BBA 6th Semester International Business Management (604) UNIT 2

Compiled by: Ankit Agarwal

Assistant professor

DS College, Aligarh

Globalization:
Globalization is a process where businesses are dealt in markets around the world, apart from the
local and national markets. According to business terminologies, Globalization is defined as ‘the
worldwide trend of businesses expanding beyond their domestic boundaries’.
Globalization can be defined as "integration of a country's economy with world economy, where
goods and services as well as capital move across the border, where a country's financial markets
are affected by fluctuations in the global market."
Globalization is often used to refer to economic globalization, that is, integration of national
economies into the international economy through trade, foreign direct investment, capital flows,
migration, and the spread of technology.

The IMF defines globalization as “the growing economic interdependence of countries

worldwide through increasing volume and variety of cross border transactions in goods and
services and of international capital flows, and also through the more rapid and widespread
diffusion of technology”.
In the Management Challenges for the 21st Century Peter Drucker writes that, all institutions
have to make global competitiveness a strategic goal. No institution, whether a business, a
university or a hospital, can hope to survive, let alone to succeed, unless it measures up to the
standards set by the leaders in its field, any place in the world.
Dimensions of globalization
Manfred Steger, professor of Global Studies at the University of Hawaii at Manoa argues that
globalization has four main dimensions: economic, political, cultural, ecological, with
ideological aspects of each category.
Economic
Economic globalization is the intensification and stretching of economic interrelations around
the globe.[3] [4] It encompasses such things as the emergence of a new global economic order, the
internationalization of trade and finance, the changing power of transnational corporations, and
the enhanced role of international economic institutions.
Political
Political globalization is the intensification and expansion of political interrelations around the
globe.[2] Aspects of political globalization include the modern-nation state system and its
changing place in today's world, the role of global governance, and the direction of our global
political systems.
Military
Military globalization, as subdomain of political globalization, is defined as the intensification
and stretching of military power across the globe through various means of military power
(nuclear military weapons, radiation weapons simply weapons of mass destruction). This form of
globalization occurs across offensive and defensive uses of power and survival in international
field. Beyond states, global organizations such as the United Nations also extend military means
globally through support given by both Global North and South countries.
Cultural
Cultural globalization is the intensification and expansion of cultural flows across the globe.
Culture is a very broad concept and has many facets, but in the discussion on globalization,
Steger means it to refer to “the symbolic construction, articulation, and dissemination of
meaning.” Topics under this heading include discussion about the development of a global
culture, or lack thereof, the role of the media in shaping our identities and desires, and the
globalization of languages.
Ecological
Topics of ecological globalization include population growth, access to food, worldwide
reduction in biodiversity, the gap between rich and poor as well as between the global North and
global South, human-induced climate change, and global environmental degradation.

Benefits of globalization:
❖ Employment
 Considered as one of the most crucial advantages, globalization has led to the generation of
numerous employment opportunities. Companies are moving towards the developing countries
to acquire labor force. This obviously caters to employment and income generation to the people
in the host country. Also, the migration of people, which has become easier has led to better jobs
opportunities.

❖ Education
A very critical advantage that has aided the population is the spread of education. With
numerous educational institutions around the globe, one can move out from the home country for
better opportunities elsewhere. Thus, integrating with different cultures, meeting and learning
from various people through the medium of education is all due to globalization. Developing
countries or labor-intensive countries have benefited the most.

❖ Product Quality
The onset of international trade has given rise to intense competition in the markets. No longer
does one find limited number of commodities available. A particular commodity may fetch
hundreds of options with different prices. The product quality has been enhanced so as to retain
the customers. Today the customers may compromise with the price range but not with the
quality of the product. Low or poor quality can adversely affect consumer satisfaction.

❖ Cheaper Prices
Globalization has brought in fierce competition in the markets. Since there are varied products
to select from, the producer can sustain only when the product is competitively priced. There is
every possibility that a customer may switch over to another producer if the product is priced
exorbitantly. 'Customer is the King', and hence can dictate the terms to a very large extent.
Therefore, affordable pricing has benefited the consumer in a great way.

❖ Free Movement of Capital

Capital, the backbone of every economy, is of prime importance for the proper functioning of
the economy. Today, transferring money through banks is possible just by the click of a button,
all due to the electronic transfer that has made life very comfortable. Many huge firms are
investing in the developing countries by setting up industrial units outside their home country.
This leads to Foreign Direct Investment, which helps in promoting economic growth in the host
country.

❖ Communication
Information technology has played a vital role in bringing the countries closer in terms of
communication. Every single information is easily accessible from almost every corner of the
world. Circulation of information is no longer a tedious task, and can happen in seconds. The
Internet has significantly affected the global economy, thereby providing direct access to
information and products.
❖ Transportation
Considered as the wheel of every business organization, connectivity to various parts of the
world is no more a serious problem. Today with various modes of transportation available, one
can conveniently deliver the products to a customer located at any part of the world. Besides,
other infrastructural facilities like, distribution, supply chain, and logistics have become
extremely efficient and fast.

❖ International Trade
Purchase and sale of commodities are not the only two transactions involved in international
trade. Today, international trade has broadened its horizon with the help of business process
outsourcing. Sometimes in order to concentrate on a particular segment of business it is a
practice to outsource certain services. Some countries practice free trade with minimal
restrictions on EXIM (export-import) policies. This has proved beneficial to businesses.

