maximization of gains i.e. the "tariff should be optimum
tariffs". Hence it paves the way for non-tariff barriers.
Tariffs are not very effective in under developed countries. Their problems are different
from the problems faced by the developed countries. The problem before the developed
countries is to maintain the already attained high rate of economic growth while the
problem before the undeveloped countries is to accelerate the rate of economic growth.
The underdeveloped countries face the problem of deficit in the balance of payment. To
correct the deficit in the balance of payment the underdeveloped countries need to have
indirect controls like non-tariff barriers i.e. import quota and not the direct controls like
tariffs.
 CONCEPT
The measures which are used other than tariffs to restrict imports get collectively referred
to as non-tariff barriers. These are direct measures of import restrictions. The setting up if
GATT and WTO led to progressive reduction in tariffs. However it paved the way for the
adoption of non-tariff barriers methods by the developed countries for the reduction of
imports. The non-tariff barriers include a cafeteria of Trade barriers viz. Import Quota,
Import licensing, voluntary export restraints, Dumping, International Cartels, Subsidies
etc.

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CHAPTER 2: Types of Tariff & Non Tariff Barrier
 TYPES OF TARIFFS BARRIERS
There are several types of tariffs and barriers that a government can employ. These types
are explained as follows:
(A) On the basis of origin and destination of the goods crossing the national
boundary:-
On the basis of origin and destination of the goods crossing the national boundary, there
is a threefold classification of Tariffs which is as under:
a) Import Duties: An import duty is a tax imposed on a commodity originating from
abroad and imported by the duty levying country.
b) Export Duties: An export duty is a tax levied up on a commodity originating from the
duty levying country imported by the foreign country.
c) Transit Duties: A transit duty is a tax imposed upon a commodity crossing the
national frontiers originating from the foreign country and imported by other foreign
country.
(B) On the basis of the qualifications of tariff :-
a) Specific Duties: A fixed fee levied on one unit of an imported good is referred to as a
specific tariff. This tariff can vary according to the type of good imported. For example, a
country could levy a Rs. 100 tariff on each pair of shoes imported, but levy a Rs. 1000
tariff on each computer imported.
b) Ad-valorem Duties: The phrase ad valorem is Latin for ―According to the value‖,
and this type of tariff is levied on a good based on a percentage of that good‘s value. An
example of an ad valorem tariff would be a 15% tariff levied by India on U.S.
automobiles. The 15% is a price increase on the value of the automobile, so a $10,000
vehicle now costs $11,500 to Indian consumers. This price increase protects domestic
producers from being undercut, but also keeps prices artificially high for Indian car
shoppers.
c) Compound Duties: When a commodity is subjected to both specific and ad-valorem
duties then the tariff gets referred to as compound duty. These duties are charged
depending upon the situation of minimum criterion. If the specific duty happens to be
minimum then specific duty will be charged conversely if the ad-valorem duty happens to
be minimum then the ad-valorem duty will be charged.

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(C) On the basis of the application of tariff between different countries:-
a) Single columns Tariff: The single columns Tariff is also known as uni-linear tariff.
When the uniform rate of duty is charged on all the commodities without making any
discrimination between countries then the tariff gets referred to as Single Columns Tariff.
b) Double columns Tariff: When two rates of duties are charged on some or all the
commodities then the tariff gets referred to as double column tariff. The double column
tariff discriminates between countries.
(D) On the basis of the purpose of the imposition of tariff:-
a) Revenue Tariff: Many a times a tariff is imposed on the goods and services to earn
revenue or income to the country then it is termed as ―Revenue tariff‖. When the main
purpose of the Government in imposing tariff is to obtain revenue then the tariff gets
referred to as revenue tariff. When raising of revenue happens to be the main or primary
motive behind imposition of tariff the rate of tariff generally remains low otherwise
imports will be curtailed and the Government will not be in a position to raise enough
revenue. Revenue tariff tends to fall on mass consumption goods. Government would like
to earn additional revenue in order to calls to various functions viz.:
1) Obligatory functions like administrations of the country, maintenance of law and
order, administrations of justice, preservation of peace.
2) Optional functions or development and welfare oriented functions like poverty
alleviation, employment generations, social justice, planning, economic development etc.
b) Protective Tariff: when the tariffs imposed in order to restrict imports into a country
as far as protection to the domestic industries are concerned then it is called as
―Protective tariffs‖ these kinds of tariffs are used by developing nations of the World.
c) Countervailing and Anti-Dumping Duties: Countervailing Duties may be imposed
on certain items of imports when these items have been subsidized by foreign countries
Governments. Anti-Dumping Duties are imposed in the foreign goods when there goods
get dumped in the domestic market. Below the price prevailing the originating the
market. Countervailing and Anti-Dumping Duties are generally the penalty duties.

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 TYPES OF NON-TARIFF BARRIERS
There are various types of barriers are available to the Non-Tariff Barriers to Trade
Following are the various Six Types of Non-Tariff Barriers to Trade.
1. Specific Limitations on Trade: it includes the Quotas, Import Licensing
requirements, Proportion restrictions of foreign to domestic goods (local content
requirements), Minimum import price limits, Embargoes.
2. Customs and Administrative Entry Procedures: It includes the Valuation systems,
Anti-dumping practices, Tariff classifications, Documentation requirements, Fees and
soon.
3. Standards: In this type the Standard disparities, Intergovernmental acceptances of
testing methods and standards, Packaging, labeling, and marking etc. are included.
4. Government Participation in Trade: It has Government procurement policies,
Export subsidies, Countervailing duties, Domestic assistance programs
5. Charges on imports: It includes Prior import deposit subsidies, Administrative fees,
Special supplementary duties, Import credit discrimination, Variable levies, Border taxes
etc.
6. Others: It has Voluntary export restraints, Orderly marketing agreements and so on.
Thus, the various types of barriers to the Non-Tariff barriers are explained as well. The
Non-Tariff barriers can include wide variety of restrictions to trade. Here is some
example of the ―popular Non-Tariff barriers.
A) Licenses
License is the most common instruments of direct regulation of imports (and sometimes
export) are licenses and quotas. Almost all industrialized countries apply these Non-
Tariff methods. The license system requires that a state (through specially authorized
office) issues permits for foreign trade transactions of import and export commodities
included in the lists of licensed merchandises. The main types of licenses are general
license that permits unrestricted importation of goods included in the lists for a certain
period of time.
B) Quotas
A quota is a limitation in value or in physical terms, imposed on import and export of
certain goods for a certain period of time. It is also an important instrument to restrict
trade as far as Non-Tariff barriers are concerned. Licensing of foreign trade is closely
related to quantitative restrictions – quotas - on imports and exports of certain goods.
This category includes global quotas in respect to specific countries, seasonal quotas, and

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so-called ―voluntary" export restraints. Quantitative controls on foreign trade
transactions carried out through one-time license.
Licenses and quotas limit the independence of enterprises with a regard to entering
foreign markets, narrowing the range of countries, which may be entered into transaction
for certain commodities, regulate the number and range of goods permitted for import
and export. The licensing and quota systems are an important instrument of trade
regulation of the vast majority of the world. The consequence of this trade barrier is
normally reflected in the consumers‘loss because of higher prices and limited selection of
goods as well as in the companies that employ the imported materials in the production
process, increasing their costs.
C) Voluntary Export Restraints (VERs)
A Voluntary Export Restraints (VERs) is a restriction set by a government on the
quantity of goods that can be exported out of a country during a specified period of time.
Often the word voluntary is placed in quotas because these restraints are typically
implemented upon the insistence of the importing countries.
D) Embargo:
Embargo is a specific type of quotas prohibiting the trade. As well as quotas, embargoes
may be imposed on imports or exports of particular goods, regardless of destination, in
respect of certain goods supplied to specific countries, or in respect of all goods shipped
to certain countries. Although the embargo is usually introduced for political purposes,
the consequences, in essence, could be economic.
E) Standards:
Standards take a special place among Non-Tariff barriers. Countries usually impose
standards on classification, labeling and testing of products in order to be able to sell
domestic products, but also to block sales of products of foreign manufacture. These
standards are sometimes entered under the pretext of protecting the safety and health of
local populations.