❖ GDP Increase
Gross Domestic Product, commonly known as GDP, is the money value of the final goods and
services produced within the domestic territory of the country during an accounting year. As the
market has widened, the scope and demand for a product has increased. Producers familiarize
their products and services according to the requirements of various economies thereby tapping
the untapped markets. Thus, the final outcome in terms of financial gain enhances the GDP of
the country. If statistics are of any indication, the GDP of the developing countries has increased
twice as much as before.

Disadvantages of Globalization
❖ Health Issues
Globalization has given rise to more health risks and presents new threats and challenges for
epidemics. A very customary example is the dawn of HIV/AIDS. Having its origin in the
wilderness of Africa, the virus has spread like wildfire throughout the globe in no time. Food
items are also transported to various countries, and this is a matter of concern, especially in case
of perishable items. The safety regulations and the standards of food preparation are different in
different countries, which may pose a great risk to potential health hazards.

❖ Loss of Culture
Conventionally, people of a particular country follow its culture and traditions from time
immemorial. With large number of people moving into and out of a country, the culture takes a
backseat. People may adapt to the culture of the resident country. They tend to follow the foreign
culture more, forgetting their own roots. This can give rise to cultural conflicts.

❖ Uneven Wealth Distribution

 It is said that the rich are getting richer while the poor are getting poorer. In the real sense,
globalization has not been able to reduce poverty. Instead it has led to the accumulation of
wealth and power in the hands of a few developed economies. Therefore the gap between the
elite and the underprivileged seems to be a never ending road, eventually leading to inequality.

❖ Environment Degradation
The industrial revolution has changed the outlook of the economy. Industries are using natural
resources by means of mining, drilling, etc. which puts a burden on the environment. Natural
resources are depleting and are on the verge of becoming extinct. Deforestation is practiced
owing to the non-availability of land, thereby drastically reducing the forest cover. This in turn
creates an imbalance in the environment leading to climate change and occurrence of natural
calamities.

❖ Disparity
Though globalization has opened new avenues like wider markets and employment, there still
exists a disparity in the development of the economies. Structural unemployment owes to the
disparity created. Developed countries are moving their factories to foreign countries where
labor is cheaply available. The host country generates less revenues, and a major share of the
profits fall into the hands of the foreign company. They make humongous profits thereby
creating a huge income gap between the developed and the developing countries.

❖ Cut-throat Competition
Opening the doors of international trade has given birth to intense competition. This has affected
the local markets dramatically. In recent times the standard of living has improved. People are
therefore ready to shell out extra money for a product that may be available at a lower price. This
is because of the modern marketing techniques like advertising and branding. The local players
thereby suffer huge losses as they lack the potential to advertise or export their products on a
large scale. Therefore the domestic markets shrink.

❖ Conflicts
Every economy wants to be at the top spot and be the leader. The fast-paced economies, that is
the developed countries are vying to be the supreme power. It has given rise to terrorism and
other forms of violence. Such acts not only cause loss of human life but also huge economic
losses.

❖ Monopoly
Monopoly is a situation wherein only one seller has a say in a particular product or products. It
is possible that when a product is the leader in its field, the company may begin to exploit the
consumers. As there exists no close competitors, the leader takes full advantage of the sale of its
product, which may later lead to illegal and unethical practices being followed. Monopoly is
disastrous as it widens the gap between the developed and developing countries.
The globalization of markets:
The globalization of markets refers to the merging of historically distinct and separate national
markets into one huge global marketplace. Falling barriers to cross-border trade have made it
easier to sell internationally. It has been argued for some time that the tastes and preferences of
consumers in different nations are beginning to converge on some global norm, thereby helping
to create a global market. Consumer products such as Citigroup credit cards, Coca-Cola soft
drinks, Sony PlayStation video games, McDonald’s hamburgers, Starbucks coffee, and IKEA
furniture are frequently held up as prototypical examples of this trend. Firms such as those just
cited are more than just benefactors of this trend; they are also facilitators of it. By offering the
same basic product worldwide, they help to create a global market.
A company does not have to be the size of these multinational giants to facilitate, and benefit
from, the globalization of markets. In the United States, for example, nearly 90 percent of firms
that export are small businesses employing less than 100 people, and their share of total U.S.
exports has grown steadily over the last decade to now exceed 20 percent. Firms with fewer than
500 employees account for 97 percent of all U.S. exporters and almost 30 percent of all exports
by value. Typical of these is Hytech, a New
York–based manufacturer of solar panels that generates 40 percent of its $3 million in annual
sales from exports to five countries, or B&S Aircraft Alloys, another New York company whose
exports account for 40 percent of its $8 million annual revenues. The situation is similar in
several other nations. In Germany, for example, which is the world’s largest exporter, a
staggering 98 percent of small and midsized companies have exposure to international markets,
either via exports or international production.
Despite the global prevalence of Citigroup credit cards, McDonald’s hamburgers, Starbucks
coffee, and IKEA stores, it is important not to push too far the view that national markets are
giving way to the global market. As we shall see in later chapters, significant differences still
exist among national markets along many relevant dimensions, including consumer tastes and
preferences, distribution channels, culturally embedded value systems, business systems, and
legal regulations. These differences frequently require companies to customize marketing
strategies, product features, and operating practices to best match conditions in a particular
country.
The most global markets currently are not markets for consumer products—where national
differences in tastes and preferences are still often important enough to act as a brake on
globalization—but markets for industrial goods and materials that serve a universal need the
world over. These include the markets for commodities such as aluminum, oil, and wheat; for
industrial products such as microprocessors,
DRAMs (computer memory chips), and commercial jet aircraft; for computer software; and for
financial assets from U.S. Treasury bills to eurobonds and futures on the Nikkei index or the
Mexican peso.
Beijing, China: Chinese shoppers walk through Beijing’s main downtown shopping promenade
past a Kentucky Fried Chicken (KFC) franchise. KFC is one of the most successful international
businesses in China due to its adaptation and appeal to the Chinese market.
In many global markets, the same firms frequently confront each other as competitors in nation
after nation. Coca-Cola’s rivalry with PepsiCo is a global one, as are the rivalries between Ford
and Toyota,
Boeing and Airbus, Caterpillar and Komatsu in earthmoving equipment, General Electric and
Rolls Royce in aero engines, and Sony, Nintendo, and Microsoft in video games. If a firm moves
into a nation not currently served by its rivals, many of those rivals are sure to follow to prevent
their competitor from gaining an advantage. As firms follow each other around the world, they
bring with them many of the assets that served them well in other national markets—including
their products, operating strategies, marketing strategies, and brand names—creating some
homogeneity across markets. Thus, greater uniformity replaces diversity. In an increasing
number of industries, it is no longer meaningful to talk about “the German market,” “the
American market,” “the Brazilian market,” or “the Japanese market”; for many firms there is
only the global market.