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EFFECTS OF TARIFFS
As far as tariffs are concerned these are concerned with two important things i.e. revenue
and protection to the domestic industries from the foreign goods. The role of tariffs is
very important as far any particular nation of the World is concerned. Many of the
developing nations take an advantage of tariffs in the forms of protection and revenue
source as well. Kindleberger has analyzed various effects of tariffs based on price,
consumption, revenue, protection and so on.
It has been briefly explained as follows:
1) Price effect
2) Revenue effect
3) Protection effect
4) Consumption effect
5) Redistribution effect
6) Terms of trade effect
7) Competition effect
8) Income and employment effect
9) The balance of payment effect (BOP)
All these effects of tariffs are discussed below with the help of following diagram

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In the above diagram quantity of commodity is represented on ‗X‘ axis and on the ‗Y‘
axis price of commodity has been mentioned.
Where, DD is the Domestic Demand Curve, SS is the Domestic Supply Curve, OP is the
Equilibrium Price without Trade,OP1 is the Price of the Import under the Trade,OP2 is
the Price after Imposition of Tariff on Imports,
Various effects of tariffs mentioned above can be better understood with the help of
above diagram and an explanation given below;
1) Price effect:
The price effect of tariff refers to an increase in the price of the commodity on which
profit is levied. It the tenancy of the importer is to impose the entire tariff on the
consumers the price will increase as an amount of tariff is levied on the import of goods.
If in the market the demand is inelastic in nature then full burden will be passed on the
consumers and in the opposite situations if demand is perfectly elastic then the price
effect will have fewer burdens as well. In the above diagram P1P2 is the price effect of
tariff as the post tariff price is OP2.
2) Revenue effect:
Many of the times there have been tendencies of the nations to earn revenue by imposing
tariffs. The revenue effect can be expressed by simple calculations of, the rate of tariff
multiplied by the imports.
3) Protection effect:
A tariff has protective effect for the domestic industries. It tends to raise the domestic
price of the imported commodity, reduce the domestic demand for that commodity and
thereby stimulates its domestic production.
4) Consumption effect:
Imposition of tariff raises the price, and as a result, the demand for the commodity falls.
Total outlay on consumption of the commodity is larger or smaller depending upon
whether demand is inelastic or elastic.
5) Redistribution effect:
Redistribution Effect refers to the transfer of real income from the consumers to the
producers as a result of tariff. The tariff-imposed price increase results in the loss of
consumer‘s surplus. The redistribution effect takes place while an increase in the price
due to tariffs. It implies redistribution of income and wealth from one class to another
class. As far as developing nations are concerned capital is limited available as compared
to the labor so tariff is not expected due to the social justice.

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6) Terms of trade effect:
When a country imposes a tariff duty, its willingness to receive imports is reduced. For a
given quantity of exports, the country now demands a larger quantity of imports because
a part of these imports are to be surrendered to the customs authorities in the form of
tariff payment. Or, putting the same thing differently, the country is now willing to offer
less of exports in exchange for a given quantity of imports.
Thus, the tariff reduces the country's offer of exports for imports.
7) Competition effect
Tariff protects the domestic industry from foreign competition. Under this protection an
infant industry after a period of time, grows into an economically strong industry which
can fully compete in the world market. But, the sluggish and lazy industry may not like to
face the competition and remain inefficient even under the protection cover provided
through tariffs.
8) Income and employment effect:
As a result of tariff, the expenditure on imported goods is reduced. This will increase the
export surplus of the country and thereby the income from foreign trade. The money
shifted from imports can now be spent on the domestically produced goods. If the
country is at less than-full employment level, this will raise income and employment in
the country.
9) The balance of payment effect (BOP):
Tariff has favorable effect on the balance of payments position of the imposing country.
It reduces imports and increases the export surplus of the country. Thus, through tariffs, a
deficit in the balance of payment can be corrected.
Thus, tariff plays an important role as far as international trade and relations are
concerned, it has positive and negative effects on the exporting as well as importing
nations of the world. It is not only bringing revenue to the government but also to protect
and save the domestic industries, but an appropriate use of tariffs is very important.

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Non-Tariff Measures affecting India's Exports
According to recent estimates, multilateral liberalisation in the wake of the Uruguay
Round is expected to increase world income by between US$ 212 to 510 billion by the
turn of the 21st century. The welfare gains are likely to result from the expansion in
world trade as well as greater productive efficiency and higher rates of return on capital.
However, other evidence suggests that the distribution of gains is likely to be uneven
between economies with the possibility that some developing countries might benefit less
than other economies. Against a background of falling tariff barriers, one determinant of
export success is the extent to which non-tariff measures (NTMs) in major markets affect
a given developing country. Another is the speed of developing country trade and market
liberalisation.
Since 1991, India has begun gradually liberalising its economy and dismantling barriers
to trade and investment. Although the reform process is incomplete, India has developed
a fairly diverse production base by developing country standards, which has become
increasing export-oriented and open to foreign direct investment. This base has been
dominated by resource-based and low-technology products for which global demand is
somewhat stagnant. There is also a small set of high skill and technology products with
considerable export potential. Following the Asian currency crisis in mid-1997 and
international recession, there is an emerging perception that non-tariff measures in
overseas markets may adversely affect the country's export growth. These measures are
likely to affect the whole range of Indian exports.
Against this background, the Government of India requested the Commonwealth
Secretariat to conduct a study on non-tariff measures (NTMs) affecting selected Indian
exports representing different categories of exports (i.e. resource-based, low, medium and
high technology exports). The study had three objectives:
 To identify the nature and origin of NTMs affecting particular Indian industries;
 To evaluate enterprise responses to NTMs and the costs of adjustment;
 To assess the adequacy of public and private sector institutional support for
overcoming NTMs at enterprise-level.
The study is based on information from several different sources: interviews with 57
enterprises in five categories of exports (pharmaceuticals, engineering, leather products,
marine products and mangos), discussions with Indian government officials and private
sector representatives, consultations with WTO and UNCTAD officials, published
studies and desk research.

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Analytical Framework
The World Trade Organization (WTO) provides the global framework for the conduct of
international trade in goods and services. It administers the implementation of a set of
agreements which include the Agreement on Technical Barriers to Trade (TBT) and the
Agreement on the Application of Sanitary and Phytosanitary Measures (SPS). These two
Agreements constitute the core of what have been known as Non-Tariff Measures
(NTMs). This study makes a distinction between non-tariff barriers (NTBs) and non-tariff
measures (NTMs) and focuses only on NTMs. The former relate to quantitative
restrictions on imports and include quotas, licensing and voluntary export restraints. The
latter relate to that wide spectrum of mandatory technical regulations and voluntary
standards, which relate to issues of health, safety, consumer protection and the
environment. Examples include the requirement that US Food and Drug Administration
(FDA) approval be obtained for Indian pharmaceutical exports, the prohibition of dyes
and chemicals in leather products, quarantine certificates for seafood exports and a ban
on fresh mango exports from India owing to fruit fly regulations.
There is general agreement that there has been a steady growth in NTMs over the past 30
years both in a formal sense (mandatory requirements) and in an informal sense
(voluntary requirements). NTMs can play a positive role in encouraging international
trade through the provision of information and greater transparency and raising domestic
standards to international levels. Equally, however, NTMs may be used to protect
domestic producers if used in a discriminatory fashion. The WTO lays down certain
procedures and rules for the application of technical regulations and standards including
the principle that they must be applied in a non-discriminatory fashion (the most favoured
nation principle) and that they must not extend to imported products treatment less
favourable than that extended to domestically produced goods (national treatment
principle). The SPSS Agreement requires countries to base their measures on
international standards and guidelines. The paramount consideration for their application
is that scientific evidence is used. The basic aim of the TBT Agreement is to ensure that
technical regulations and standards (including packaging, marking and labelling
requirements) and procedures used for assessing conformity with such regulations,
requirements and standards are not formulated and applied so as to create unnecessary
barriers to trade. Both agreements contain provisions for the extension of special and
differential treatment for developing countries.
The imposition of an NTM can be seen as an external shock to which enterprises have to
react quickly and positively if they are to maintain their competitive advantage. For the
purpose of this study we distinguish between offensive and defensive competitive
strategies. The former involve investment in new plant and equipment, acquiring new
technology, upgrading product quality and seeking joint ventures with foreign partners.

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The defensive competitive strategy may involve moving back into the domestic market,
cutting costs by reducing wages and employment and lobbying government.
Government bodies and private sector sources can provide a variety of services to assist
enterprises to react positively the imposition of NTMs and adopt offensive competitive
strategies. These services can include technical assistance with inspection, certification
and compliance; training of different kinds, and providing marketing information.
Developing countries characterised by a strong institutional support system, which is
closely connected with the industrial sector, are likely to perform better than those
countries lacking such an infrastructure.
Pharmaceuticals
The Indian pharmaceutical industry is a high technology sector, which has been growing
rapidly since economic liberalisation and presently accounts for about 2.8% of India's
total exports. Ten pharmaceutical enterprises - all located in and around New Delhi in
North India – were interviewed. The sample firms produce two broad types of products:
bulk drugs (intermediates and active pharmaceutical ingredients which are used to make
up finished goods or formulations) and finished formulations in various dosage forms.
These enterprises were exporting to developed countries, CIS markets and a large number
of developing countries.
The main findings in regard to the incidence of NTMs, firm strategies and institutional
support are as follows:
 There are at least eight different kinds of NTMS, which seem to affect Indian
exporters in overseas markets. These include: company and product registration,
product registration only, WHO-GMP certification, packaging and labelling
requirements, import bans, anti-dumping measures and pre-shipment inspection.
Each of these has a different purpose, regulatory requirement and impact on firm
behaviour.
 The incidence of NTMs varies across export markets and a distinct pattern can be
observed. Developed countries like the US, France and Japan tend to have one
main type of NTM (company and product registration) while developing and
transition economies appear to have entirely different types of NTMs (e.g.
product registration only, WHO-GMP certification, packaging and labelling
requirements, pre-shipment inspection and import bans).
 Seven of the ten pharmaceutical enterprises in the sample appeared to have
adopted offensive competitive strategies in relation to NTMs in major export
markets. Of the remaining three pharmaceutical enterprises, one seems to be

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showing a mixed response to NTMs (with some positive and negative aspects to
its approach) while the other two seem to be reacting defensively.
 Compliance with NTMs has involved significant financial and time costs for the
sample pharmaceutical enterprises. By far the greatest compliance costs are
associated with obtaining US Food and Drug Administration approval - the cost
of requisite clinical trials can range from US$ 0.15 million to US$ 1.5 million
depending on the type of drug being tested and process can take up to two years.
WHO-GMP certification can also involve relatively high compliance costs
depending on the extent of upgrading required and a certification processing
spanning between 3-12 months.
 The sample pharmaceutical enterprises seem to draw on half a dozen sources of
technical assistance to comply with NTMs in overseas markets including in-house
technical staff, consultants, equipment suppliers, commercial labs, chambers of
commerce and industry associations and state and central government drug
control agencies. However, interviews with the sample pharmaceutical enterprises
suggested that these sources of support were insufficient in relation to enterprise
needs. These gaps seem to apply to both private as well as public sector service
provision.
Engineering
The Indian engineering industry is relatively diversified with a number of distinct sub-
sectors including capital goods and automobile assembly and components. It exports a
wide range of products covering the spectrum of technology, from hand tools to
automobile products and electrical machinery. Sixteen engineering companies, located in
Ludhiana and Chennai, were interviewed. The sample firms produced a wide range of
products and exported to a variety of markets, mainly developed market economies and
developing countries worldwide.
 a variety of NTMs were identified by sample firms, including anti-dumping
measures (or the threat thereof), discriminatory specifications, visa problems and
customs delays and harassment; there was no overall pattern, however, and the
sample enterprises did not identify NTMs as a major problem facing them in
crucial export markets;

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 constraints on market access and discriminatory treatment were more likely to be
found in developing country markets, but care must be exercised in generalising
from such a small sample; the highest profile NTM was that imposed by France
on imports of Indian bicycles;
 ten of the sample companies for which information was available adopted an
aggressive (actively competitive) or intermediate (passively competitive) stance
when faced with NTMs; only one company could be said to have adopted a purely
defensive stance; the competitive response involved investment in new plant and
equipment and upgrading standards, procedures, products and processes; although
in some cases the additional costs incurred by such strategies could be estimated,
in general the Companies had limited choice - they either had to meet the
standards imposed by their customers or lose their market;
 because of the relatively low technological content of most engineering exports,
Indian exporters were very vulnerable to both NTMs and new sources of
competition, especially that posed by Chinese enterprises;
 few sources of domestic assistance to sample enterprises were identified; most
enterprises relied on their own resources and/or bought in consultants; neither
industry associations nor government bodies appeared to play an active role in
assisting Indian exporters.
Marine Products
Marine products is a relatively new natural resource based export sector that has emerged
in the post-economic liberalisation era and currently makes up for about 3.2% of total
Indian exports. Eleven marine products enterprises were interviewed. With one exception
(based in Cochin), the marine sample enterprises are located in Chennai in South India.
The sample firms were exporting several kinds of marine products (e.g. live lobsters,
chilled fish and frozen shrimp) to developed and developing country markets.