Role of Information Technology in globalization.

In nearly every corner of the world, from Mumbai to Madrid, one cannot enter a café or walk
down the street without seeing someone talking, texting, or surfing the Internet on their cell
phones, laptops or tablet PCs. Information Technology (IT) has become ubiquitous and is
changing every aspect of how people live their lives.

Recent advances in our ability to communicate and process information in digital form— a series
of developments sometimes described as an “IT revolution”—are reshaping the economies and
societies of many countries around the world.

IT is a driving factor in the process of globalization. Improvements in the early 1990s in

computer hardware, software, and telecommunications greatly increased people’s ability to
access information and economic potential. While advancements in Internet-based tools over the
past five to ten years, such as social networking websites, twitter, and other Web2.0 applications
are changing the way people use and share information for personal, political, and commercial
purposes. These developments have facilitated efficiency gains in all sectors of the economy. IT
drives the innovative use of resources to promote new products and ideas across nations and
cultures, regardless of geographic location. Creating efficient and effective channels to exchange
information, IT has been the catalyst for global integration.

Products based upon, or enhanced by, information technology are used in nearly every aspect of
life in contemporary industrial societies. The spread of IT and its applications has been
extraordinarily rapid. Just 30 years ago, for example, the use of desktop personal computers was
still limited to a fairly small number of technologically advanced people. The overwhelming
majority of people still produced documents with typewriters, which permitted no manipulation
of text and offered no storage.

Twenty years ago, large and bulky mobile telephones were carried only by a small number of
users in just a few U.S. cities. According to a 2013 International Telecoms Union (ITU) World
Report, there were 6.8 billion cell phone subscriptions worldwide at the end of 2012. Global
mobile cellular penetration reached 96 percent in 2012 (ICT Facts and Figures, 2013). In some
developing countries, mobile phones are used by more people than the fixed line telephone
network.

But perhaps most dramatically, just fifteen years ago, only scientists were using (or had even
heard about) the Internet, the World Wide Web was not up and running, and the browsers that
help users navigate the Web had not even been invented yet. Today, of course, the Internet and
the Web have transformed commerce, creating entirely new ways for retailers and their
customers to make transactions, for businesses to manage the flow of production inputs and
market products, and for job seekers and job recruiters to find one another. According to ITU
World Report 2013, the total amount of users reached more than 2.7 billion (39 percent of the
world’s population) by 2013.

The news industry was dramatically transformed by the emergence of numerous Internet-enabled
news-gathering and dissemination outlets. Websites, blogs, instant messaging systems, e-mail,
social networking sites and other Internet-based communication systems have made it much
easier for people with common interests to to connect, exchange information, and collaborate
with each other. Education at all levels is continually transforming thanks to innovations in
communication, education, and presentation software. Websites now serve as a primary source
of information and analysis for the masses.

Globalization accelerates the change of technology. Every day it seems that a new technological
innovation is being created. The pace of change occurs so rapidly many people are always
playing catch up, trying to purchase or update their new devices. Technology is now the
forefront of the modern world creating new jobs, innovations, and networking sites to allow
individuals to connect globally. The timeline below shows the rapid transformation of how
technology has accelerated within the last 20 years to 2012.

18 years ago: Internet commercialized

17 years ago: first mobile phone with Internet connectivity

15 years ago: Google named the search engine of choice by PC magazine

12 years ago: Blackberry launched

9 years ago: Facebook launched

7 years ago: Twitter launched

6 years ago: iPhone, the first of the smart phones, introduced

5 years ago: Groupon introduced

2 years ago: 17 million smart tablets sold — estimated that 100 + million by 2014

1 year ago: Google Glass announced

Every 60 seconds (so it seems): new apps, tailored to users’ specific needs created

Forces of Globalization:
(a) Advancement of Technologies:
Refers to one of the crucial factors of globalization. Since 1990s, enhancement in
telecommunications and Information Technology (IT) has marked remarkable improvements in
access of information and increase in economic activities. This advancement in technologies has
led to the growth of various sectors of economies throughout the world.

Apart from this, the advancement in technology and improved communication network has
facilitated the exchange of goods and services, resources, and ideas, irrespective of geographical
location. In this way, advanced technologies have led to economic globalization.

(b) Reduction in Cross-trade Barriers:

Refer to one of the critical forces of globalization. Every- country restricts the movement of
goods and services across its border. It imposes tariffs and quotas on the goods and services
imported in its country. In addition, the random changes in the regulations create a chaos in
global business environment.

Such practices impose limits on international business activities. However, gradual relief in the
cross-border trade restrictions by most governments induces free trade, which, in turn, increases
the growth rate of an economy.

(c) Increase in Consumer Demand:

Acts as a main driver to facilitate globalization. Over the years, with increase in the level of
income and standard of living, the demand of consumers for various products has also increased.
Apart from this, nowadays, consumers are well aware about products and services available in
other countries, which impel many organizations to work in association with foreign players for
catering to the needs of the domestic market.

(d) High Competition:

Constitutes an important driver for bringing about globalization. An organization generally
strives hard to grain competitive edge in the market. The frequent increase in competition in the
domestic market compels organizations to go global. Thus, various organizations enter other
countries (for selling goods and services) to expand their market share.

They export goods in foreign markets where the price of goods and services are relatively high.
Many organizations have achieved larger global market shares through mergers and acquisitions,
strategic alliances, and joint ventures. So, these are the major factors that have contributed a lot
in globalization and the growth of global economy.

Impact of globalization on Indian economy

Positive impacts-

 Investments +new jobs, local companies supplying raw materials, etc. to these
industries have prospered.
 Indian companies gained from successful collaborations with foreign companies.
Ex: Tata Motors, Infosys.
 With big Indian MNCs contributing to world trade, India can raise its voice for
fairer trade rules at WTO.
 Exports would potentially increase therefore making our trade more favourable.
 Consumers have an option to choose from a wide range of products- they can have
cheapest, best thing.
 Technological development+ Increase in volume of trade will increase world’s
GDP.
 Extension of internet facilities +Infra to remotest rural areas>rural development,
inclusive growth.
 We can export what we produce in excess. So, less wastage and we can import what
we produce in deficient.
 In agricultural sphere, Globalization promotes contract farming which increases the
earning capacities of farmers.

Negative impacts-

 Trade deficit (as in case of India) which hurt most in case of under-developed and
developing economies and widen the gap between the developed & not so developed
economies.
 Outsourcing of jobs from developed countries to developing countries. It has led to
loss of jobs in developed countries and subsequent protectionist measures as
recently in USA and Saudi Arabia.
 As the economies are interlinked any financial crisis in one country, especially
developed countries will result in slow down in developing economies. Eg-crisis in
COVID 19 times
  Agriculture sector not improved as much as services and manufacturing secto-
becoming an expensive affairs. + state is withdrawing its extensive role in
agriculture.
 Neo-colonialism in smaller developing countries .
 MNC’s ruling the globe and exercising a great political control all over the
world+wider economic inequalities.
 Not sustainable growth, development on growing negligence of environment,
forests, wildlife etc.
 Destruction of traditional service providers. For example, old restaurants, parathas
and lassi are replaced by Mc. Donald’s, Chinese restaurants, etc.
 Advent of a consumer credit society. A person can now buy goods and services even
if he does not have sufficient purchasing power at his disposal.

Liberalization
Liberalization refers to the slackening of government regulations. The economic liberalization in
India denotes the continuing financial reforms which began since July 24, 1991.
The main aim of liberalization was to dismantle the excessive regulatory framework which acted
as a shackle on freedom of enterprise. Over the years, the country had developed a system of
“license-permit raj.” The aim of the new economic policy was to save the entrepreneurs from
unnecessary Harassment of seeking permission from the Babudom (the bureaucracy of the
country) to start an undertaking. The major purpose of liberalization was to free the large private
corporate sector form bureaucratic controls. It, therefore, started dismantling the regime of
industrial licensing and controls.
Liberalization is a relaxation of previous government restrictions, usually in areas of social or
economic policy.

Benefits of Liberalization: -
The main benefits of Liberalization are as follows: -
1. Promotes competition, which leads to lower costs and prices for consumers.
2. Competition promotes efficiency, so resources are wasted much less.
3. Liberalization allows financial markets to provide loans to people who previously may not
have been able to access loans that they can pay off, and it allows more financial instruments
to be developed so people can choose the one that suits them.
4. Liberalization removes government regulations on the economy, which promotes jobs, lower
prices, and higher incomes and lowers inflation.
5. It have removed all trade barriers so imported goods are available at cheap rates.

Disadvantages of Liberalization: -
1. We misuse the liberty for our own means.
Privatization:
Privatization refers to the participation of private entities in businesses and services and transfer
of ownership from the public sector (or government) to the private sector as well. Globalization
stands for the consolidation of the various economies of the world.
Privatization is the process of involving the private sector in the ownership or operation of a state
owned or public sector undertaking.

Privatization - is the incidence or process of transferring ownership of business from the

public sector (government) to the private sector (business).

Benefits of Privatization:
1. Better quality products.
2. Lower priced products.
3. More efficient firms which have lower costs.
4. Makes costs lower for other firms who use the product the privatized firm produces.
5. It increases employment and incomes across the economy.
6. Government no longer needs to subsidize product.
7. Government makes revenue from asset sale to spend on health, education etc.
8. Development would be faster (due to competition with the other private parties).
9. Innovative solutions (due to again competition with the other private parties).
10. Effective & time bound results.
11. Increase the productivity.