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 There are at least five kinds of NTMs, which seem to affect Indian exporters of
marine products in overseas markets. These pertain to issues of quotas, standards,
distribution, documentation and transportation.
 The incidence of NTMs seems to differ across export market with a lack of a clear
pattern. Japan, for instance, seems to have three types of NTMs - a quota on
imports of a specific variety of squid, a requirement for a local quarantine
certificate and cartelised distribution chains. In contrast, the US and the EU have
single NTMs -the former takes the form of a quality certificate (known as a Green
Ticket) while the EU also has tough standards on seafood imports which have
been stringently enforced following a total import ban in 1997 because of a
shipment affected by cholera. Meanwhile, selected developing countries have
NTMs relating to health regulations, documentation requirements and an
insistence on full container loads.
 Eight of the ten marine enterprises in the sample appeared to have adopted
offensive competitive strategies in relation to NTMs in major export markets. Of
the remainder, one reported that it was not affected by NTMs and the other had
reacted defensively by moving to a less demanding export market.
 Compliance with NTMs has involved significant financial and time costs for the
marine sample enterprises. In the case of EU standards, these costs are primarily
in the nature of fixed costs of upgrading plant and equipment. Based on the
evidence from the sample, it seems that an investment of about US$ 315,000 is
required to upgrade a typical Indian marine export plant to meet EU standards and
process of upgrading can take more than one year. However, obtaining the Green
Ticket for exporting to the US is much cheaper (as it involves only checking final
products and not the process of production) and the procedure can take between
3-6 months.

22
 Most sample firms seemed to complain about the lack of technical assistance to
marine exporters from government institutions especially in regard to disease
prevention and provision of market information. Instead, they seem to rely on
advice from in-house technical staff, equipment suppliers and Japanese buyers of
marine products.

23
CHAPTER 3: EFFECT ON AGRICULTURAL PRODUCT
India is a minor participant in global agricultural markets. In 2008, Indian agricultural
imports and exports accounted for just 1 percent and 3 percent, respectively, of global
agricultural trade. Agriculture’s share of total Indian merchandise imports and exports
was 3 percent and 11 percent, respectively. Only about 3 percent of Indian food and
agricultural demand is met by imports, compared with 13 percent for Asia as a whole.
During 2003–08, India experienced an increasingly positive trade balance in agricultural
products, reaching $11.6 billion in 2008 (fig. 2.1). Much of this growth occurred in 2007
and 2008, mostly reflecting significantly higher global commodity prices. Between 2003
and 2008, Indian agricultural imports increased at an annual average rate of about 13
percent, reaching a record $8.5 billion in 2008. Indian agricultural exports increased more
than threefold, from $6.1 billion in 2003 to $20.2 billion in 2008, representing annual
average growth of 27 percent.
Imports
 Imports by Product
Indian agricultural imports from the world are highly concentrated in a few major product
categories (table 2.1 and fig. 2.2) in which domestic supply is unable to meet domestic
demand. These categories include edible oils (mostly palm and soybean oils), pulses
(peas, beans, and lentils), and nuts, which together accounted for 60 percent of all
agricultural imports in 2008. Imports of hides and skins, wool, and cotton accounted for
13 percent of imports during 2006–08. With the exception of wheat, animal feed and
alcoholic beverages, all other product categories each accounted for less than 1 percent of
total agricultural imports during this period. Notably, Indian imports of food grains
(excluding wheat), feed grains, oilseeds, meat, dairy products, sweeteners, and processed
foods were negligible in 2008. As outlined in chapter 1, low levels of trade in agricultural
products are an outcome of Indian government policies aimed at food security, food self-
sufficiency, and income support for farmers, implemented through domestic agricultural
production support, tariffs and nontariff measures (NTMs), and export restrictions.
Consequently, many trade trends can be explained more by domestic and trade policy
initiatives, such as tariff changes, than by changing market factors, such as weather.

24
Imports by Major Trading Partner
In terms of major suppliers, Association of Southeast Asian Nations (ASEAN) countries
accounted for 35 percent of Indian agricultural imports during 2006–08. Indonesia, a
major supplier of palm oil, was by far the largest supplier, accounting for close to one
quarter of Indian imports during this period (table 2.2 and fig. 2.5). Other leading
ASEAN suppliers were Burma (dry beans) and Malaysia (palm oil, certain cocoa
products), accounting for 7 percent and 4 percent of total Indian agricultural imports,
respectively. During this period, imports of soybean oil from Argentina fell sharply, from
$661 million to $222 million, as India sourced more competitively priced palm oil from
Indonesia. These losses were somewhat offset by Argentine exports of wheat as India
resumed importing in 2006 after several years of being a net wheat exporter.35 During
2006–08, the EU-27 supplied a wide range of products, led by alcoholic beverages
(mostly whiskies), peas, fibers (wool and flax), and hides and skins. Indian agricultural
imports from Canada increased sharply during 2003–08, such that by 2008, Canada
became the second-largest agricultural supplier behind Indonesia. Canada’s exports to
India were almost exclusively peas and lentils.

25
Exports
The competitiveness of Indian agricultural exports is based on low costs associated with
abundant labor and subsidized inputs, including fertilizer, electricity, and seeds. India’s
proximity to ASEAN and Middle Eastern markets provides India with a transportation
cost advantage over other suppliers. Other factors affecting Indian agricultural exports
include government export restrictions aimed at curtailing food price inflation (box 2.2),
a minimum export price program that makes certain Indian exports less competitive in
world markets and the use of export subsidies when government buffer stocks become
too large.
 Exports by Product
Between 2003 and 2008, Indian agricultural exports to the world grew more than
threefold, increasing from $6.1 billion in 2003 to $20.2 billion in 2008. Similarly, Indian
agricultural exports to the United States increased steadily from $585 million in 2003 to
about $1.3 billion in 2008. Indian global agricultural exports are concentrated in a few
major commodities. During 2006–08, rice, soybean meal, and cotton represented one-half
of Indian global agricultural exports, with sugar and frozen beef (mostly buffalo meat)
accounting for an additional 20 percent. Tobacco, nuts (mostly cashews and peanuts),
beverages (tea and coffee), and spices are also exported by India. Agricultural products
exported by India to the United States include nuts and a wide range of specialty products
supplying ethnic grocery stores and restaurants.
Exports by Major Trading Partner
Indian agricultural exports are dispersed among a large number of destination markets
(table 2.4). During 2006–08, the EU-27 was India’s largest agricultural export market,
accounting for 14 percent of the total, followed by the United Arab Emirates (UAE),
China, and the United States each with a 7 percent share (fig. 2.8). Other important
markets include Bangladesh, Saudi Arabia, and Vietnam. During 2003-08, growth in
Indian agricultural exports to the UAE, China, Vietnam, and Pakistan was particularly
strong, led by sharply higher exports of rice, cotton, meat, and animal feed.

26
India’s agricultural production, valued at $176 billion1 and representing 17 percent of
Indian gross domestic product (GDP) in 2007, has been heavily influenced by domestic
government policies emphasizing food security, food self-sufficiency, and income
support for farmers. Indian food consumption is overwhelmingly supplied by domestic
production, with imports playing a minor role for most commodities.
Agriculture is an important sector of India’s economy. It employs more than 60 percent
of the population dominated by millions of extremely poor farmers working small to
marginal landholdings, who account for more than one-half of total Indian agricultural
production. India is a leading global producer of a number of commodities—including
various grains, dairy, fruits, and vegetables—because of its significant natural resource
base. The country has the world’s second-largest arable land base after the United States
4 and is endowed with all of the world’s major climates. While grains remain the
foundation of the Indian diet, production has recently increased for other foods, such as
milk, meat, fruits, and vegetables; in response to increasing Indian demand. the value
added food processing sector of the Indian economy is small but growing.
During marketing years (MYs) 2003/04–2007/08, Indian production volumes of many
commodities increased, some with annual double-digit growth rates. Many of the
increases were aided by favorable weather and prices, increased planted area, and rising
yields. Yet growth in the overall value of agricultural production slowed relative to past
performance and lagged behind the growth in population. The 2.5 percent growth
recorded during fiscal years (FYs) 2002/03–2006/07 (the years covered by the
government’s Tenth Five-Year Plan) is not considered by the Indian government
sufficient to sustain food security objectives. Consequently, the government is currently
looking for ways to improve performance in the sector, which suffers from fragmented
landholdings, an incentive program that distorts crop planting decisions, the overuse of
fertilizer and groundwater, inadequate postharvest treatment, and inefficient market
channels.