Disadvantages of Privatization:
1. Always a threat to working staff.
2. As private parties try to extract work from minimum resources, downsizing is the
common problem.
3. Un-employment increases.
4. If the private party is inefficient, there is every possibility of the business winding up
5. More restrictions on many things.
6. Purely commercial in nature and lacks ethical / human morals at times.

Tariff:-
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.
In simplest terms, a tariff is a tax. It adds to the cost of imported goods and is one of several
trade policies that a country can enact
Tariff is a tax on imported goods. When a ship arrives in port a customs officer inspects the
contents and charges a tax according to the tariff formula. Since the goods cannot be landed until
the tax is paid it is the easiest tax to collect, and the cost of collection is small. Smugglers of
course seek to evade the tariff.
An import tariff is a tax collected on imported goods. Generally speaking, a tariff is any tax or
fee collected by a government. However, the term is much more commonly applied
to a tax on imported goods. There are two basic ways in which tariffs may be levied: specific
tariffs and ad valorem tariffs. A specific tariff is levied as a fixed charge per unit of
imports.

Gainers of Tariff:-
 The government gains, because the tariff increases govt. revenues.
 Domestic producers gain because the tariff affords them some protection against foreign-
competitors by increasing the cost of imported foreign goods.
 Country earns foreign exchange by putting tariff and non-tariff barriers.
 The local industry of the country is protected by the foreign competitive industries.
 Less imported goods are brought into the country due to which consumer also buys local
products.

Sufferers of Tariff:-
 Consumers suffer, because they must pay more for certain imports.

Types of Tariffs and Trade Barriers: -

There are several types of tariffs and barriers that are as follows:-
1. Specific tariffs.
2. Ad valorem tariffs.
3. Licenses.
4. Import quotas.
5. Voluntary export restraints.
6. Local content requirements.

1. Specific Tariffs: - 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 $15 tariff on each pair of shoes imported, but levy a $300 tariff on each
computer imported.

2. Ad Valorem Tariffs - The phrase ad valorem is Latin for "according to 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 Japan 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 Japanese
consumers. This price increase protects domestic producers from being undercut, but also
keeps prices artificially high for Japanese car shoppers.
3. Licenses - A license is granted to a business by the government, and allows the business to
import a certain type of good into the country. For example, there could be a restriction on
imported cheese, and licenses would be granted to certain companies allowing them to act as
importers. This creates a restriction on competition, and increases prices faced by consumers.

4. Import Quotas - An import quota is a restriction placed on the amount of a particular good
that can be imported. This sort of barrier is often associated with the issuance of licenses.
For example, a country may place a quota on the volume of imported citrus fruit that is
allowed.

5. Voluntary Export Restraints (VER) - This type of trade barrier is "voluntary" in that it is
created by the exporting country rather than the importing one. A voluntary export restraint is
usually levied at the behest of the importing country, and could be accompanied by a
reciprocal VER. For example, Brazil could place a VER on the exportation of sugar to
Canada, based on a request by Canada. Canada could then place a VER on the exportation of
coal to Brazil. This increases the price of both coal and sugar, but protects the domestic
industries.

6. Local Content Requirement - Instead of placing a quota on the number of goods that can be
imported, the government can require that a certain percentage of a good be made
domestically. The restriction can be a percentage of the good itself, or a percentage of the
value of the good. For example, a restriction on the import of computers might say that 25%
of the pieces used to make the computer are made domestically, or can say that 15% of the
value of the good must come from domestically produced components.
In the final section we'll examine who benefits from tariffs and how they affect the price of
goods.

Differences between Tariff Barriers and Non-Tariff Barriers

BASIS FOR
TARIFF BARRIERS NON-TARIFF BARRIERS
COMPARISON

Meaning Tariff Barriers implies the taxes or Non-tariff barriers cover all the
duties imposed by the government on restrictions other than taxes imposed by
its imports, so as to provide the government on its imports, so as to
protection to its domestic companies provide protection to the domestic
and increase government revenue. companies and discriminate new
entrants.

Permissibility World Trade Organization allowed World Trade Organization abolished the
the imposition of tariff barriers to its imposition of import quotas and
 BASIS FOR
TARIFF BARRIERS NON-TARIFF BARRIERS
COMPARISON

member nation but at a reasonable voluntary export restraints.

rate only.

Nature Explicit Implicit

Form Taxes and Duties Regulations, Conditions, Requirements,

Formalities, etc.

Revenue Government receives revenue No revenue is received by the

government

Affects It affects the price of imported goods. It affects the quantity or price or both of
the imported goods.

Monopolistic As the government charges import The monopolistic organization charges

Organizations duty, monopolistic groups can be high prices through low output.
controlled.

Profit High profits made by the importers Importers can make more profits.
can be controlled.

Tariffs and Trade-Barriers are used:-

Tariffs are often created to protect infant industries and developing economies, but are also used
by more advanced economies with developed industries. There are five top reasons that tariffs
are used:-
1. Protecting Consumers: - A government may levy a tariff on products that it feels could
endanger its population. For example, South Korea may place a tariff on imported beef from
the United States if it thinks that the goods could be tainted with disease.

2. Protecting Domestic Employment: - The levying of tariffs is often highly politicized. The
possibility of increased competition from imported goods can threaten domestic industries.
These domestic companies may fire workers or shift production abroad to cut costs, which
means higher unemployment and a less happy electorate. The unemployment argument often
shifts to domestic industries complaining about cheap foreign labor, and how poor working
conditions and lack of regulation allow foreign companies to produce goods more cheaply. In
 economics, however, countries will continue to produce goods until they no longer have a
comparative advantage (not to be confused with an absolute advantage).

3. Infant Industries: - The use of tariffs to protect infant industries can be seen by the Import
Substitution Industrialization (ISI) strategy employed by many developing nations. The
government of a developing economy will levy tariffs on imported goods in industries in
which it wants to foster growth. This increases the prices of imported goods and creates a
domestic market for domestically produced goods, while protecting those industries from
being forced out by more competitive pricing. It decreases unemployment and allows
developing countries to shift from agricultural products to finished goods.
Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the
development of infant industries. If an industry develops without competition, it could wind
up producing lower quality goods, and the subsidies required to keep the state-backed
industry afloat could sap economic growth.

4. National Security: - Barriers are also employed by developed countries to protect certain
industries that are deemed strategically important, such as those supporting national security.
Defense industries are often viewed as vital to state interests, and often enjoy significant
levels of protection. For example, while both Western Europe and the United States are
industrialized, both are very protective of defense-oriented companies.

5. Retaliation: - Countries may also set tariffs as a retaliation technique if they think that a
trading partner has not played by the rules. For example, if France believes that the United
States has allowed its wine producers to call its domestically produced sparkling wines
"Champagne" (a name specific to the Champagne region of France) for too long, it may levy
a tariff on imported meat from the United States. If the U.S. agrees to crack down on the
improper labeling, France is likely to stop its retaliation. Retaliation can also be employed if
a trading partner goes against the foreign policy objectives of the government.

Subsidies:-
In economics, a subsidy is generally a monetary grant given by government to lower the price
faced by producers or consumers of a good, generally because it is considered to be in the public
interest. Subsidies are also referred to as corporate welfare by those who oppose their use.
The term subsidy may also refer to assistance granted by others, such as individuals or non-
government institutions, although this is more usually described as charity. A subsidy normally
exemplifies the opposite of a tax, but can also be given using a reduction of the tax burden.
These kinds of subsidies are generally called tax expenditures or tax breaks.

The benefit given by the government to groups or individuals usually in the form of a cash
payment or tax reduction is called as Subsidies. The subsidy is usually given to remove some
type of burden and is often considered to be in the interest of the public.
A subsidy is a government payment to a domestic producer. Subsidies take many forms
including cash grants, low-interest, tax breaks and government equity participation in domestic
and government producers in two ways:-
1.They help producers compete against foreign imports and
2. Subsidies help them gain export markets.

A subsidy is assistance to a business or economic sector or producers. Most subsidies are set in
place by the government for producers or are distributed as subventions in an industry to prevent
the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase
in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage
subsidy). Examples are subsidies to encourage the sale of exports; subsidies on some foods to
keep down the cost of living, especially in urban areas; and subsidies to encourage the expansion
of farm production and achieve self-reliance in food production. Subsidy has been used by
economists with different meanings and connotations in different contexts.

The dictionary [Concise Oxford] defines it as "money granted by state, public body, etc., to
keep down the prices of commodities, etc.”.

Environmental economists define subsidies as uncompensated environmental damage arising

from any flow of goods and services. In a budgetary context, it may be defined as “unrecovered
costs in the public provision of private goods”.

Subsidies are often regarded as a form of protectionism or trade barrier by making domestic
goods and services artificially competitive against imports. Subsidies may distort markets, and
can impose large economic costs. Financial assistance in the form of a subsidy may come from
one's government, but the term subsidy may also refer to assistance granted by others, such as
individuals or non-governmental institutions.
Examples of industries or sectors where subsidies are often found include utilities, gasoline in
the United States, welfare, farm subsidies, and (in some countries) certain aspects of student
loans.

Kinds / Types of Subsidies:-

There are many different ways to classify subsidies, such as the reason behind them, the
recipients of the subsidy, the source of the funds (government, consumer, general tax revenues,
etc.). In economics, one of the primary ways to classify subsidies is the means of distributing the
subsidy. In economics, the term subsidy may or may not have a negative connotation: that is, the
use of the term may be prescriptive but descriptive. In economics, a subsidy may nonetheless be
characterized as inefficient relative to no subsidies; inefficient relative to other means of
producing the same results; "second-best", implying an inefficient but feasible solution
(contrasted with an efficient but not feasible ideal), among other possible terminology.
In other cases, a subsidy may be an efficient means of correcting a market failure. For example,
economic analysis may suggest that direct subsidies (cash benefits) would be more efficient than
indirect subsidies (such as trade barriers); this does not necessarily imply that direct subsidies are
bad, but they may be more efficient or effective than other mechanisms to achieve the same (or
better) results. Insofar as they are inefficient, however, subsidies would generally be considered
by economists to be bad, as economics is the study of efficient use of limited resources.
Ultimately, however, the choice to enact a subsidy is a political choice. Note that subsidies are
linked to the concept of economic transfers from one group to another.
Another form of subsidy is due to the practice of a government guaranteeing a lender payment if
a particular borrower defaults. This occurs in the United States, for example, in certain airline
industry loans, in most student loans, in small business administration loans and is alleged to
occur in the mortgage-backed bonds issued through Fannie Mae and Freddie Mac. A government
guarantee of payment lowers the risk of the loan for a lender, and since interest rates are
primarily based on risk, the interest rate for the borrower lowers as well.
There are many forms of subsidies given out by the government, including welfare payments,
housing loans, student loans and farm subsidies. For example, if a domestic industry, like
farming, is struggling to survive in a highly competitive international industry with low prices, a
government may give cash subsidies to farms so that they can sell at the low market price but
still achieve financial gain.