27
Applied Tariffs
High applied tariff rates are a major impediment to U.S. agricultural exports to India,
according to U.S. agricultural exporters, because they increase the price of U.S. goods in
relation to domestically produced products. Indian tariff rates are applied almost
exclusively on an ad valorem basis and primarily range from 10 to 150 percent. The
simple average of Indian applied tariff rates on agricultural products declined
significantly from 113 percent in 1991 12 to approximately 34 percent during 2007;
however, they remain among the highest in the world. Indian applied tariff rates on
agricultural products are also substantially higher than its applied rates for
nonagricultural products. As a result of the continuing sensitivity of the Indian
agricultural sector and India’s preparations to implement a free trade agreement (FTA)
with the Association of Southeast Asian Nations (ASEAN), the government has been
reducing tariff rates on nonagricultural products faster than those for agricultural
products. India’s applied tariff rates vary substantially by product and product group.
Certain agricultural product groups, such as sugar and grains, are considered sensitive
because of employment and food security concerns; these generally have high average
applied tariff rates. Market conditions, industry stability and employment, and the
importance of the product to Indian consumers are other factors that contribute to
significant differences in applied tariff rates for specific agricultural products within
product groups. For example, among vegetable fats and oils, the tariff rate for margarine
is 80 percent, while the tariff rates on crude soybean and palm oils were reduced to free
in March 2009. Vegetable oils have traditionally been protected by high tariffs, although
tariff rates on this product group have been reduced to an average of 24 percent in order
to combat food price inflation. Similarly, the average tariff rate on animal products is 33
percent, with most products subject to a 30 percent tariff. However, imported fresh and
frozen chicken cuts, which compete with the large domestic industry, are subject to a 100
percent applied tariff rate. Applied tariff rates on specific grains also differ widely. For
example, the tariff rates on oats and rye are zero, while the tariff rates on other cereals,
such as semi- and wholly milled rice and wheat, which are important for maintaining
food self-sufficiency, are 70 percent and 50 percent, respectively.
U.S. exporters indicate that high tariffs raise the price of imported U.S. products to levels
that can substantially dampen Indian demand for them. For example, the U.S. apple and
pear industries estimate that U.S. exports could more than double if the tariff rates were
reduced or eliminated. Both the U.S. apple and pear industries compete for market share
with cost-competitive Indian producers. In some instances, the presence of high tariffs
keeps U.S. exporters from trying to enter the Indian market.

28
In addition to lower tariffs, some industry officials, including U.S. exporters and Indian
importers, suggest that certain other changes to the current Indian tariff structure could
increase U.S. access to the Indian market. For example, some Indian importers have
requested that India follow the approach taken in the European Union on certain seasonal
products by varying tariff levels on imports of those products based on the time of year,
with higher rates applied when domestic production is available and a lower rate applied
when domestic production is out of season. Some importers claim that this change would
increase market access while not harming the domestic industry. In addition, certain
importers have requested that the Indian government apply tariffs on a specific or per-
kilogram basis, a method used currently only for almond imports, instead of on an ad
valorem basis. This system would create more certainty for foreign exporters because
industry officials report that tariffs assessed by volume are generally less likely to be
manipulated than those assessed by value.

29
Tariff Variability
The difference between high Indian average bound tariff rates and lower average applied
tariff rates for agricultural products allows the government to raise applied tariffs on most
agricultural products without violating its WTO commitments. The Indian government
has used this authority to modify rates on certain agricultural products frequently,
especially for staple food products. Industry sources claim that tariff-rate variability is an
impediment for U.S. agricultural exports because frequently changing tariff rates create
uncertainty, making negotiating future sales and determining financial plans difficult.
The Indian government views the ability to adjust tariff rates as a necessary trade
instrument, as long as the system is WTO compatible. The rationale for adjusting tariff
rates is to protect farmers and maintain domestic price stability when domestic
production and international prices fluctuate. The Indian government strives to balance
competing interests of producers and consumers by adjusting tariff rates in reaction to
market conditions, typically lowering them when domestic prices are rising and domestic
production cannot meet domestic demand. Conversely, the Indian government often
increases tariff rates when international market prices are falling and there is a surplus in
domestic production or government buffer stocks, decreasing the country’s need for
imports. In addition to government-directed changes, domestic industry associations can
petition the Ministry of Finance to lower tariffs. In response, the Ministry of Finance will
determine the reduction’s impact on the budget before lowering tariff rates. Concerns
about the impact of tariff-rate adjustments on government revenue are generally
secondary to their impact on producers and consumers.
The history of Indian applied tariff rates for certain products, especially food staples,
illustrates the frequent variability that occurs. Between 2005 and 2008, production
shortfalls and rising international prices caused Indian domestic food prices to rise
sharply. To minimize the burden on consumers, India decreased tariff rates on many
staple food products. As prices declined, however, tariff rates generally were returned to
their previous levels to support Indian farm prices. This is shown by recent changes in
applied tariff rates for wheat, rice, pulses, and vegetable oils:
 Wheat: The tariff rate on wheat was lowered as poor harvests caused domestic
prices to increase. The rate was lowered from 50 percent to 5 percent in June 2006
before being reduced to zero in September 2006. As a result, India imported
wheat in 2006 for the first time since 2001. As domestic production increased and
prices declined, India returned the rate to 50 percent on January 1, 2009.
 Rice: Concerns about the rising price of rice caused India to lower the tariff rate
on rice from 70 percent to zero in March 2008. When market prices stabilized in
March 2009, the tariff rate was returned to 70 percent.
 Pulses: The wholesale price index for pulses rose by 45.6 percent between 2003
and 2006.33 As a result, on June 8, 2006, the Indian government exempted pulses