Merits of Subsidies:-
Some merits of Subsidies are as follows:-
 Reduces cost of production.
 Releases resources to be used for other purposes e.g. expansion (increased supply).
 Increases the firm’s competitive edge in terms of prices. With subsidies they are able to cover
cost without making their products unaffordable.
De-merits of Subsidies:-
Some de- merits of Subsidies are as follows:-
 They are expensive (higher taxes).
 They may encourage inefficiency by relying more in the subsidy money.
 It is difficult to decide on who may receive a subsidy.
 They can create a production surplus which may end up as waste.
 They encourage new entrants into the industry even when demand does not require these.
 It increases dependence of firms and hence, might not provide motivation necessary for
increasing efficiency and supply.

Quotas:-
A quota is a prescribed number or share of something.
In common language, especially in business, a quota is a time-measured goal for production or
achievement. An assembly line worker might have a quota for the number of products made; a
salesperson might have a quota to meet for weekly sales; in trade, a quota is a form of
protectionism used to restrict the import of something to a specific quantity
The number of cars imported from Japan may have a quota of 50,000 vehicles per annum to
protect auto manufacturers in the United States

IMF member’s quota is broadly determined by its economic position relative to other members.
Various economic factors are considered in determining changes in quotas, including GDP,
current account transactions, and official reserves. When a country joins the IMF, it is assigned
an initial quota in the same range as the quotas of existing members considered by the IMF to be
broadly comparable in economic size and characteristics.

Import Quotas:-
An import is a direct restriction on the quantity of some good that may be imported into a
country. This restriction is usually enforced by issuing import licenses to a group of individuals
or firms.
Import quotas are limitations on the quantity of goods that can be imported into the country
during a specified period of time. An import quota is typically set below the free trade level of
imports. In this case it is called a binding quota. If a quota is set at or above the free trade level of
imports then it is referred to as a non-binding quota.
Goods that are illegal within a country effectively have a quota set equal to zero. Thus many
countries have a zero quota on narcotics and other illicit drugs.
There are two basic types of quotas: absolute quotas and tariff-rate quotas. Absolute quotas limit
the quantity of imports to a specified level during a specified period of time.
Tariff-rate quotas allow a specified quantity of goods to be imported at a reduced tariff rate
during the specified quota period.
An import quota is a direct restriction on the quantity of a good that is imported. The restriction
is usually enforced by issuing licenses to some group of individuals or firms. License holders are
able to buy imports and resell them at a higher price in the domestic market. The profits received
by the holders of such import licenses are known as quota rents.
An import quota always raises the domestic price of the imported good. The difference between
a quota and a tariff is that with a quota the government receives no revenue. However, in
assessing the costs and benefits of an import quota, it is crucial to determine who gets the rents,
too, as well as to question how these rents influence the general welfare.

An import quota is a limit on the quantity of a good that can be produced abroad and sold
domestically. It is a type of protectionist trade restriction that sets a physical limit on the quantity
of a good that can be imported into a country in a given period of time. If a quota is put on a
good, less of it is imported. [2] Quotas, like other trade restrictions, are used to benefit the
producers of a good in a domestic economy at the expense of all consumers of the good in that
economy.
Types of Import Quotas:-
Quotas are established by legislation and Presidential proclamations issued pursuant to specific
legislation and provided for in the Harmonized Tariff Schedule of the United States (HTSUS).
United States import quotas may be divided into two types: absolute quota and tariff-rate quota.
Once a specific quota has been reached in a particular category, goods may still be entered, but at
a considerably higher rate of duty.

1. Absolute quotas:-
Absolute quotas limit the quantity of certain goods that may enter the commerce of the United
States during a specific period. Once the quantity permitted under an absolute quota is filled, no
further entries or withdrawals from warehouse for consumption of merchandise subject to the
quota are permitted for the remainder of the quota period.

Importers may hold shipments in excess of a specified absolute quota limit until the opening of
the next quota period by entering the goods into a foreign trade zone or bonded warehouse. The
goods may also be exported or destroyed under U.S. Customs and Border Protection (CBP)
supervision.

2. Tariff-rate quotas:-
Tariff rate quotas permit a specified quantity of imported merchandise to be entered at a reduced
rate of duty during the quota period. There is no limitation on the amount of merchandise that
may be imported into the United States; however quantities entered in excess of the quota limit
during that period are subject to a higher duty rate.
If the importer has not taken possession of the goods, and elects not to pay the higher rate of
duty, they may enter the goods into a foreign trade zone or bonded warehouse until the opening
of the next quota period, or export or destroy the goods under CBP supervision.