30
from the applicable 10 percent import duty in order to control prices. The duty
exemption has been extended until March 31, 2010.
 Vegetable oils: In order to support farm prices, India raised tariff rates in early
2005 on crude palm oil from 65 percent to 80 percent and on refined palm oil
from 70 percent to 90 percent. In early 2007, edible oil prices began rising quickly
because of lower domestic production, which led the government to reduce rates
three times during 2007 on both crude and refined palm oils, before reducing the
tariff rates on crude soybean and crude palm oils to zero and on all refined edible
oils to 7.5 percent on April 1, 2008. During the remainder of 2008 and through
early 2009, prices and import levels of soybean oil continued to fluctuate, and as a
result, the tariff rate on crude soybean oil also continued to vary.
Tariff Adjustment Process
Not only does the Indian government adjust tariff rates frequently, but the rates are
adjusted under two different methods, which adds complexity and confusion to the tariff
system. The first method involves changes made annually through the budgetary process,
under which tariff revenues still represent a significant source of revenue for the Indian
government. During February of each year, the Minister of Finance presents the
government’s budget to the Indian Parliament for the new fiscal year, which begins April
1. The budget is enacted after parliamentary review and approval. The proposed budget,
which is released to the public, may propose changes to any number of applied tariff
rates. The budget approved for FY 2008/09, for example, adjusted tariff rates on four
agricultural products: tariffs on two were reduced (unworked corals and feed additives),
and tariffs on two were increased (cigars and cigarillos).
The second and more common method is for tariffs to be changed on an ad hoc basis by
the Indian Ministry of Finance’s Central Board of Excise and Customs in notifications
published in the Gazette of India, the national government’s official publication. During
2008, the Indian government issued 138 tariff-rate amendment notifications. Because
tariff-rate adjustments can be made frequently and through more than one government
process, and because they may be effective for either a set period of time or an indefinite
period, exporters to the Indian market generally describe the process as lacking
transparency and certainty. Other complications compound the difficulties. For example,
tariff-rate changes in many notifications are referenced by serial numbers established and
designated to goods in previous notifications, rather than providing descriptive product
language or specific tariff codes. The research required to determine which serial
numbers apply to which goods reportedly increases costs to exporters. To keep track of
the current tariff rates, market participants state that they must monitor the Customs and
Excise website daily because tariff-rate changes come into effect immediately unless
otherwise specified. Additionally, the large number of notifications reportedly also makes
the system more susceptible to error, irregular or arbitrary administrative discretion, or
corruption. U.S. industry officials report that Indian customs agents may not be aware of
which tariff rate applies to certain imports, and unless the importer knows for certain that
a specific tariff rate has been reduced, customs agents may charge the higher rate
previously in effect. In addition, many notifications incorporate changes to a wide variety

31
of products, both agricultural and nonagricultural, while amending notifications from
previous years. The Indian Minister of Finance recognized the complexity of the system
in his February 2006 budget speech and called for the system of notifications to be
simplified.
Simulated Effects of Indian Agricultural Applied Tariffs
Model simulations prepared by Commission staff suggest that Indian agricultural tariffs
reduced U.S. agricultural exports to India in 2007 by $200–291 million; in the absence of
Indian tariffs, U.S. agricultural exports to India would have been 42–61 percent higher in
2007. Among U.S. products most affected by Indian agricultural tariffs were almonds
(U.S. exports to India were reduced by $26.9–32.7 million), fresh apples ($16.6– 21.2
million), soybean oil ($17.1–21.7 million), cotton ($3.0–26.4 million), and certain
vegetable fats and oils ($17.8–27.2 million).
The simulation results suggest that Indian agricultural imports from all countries would
have expanded from $7.51 billion in 2007 to $10.7–11.3 billion in the absence of Indian
tariffs in 2007. Because India applies the same tariff rates on imports from the United
States as on imports from other countries, the U.S. share of those imports would have
expanded from 6.36 percent in 2007 to 6.37–6.81 percent in the absence of Indian tariffs.
The simulated tariff effects were obtained from model simulations of the absence of
Indian applied tariffs on agricultural imports from all countries. The simulations are
based on 2007 statistics. The simulations were performed with an interrelated framework
that links a partial equilibrium trade model, specified at the six-digit level of the
Harmonized System (HS6), to an economy-wide trade model, the Global Trade Analysis
Project (GTAP) model.
The simulated tariff effects are the marginal effects of applied Indian tariffs and do not
incorporate any other effects. In the absence of Indian tariffs and in the span of a few
years, U.S. exports could expand by more than indicated here because of possible
additional effects of economic growth in India and the results of market development by
U.S. exporters. The tariff simulations focus on applied tariffs and do not consider other
policies that reduce demand for U.S. products in India.

32
EFFECTS OF TARIFFS ON PRICES
Tariffs increase the prices of imported goods. Because of this, domestic producers are not
forced to reduce their prices from increased competition, and domestic consumers are left
paying higher prices as a result. Tariffs also reduce efficiencies by allowing companies
that would not exist in a more competitive market to remain open.
Figure 1 illustrates the effects of world trade without the presence of a tariff. In the graph,
DS means domestic supply and DD means domestic demand. The price of goods at home
is found at price P, while the world price is found at P*. At a lower price, domestic
consumers will consume Qw worth of goods, but because the home country can only
produce up to Qd, it must import Qw-Qd worth of goods.
Figure 1. Price without the influence of a
tariff
When a tariff or other price-increasing policy is put in place, the effect is to increase
prices and limit the volume of imports. In Figure 2, price increases from the non-tariff P*
to P'. Because price has increased, more domestic companies are willing to produce the
good, so Qd moves right. This also shifts Qw left. The overall effect is a reduction in
imports, increased domestic production and higher consumer prices.

33
Figure 2. Price under the effects of a
tariff
Tariffs and Modern Trade
The role tariffs play in international trade has declined in modern times. One of the
primary reasons for the decline is the introduction of international organizations designed
to improve free trade, such as the World Trade Organization (WTO). Such organizations
make it more difficult for a country to levy tariffs and taxes on imported goods, and can
reduce the likelihood of retaliatory taxes. Because of this, countries have shifted to non-
tariff barriers, such as quotas and export restraints. Organizations like the WTO attempt
to reduce production and consumption distortions created by tariffs. These distortions are
the result of domestic producers making goods due to inflated prices, and consumers
purchasing fewer goods because prices have increased.
Since the 1930s, many developed countries have reduced tariffs and trade barriers, which
has improved global integration and brought about globalization. Multilateral agreements
between governments increase the likelihood of tariff reduction, while enforcement on
binding agreements reduces uncertainty.

34
Tariff and Industrial Production: Theoretical Issues
Micro-economic Aspects
To analyse the effect of tariff on domestic industry, the partial equilibrium framework
was used in the 1950s. The focus was only on the industry or sector being protected. In
the standard competitive ihodel, a tariff increase for a product results in a reduction in
imports of the product and an increase in the output of domestic industry. This enables
the domestic industry to capture a larger share of the domestic market. In the oligopolistic
models also, the same effect of tariff on the production of domestic firms (i.e. expansion
of domestic industry) was envisaged.
While the micro-economic analysis based on partial equilibrium framework showed tariff
to have a favourable effect on the production of the domestic industry, the welfare costs
of protection were also recognised. Such costs arise because tariffs drive a wedge
between international prices and domestic prices which leads to production and
consumption decisions different from what would put the society at the highest level of
social welfare. The cost of tariff protection can be decomposed into a ’production cost’
and a ’consumption cost’ referring to two types of distortions.
Since the mid 1970s, empirical work on trade restrictions has been based on general
equilibrium models1. Such models incorporate all repercussions of tariff hike on
production, including effect on X-efficiency, the terms of trade, income and employment
beyond the industry under consideration. Since both direct and indirect effects are
captured, these studies provide substantially higher estimates of the costs of protection
than do the studies based on partial equilibrium analysis.
There is also a body of literature that points to the ineffectiveness of import protection in
stimulating domestic production under certain conditions. Metzler (1949) points out the
possibility that if the small country assumption is not valid and the world prices are
allowed to change, the tariff may depress the world prices of the imported good to such
an extent that tariff inclusive domestic prices are lower than before, and in that case it
may reduce domestic production. Baldwin (1982) analyzes a number of situations using
partial equilibrium framework in which protection causes less than expected increase in
domestic production. He draws attention to (a) the possibility that the protected product is
imported in a less or more processed form than is covered in the policy and (b) the
possibility of switching to substitute products. Baldwin and Green (1988) give examples
of firms which do not plough back into the industry the increase in profits due to tariffs if
the long-term prospects of the industry are not very favourable to growth. Among other
reasons for ineffectiveness of protection is smuggling as noted in Bhagwati and Hansen
(1973). Bhagwati and Srinivasan (1980) show how lobbying for protection may also
reduce output in the domestic industry.

35
Macro-economic effects
In his seminal paper, Mundell (1961) concluded that a general tariff will have an adverse
effect on output and employment under flexible exchange rates. Mundell recognised at
the same time that, with a fixed exchange rate and in the absence of extensive retaliation,
a tariff may generate higher output and employment. MundelFs result relies on the
Laursen-Metzler hypothesis that savings will increase with improved terms of trade, due
to an increase in real disposable income. However, the Laursen-Metzler effect is not a
clearly established empirical or theoretical result. Thus, much of the recent work on tariff
policy has noted the restrictiveness of the Laursen-Metzler assumption and has attempted
to see whether the result of Mundell holds under more generalised assumption.
Chan (1978) shows that when a money market is added to Mundell’s model, a tariff is
contractionary even without the Laursen-Metzler assumption. Krugman (1982) argues
that Mundell’s tariff ineffectiveness result holds for a number of monetary extensions of
MundelPs 1961 model. These and several other such studies reach similar conclusions
because they all share similar features and in particular the quantity theory of money is
taken as the valid description of money demand. Ford and Sen (1985) have shown that, in
a large number of circumstances, tariffs can have positive effects on output and
employment if the money demand function is specified in Keynesian terms, allowing for
interest effects on money demand.
The models discussed above are restrictive in that they assume full employment, neglect
the specification of investment relationship and ignore economies of scale. In the
framework of Kaldor (1970,1982), which differs from these models, there are reasons to
expect a favourable effect of tariff on economic performance. In this framework, the
Harrod foreign trade multiplier and increasing returns in manufacturing industry occupy
an important place. Kaldor argues that the Ricardian rationale for free trade is dependent
on the assumption of constant returns to scale. The existence of scale economies in
manufacturing implies that a nation that is successful in competing with foreign firms can
expect that the advantage of an expanding market will increase its competitiveness, Also,
it should be noted that devaluation is a non-selective policy and raises the prices of all
imports, not just the competitive ones. Consequently, any attempt to generate a
substantial and long-term improvement in competitiveness through the exchange rate
may require a large reduction in the nominal rate with repercussions for inflation, real
income and economic stability. Accordingly, Kaldor has argued that some form of
protection of competitive manufactures would be a more effective policy for securing full
employment.

36
CHAPTER 4: Protectionand India’s Industrial Performance
It is widely recognised that India’s protective regime has succeeded in creating a large
and highly diversified industrial base. However, in this process, the considerations of
cost, comparative advantage (static) and international specialization have largely been
ignored with the consequence that a number of industries have come up and grown over
time in which the country does not have comparative advantage. Thus, the industrial
structure that has evolved over time is different from what it would have been if the
incentive system was more neutral (and the government did not interfere in the flow of
resources to different industries).
It is also widely held that the protective regime has been responsible for inefficiency in
resource use which has constrained the growth performance of Indian industry. Studies
on the effective rates of protection(ERP) and domestic resource cost(DRC) of Indian
industries have found these ratios to be generally very high and to be widely varying
across industries, indicating thereby that India’s foreign trade regime has led to an
inefficient allocation of resources among industries.3 There are other types of
inefficiencies as well. It is often argued that the extreme complexity and case-by-case
nature of both import licensing and tariff system have given rise to lobbying and
considerable "rent seeking" activities with consequent adverse effects on efficiency.
Further, sheltering from import competition along with domestic industrial licensing has
led to X-inefficiency and lack of technological dynamism. This is manifested in low
rates of capacity utilisation and sluggish productivity growth.
That protection of domestic industries and the process of import substitution have
adversely affected the productivity performance in Indian industries has been noted in the
studies of Goldar (1986, 1986a) and Ahluwalia (1991). Goldar (1986) found a negative
relationship between total factor productivity growth and ERP. Goldar (1986a) found a
significant negative relationship between total factor productivity growth and the extent
of import substitution. Similarly, the results of the analysis carried out by Ahluwalia
(1991) indicate that the higher the degree of import substitution in an industry, the lower
is its productivity growth.
Let us consider a hypothetical tariff leveled on, say, steel. The steel industry in the United
States might lobby for such a tariff and has done so in the past using the argument that
the tariff will protect it from foreign (often state-subsidized) competitors that will “dump”
steel on the American market at prices that domestic steel producers can’t possibly
match. The tariff, the steel industry representatives might argue, will tax the foreign
imports sufficiently to raise their price to a comparable level to the price charged by
domestic firms.
Of course, just implementing and enforcing the tariff and arranging the
administrative machinery for it can be sufficiently costly to taxpayers – including the
very owners and employees of the firms that lobbied for the tariff – as to outweigh any
possible benefits. But let us assume that the tariff has been successfully put into place and

37
has raised the price that Americans pay for imported steel. What happens then? And who
are some of the American consumers that must now pay higher prices?
It turns out that the steel tariff would raise costs for American domestic firms –
particularly those that use steel as an input. Manufacturers of automobiles, industrial
equipment, tools, building materials, and many other products would be faced with far
smaller profits – just because the tariff has raised their input costs. Thus, these firms
become less competitive relative to other firms abroad that might not have to deal with
the same artificially high steel prices. The government-imposed steel tariff actually
hampers the profitability and competitiveness of many more domestic industries than it
helps.
Consider how these firms might respond to an opportunity to move their operations
abroad where steel tariffs are lower or don’t exist. Surely, such an action would lower
their input costs and enable them to function more effectively. Tariffs imposed to
“protect” domestic firms actually give many domestic firms a strong incentive to move
outside the country!
But even the steel industry would lose in the long run due to steel tariffs. On the
face of it, it might seem that the steel industry has been benefited by the “protection”
from competition that the tariffs afford. But consider what it takes to produce steel in
mass. A steel manufacturer would need to own a lot of specialized machines that include
components made of… you guessed it – steel! By hurting the domestic industries that use
steel as an input, steel tariffs make it less likely for those firms to develop new products
that make it easier and less costly to manufacture steel! Thus, the domestic steel industry
is deprived of the ability to benefit from innovations that would have occurred in the
absence of the tariff.
Furthermore, the tariff gives the domestic steel industry an effective guarantee of certain
levels of revenue – at least in the short run. The steel industry will receive this revenue
irrespective of what it does and of whether it innovates or stagnates, cuts costs or decides
to leave them as they are. With the artificially high barriers to entry created by the steel
tariffs, there exist tremendous incentives for what economists call X-inefficiency – the
tendency of firm managers to slack off in their efforts to maximize profit and instead try
to lead an easier life by relying on the guarantees of protection offered by the
government’s tariff. The result of X-inefficiency will be that the domestic steel firms’
cost structures will actually drift upward over time, leading them to lose any productive
edge they might have had. Indeed, all historical evidence shows that industries can
seldom, if ever, be “weaned off” of government protection once it starts. Rather,
inefficiencies take holds that permanently cripple the “protected” industry’s ability to
compete with foreign producers or domestic producers whom the government does not
aid.