Import Quotas vs. Tariffs:-

Both tariffs and import quotas reduce quantity of imports, raise domestic price of good, decrease
welfare of domestic consumers, increase welfare of domestic producers, and cause deadweight
loss. However, a quota can potentially cause an even larger deadweight loss, depending on the
mechanism used to allocate the import licenses. The difference between these tariff and import
quota is that tariff raises revenue for the government, whereas import quota generates surplus for
firms that get the license to import.
For a firm that gets a license to import, profit per unit equals domestic price (at which imported
good is sold) minus world price (at which good is bought) (minus any other costs). Total profit
equals profit per unit times quantity sold.
Government may charge fees for import license. If the government sets the import license fee
equal to difference between domestic price and world price, the import quota works exactly like
a tariff. The entire profit of the firm with an import license is paid to the government. Thus
government revenue is the same under such an import quota and a tariff. Also, consumer surplus
and producer surplus are the same under such an import quota and a tariff.
So why do countries use import quotas instead of always using a tariff?
When an import quota is used, it allows a country to be sure of the amount of the good imported
from the foreign country. When there is a tariff, if the supply curve of the foreign country is
unknown, the quantity of the good imported may not be predictable.
If world supply in the home country is upward-sloping and less elastic than domestic demand (as
may be the case when the home country is the United States) then the incidence of the tariff may
fall on producers, and the price paid domestically may not rise by much. Then if the tariff is
supposed to make price of the good rise to allow domestic producers to sell at a higher price, the
tariff may not have much of the desired effect. A quota may do more to raise price. However in
competitive markets there is always some tariff that raises the price as high as the quota does.

a. Quota Impacts and Disadvantages:-

Quotas are usually employed to protect infant industries and keep market entry costs low for
domestic producers. Often the quotas last long after the industry has matured. Other uses for
quotas are to protect strategic industries such as defense and agriculture. In market environments
where imports are on the rise, quotas are more protective than tariffs. When one country uses
quotas, its trading partners do the same and cite the same reasons. The end result is less
exporting opportunity for all producers and higher prices for all consumers. Quotas are also
cumbersome for the country using them. They require a lot of paperwork indicating exact
amounts of products for each country facing a quota. It is also difficult to measure the precise
degree of protection quotas offer.

b. Administrative Policies :-
Administrative trade policies are bureaucratic rules that are designed to make it difficult for
imports to enter a country. In addition to the formal instruments of trade policy, govt. of all types
sometimes uses informal or administrative policies to restrict imports & boost exports. Some
would agree that the Japanese are the masters of this kind of trade barrier.
As with all instruments of trade, administrative instruments benefits producers and hurt
consumers, who are derived access to possibly superior foreign products.

Voluntary Export Restraints (VERs):-

A voluntary export restraint 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 quotes because these restraints are typically implemented upon the insistence of the
importing nations.

Typically VERs arises when the import-competing industries seek protection from a surge of
imports from particular exporting countries. VERs is then offered by the exporter to appease the
importing country and to avoid the effects of possible trade restraints on the part of
the importer. Thus VERs is rarely completely voluntary. Also, VERs is typically implemented
on a bilateral basis, that is, on exports from one exporter to one importing country.
A Voluntary Import Expansion (VIE) is an agreement to increase the quantity of imports of a
product over a specified period of time. In the late 1980s, VIEs were suggested by the US as a
way of expanding US exports into Japanese markets. Under the assumption
t h a t J a p a n maintained barriers to trade that restricted the entry of US exports, Japan was
asked to increase its volume of imports on specified products including semiconductors,
automobiles, auto parts, medical equipment and flat glass. The intention was that VIEs would
force a pattern of trade that more closely replicated the free trade level.

VERs is export quotas administered by the exporting country. They are however imposed at the
request of the importer, and are then agreed to by the exporter. The objective is to forestall other
trade restrictions. A VER is exactly like an import quota, but the licenses are assigned in this
case to foreign governments. As a consequence, the rents accrue to the country agreeing to
administer them, and are very costly to the importing country. Moreover, the VERs are always
more costly to importing countries than tariffs that limit imports by the same amount. They
produce a clear loss for the importing country.

Example: one of the most famous examples is the limitation on auto exports to the United States
enforced by Japanese automobile producer in 1981.

Benefits: -
1. Both imports and quotas and VERs benefit domestic producers by limiting competition.

Sufferers:-
1. VERs always raises the domestic price of an imported goods, so VER do not benefit
consumers.

Anti Dumping Policy:-

In the context of international trade, dumping is defined as selling goods in a foreign market at
below their costs of productive, or as selling goods in a foreign market at below their “fair”
market value. “Fair” market value of a good is normally judged to be greater than the costs of
producing that good.
Dumping is said to occur when the goods are exported by a country to another country at a price
lower than its normal value. This is an unfair trade practice which can have a distortive effect on
international trade. It is practice of charging a very low price in a foreign market for such
economic purposes as putting rival suppliers out of business.
If a company exports a product at a price lower than the price it normally charges on its own
home market, it is said to be “dumping” the product. Is this Unfair competition? The WTO
agreement does not pass judgment. Its focus is on how governments can or cannot react to
dumping — it disciplines anti- dumping actions, and it is often called the “Anti-dumping
Agreement”.
Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its
trade distortive effect.
The purpose of anti dumping duty is to rectify the trade distortive effect of dumping and re-
establish fair trade. The use of anti dumping measure as an instrument of fair competition is
permitted by the WTO. In fact, anti dumping is an instrument for ensuring fair trade and is not a
measure of protection per se for the domestic industry. It provides relief to the domestic industry
against the injury caused by dumping.