38
Now let us assume the worst-case scenario offered by advocates of “protective” tariffs.
That is, let us say that a domestic industry is entirely driven out of business by
competition abroad. On net, even this change would be beneficial to domestic industries
in general, and even, in the long run, to the specific workers displaced by the decline of
one particular industry.
If it is truly the case that a certain firm or industry has been displaced by free, open
competition, then this means that another firm or industry has a comparative advantage
over the displaced competitor. If the firm with a comparative advantage in producing
product A focuses on producing just A while the displaced competitor – who might have
a comparative advantage in producing B instead – focuses on producing just B, a
mathematical analysis can show that both firms can be made better off than if this
specialization did not take place. Furthermore, this can still be the case when one
competitor has an absolute advantage over the other in all areas. So even if a foreign firm
F can produce both goods A and B at lower cost than a domestic firm D, it would still be
advantageous for F to specialize in producing A and D to specialize in producing B, so
long as F can produce A more effectively than it can produce B.
So a displaced domestic industry needs only to shift its focus on producing
something else. Once the shift is in place and the workers and managers have been re-
trained, everyone is better off than they would have been if the tariff had remained in
place. There is no need to fear for the fate of the displaced workers during the transition,
as it is possible to give such workers aid in place of the tariff. Many economic analyses
have shown that an outright cash grant of several hundred thousand dollars to each
displaced worker would generate less overall economic waste than maintaining any given
protective tariff.

39
Impact to the economyof a country with the tariff imposed on it
It is easy to see why a foreign tariff hurts the economy of a country. A foreign tariff
raises the costs of domestic producers which causes them to sell less in those foreign
markets. In the case of the softwood lumber dispute, it is estimated that recent American
tariffs have cost Canadian lumber producers 1.5 billion Canadian dollars. Producers cut
production due to this reduction in demand which causes jobs to be lost. These job losses
impact other industries as the demand for consumer products decreases because of the
reduced employment level. Foreign tariffs, along with other forms of market restrictions,
cause a decline in the economic health of a nation.
Except in all but the rarest of instances, tariffs hurt the country that imposes them, as their
costs outweigh their benefits. Tariffs are a boon to domestic producers who now face
reduced competition in their home market. The reduced competition causes prices to rise.
The sales of domestic producers should also rise, all else being equal. The increased
production and price causes domestic producers to hire more workers which causes
consumer spending to rise. The tariffs also increase government revenues that can be
used to the benefit of the economy.
There are costs to tariffs, however. Now the price of the good with the tariff has
increased, the consumer is forced to either buy less of this good or less of some other
good. The price increase can be thought of as a reduction in consumer income. Since
consumers are purchasing less, domestic producers in other industries are selling less,
causing a decline in the economy.
Generally the benefit caused by the increased domestic production in the tariff protected
industry plus the increased government revenues does not offset the losses the increased
prices cause consumers and the costs of imposing and collecting the tariff. We haven't
even considered the possibility that other countries might put tariffs on our goods in
retaliation, which we know would be costly to us. Even if they do not, the tariff is still
costly to the economy.
Economics is a broad field; there are many areas that relate to economics. One of the
most important issues in a country’s economy is trading; therefore, tariffs are most often
discussed when talking about imported goods. A tariff is simply a tax or duty placed on
an imported good by a domestic government. Tariffs are usually levied as a percentage of
the declared value of the good, similar to a sales tax. Unlike a sales tax, tariff rates are
often different for every good, and tariffs do not apply to domestically produced goods.
Therefore, tariffs do affect the economy and also change consumers and producers’
behavior. Every country in the world trades with other countries, depending on how
much they need and the level of their production. This essay is going to focus on the
impact of tariffs on imports to the economy, how they affect consumers’ and producers'
behavior, the problem with the voluntary exports restraint, and the issues with WTO.

40
The purpose of the tariff is largely categorized by two big concepts. First, an original
concept is to defend domestic industries from foreign capital that would have
comparative or absolute advantages to domestic products. If a country has excess
imports, then the consumers in the foreign country gain from that importation. This is due
to a lower world price of a product. However, excess imports create a trade deficit.
Trade deficit does not create employment in a post-Keynesian world with weak unions
according to Irwin (chapter 3). Secondly, the principle of tariff is that imported goods
from countries want to gain extra profits from imported goods. The graph below (which
was taken from the class lecture) will explain more of the situation. This is a basic
imports graph, which shows the area of consumer surplus, producer surplus, and the level
of local purchases with trade and total purchase with trade.
Since there exists a problem of tariff and other problems relating imports restriction in
trade, the World Trade Organization (WTO) emerged as one of the most important and
influential of international organizations. Therefore, the role of WTO has been
established to help solving the problems dealing with the tax on imports and other
problems in the world of trading. The primary goal of WTO is to help producers of
goods and services, importers and exporters to conduct their business fairly. In general,
the WTO Agreements are a set of rules which have to be followed by governments in
formulating their policies and practices in the areas of international trade in goods and
services and intellectual property right (Das).

41
CHAPTER 5: Conclusion
Study after study has shown that tariffs, whether they be one tariff or hundreds, are bad
for the economy. If tariffs do not help the economy, why would a politician enact one?
After all politicans are reelected at a greater rate when the economy is doing well, so you
would think it would be in their self interest to prevent tariffs.
Recall that tariffs are not harmful for everyone, and they have a distributive effect. Some
people and industries gain when the tariff is enacted and others lose. The way gains and
losses are distributed is absolutely crucial in understanding why tariffs along with many
other policies are enacted. To understand the logic behind the policies we need to
understand The Logic of Collective Action. The article titled The Logic of Collective
Action discusses the ideas of a book by the same name, written by Mancur Olson in
1965. Olson explains why economic policies are often to the benefit of smaller groups at
the expense of larger ones. Take the example of tariffs placed on imported Canadian
softwood lumber. We'll suppose the measure saves 5,000 jobs, at the cost of $200,000 per
job, or a cost of 1 billion dollars to the economy. This cost is distributed through the
economy and represents just a few dollars to every person living in America. It is obvious
to see that it's not worth the time and effort for any American to educate himself about
the issue, solicit donations for the cause and lobby congress to gain a few dollars.
However, the benefit to the American softwood lumber industry is quite large. The ten-
thousand lumber workers will lobby congress to protect their jobs along with the lumber
companies that will gain hundreds of thousands of dollars by having the measure enacted.
Since the people who gain from the measure have an incentive to lobby for the measure,
while the people who lose have no incentive to spend the time and money to lobby
against the issue, the tariff will be passed although it may, in total, have negative
consequences for the economy.
The gains from tariff policies are a lot more visible than the losses. You can see the
sawmills which would be closed down if the industry is not protected by tariffs. You can
meet the workers whose jobs will be lost if tariffs are not enacted by the government.
Since the costs of the policies are distributed far and wide, you cannot put a face on the
cost of a poor economic policy. Although 8 workers might lose their job for every job
saved by a softwood lumber tariff, you will never meet one of these workers, because it is
impossible to pinpoint exactly which workers would have been able to keep their jobs if
the tariff was not enacted. If a worker loses his job because the performance of the
economy is poor, you cannot say if a reduction in lumber tariffs would have saved his
job. The nightly news would never show a picture of a California farm worker and state
that he lost his job because of tariffs designed to help the lumber industry in Maine. The
link between the two is impossible to see. The link between lumber workers and lumber
tariffs is much more visible and thus will garner much more attention.
The gains from a tariff are clearly visible but the costs are hidden, it will often appear that
tariffs do not have a cost. By understanding this we can understand why so many
government policies are enacted which harm the economy.

42
Bibliography
Newspapers:
 The Times Of India
 Economic Times
World Wide Web
 http://www.slideshare.net
 http://www.wto.org/
 http://economics.about.com/
 http://money.livemint.com/

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