Barriers To Trade

Prof. Dr. Lepi T. Tarmidi

Department of Economics, University of Indonesia

October 2007

Barriers to Trade

1. Tariff

Before the GATT Uruguay Round, average tariff rate in developed countries was already relatively low, around 8%. After the GATT Uruguay Round/WTO, the average tariff rate further declined to 5.6%. Hence tariff protection is not important any more, except in agriculture. Besides, developed countries offer tariff cuts to imports from developing countries under the Generalized System of Preferences (GSP). On the other hand, developed countries practice tariff escalation, the more advanced the production process the higher is the tariff rate.

The European Union (EU) imposes a tariff rate of 12 % for imports of canned tuna from Indonesia if the volume is within the quota limit for GSP, but in excess of it the rate increases to 24 % (Kompas, 15 June 2005).

Since tariffs are not an effective instrument of trade protection anymore, developed countries now refer to other measures known as "non-tariff barriers".

2. Non-tariff barriers

Since tariffs as a mean of protection has lost much on importance, non-tariff barriers gain more on importance for developed countries. The following is not a complete list.

a. Quantitative restrictions or quota

No longer allowed under the Uruguay Round, except for the Multifiber Arrangement (MFA), which will be phased out until January 1, 2005.

Protection is not eliminated, because countries can substitute the same level of protection with tariffs. The reason is because quantitative barriers are bilateral and hence are not transparent, while tariffs apply to all countries without discrimination and are hence transparent and can be negotiated downwards during the subsequent Rounds of trade negotiation in the WTO.

b. Administrative red-tape (Krugman & Obstfeld, p. 194)

In international trade certain documents are needed like letter of credit (L/C), bill of lading (L/D), certificate of origin, health certificate, industrial standard, etc. However, administrative requirements could be made excessive by intention with the objective of obstructing imports.

German: breweries are required to take back a certain share of their bottles to be reused in the same factory where they were first filled, while imported beers cannot do that.

c. Technical barriers in industry standard

Countries have industrial standards, however, developed countries have in general higher industrial standards that it might obstruct imports from developing countries. To prevent industrial standards to becoming trade barriers, the WTO has adopted the Agreement on Technical Barriers to Trade. The Agreement includes industrial as well as agricultural products. "Members shall ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade" (Art. 2) "Members shall provide differential and more favourable treatment to developing country Members Ð'..." (Art. 12)

d. Health and safety requirements

It is the supreme right of every country to have health standards to protect their citizens. Again, quite often the standards set by developed countries are very high so that they cannot be fulfilled by most developing countries. These would impede exports from developing countries. There are many examples: (1) eternit board used for ceilings in Indonesia is prohibited in developed countries, (2) shrimps may not content salmonella bacteria that exceeds a certain limit; (3) exports of kitchenware made of ceramics from Indonesia was once refused by the US because the kaolin contains lead material; (4) exports of pencils from Indonesia to the US was also rejected because they contain black carbon; (5) the European Union starting 1 January 2005 introduced the Europe Good Agricultural Practice (GAP) for imports of fruits and processed fruits; (6) in July 2006 the EU also threatened to put an embargo on fish exports from Indonesia, because the fish contains heavy metal and dangerous chemicals, and out of 24 laboratories which issue health certificates, 15 are not according to international standards. As of July 2006 only 12 laboratories are not allowed to issue health certificates. (Kompas, 29 June 2006). (7) As of January 2005, the EU issued a trace-ability regulation on fish, seafood and fish products, which contains information that can trace the location and the origin of the catch, its processing up to its distribution to the final consumers (Suara Pembaruan, 6 September 2004); (8) Indonesia in the late 80s and early 90s could not export canned food using local tinplates to America, because Indonesian tinplates had not gained accreditation yet according to American standards. If the protective layer of the tinplate is not perfect, then the can will corrode and contaminates its contents. Then early 90s, Indonesian tinplates get a standard certificate from the US FDA. (9) At times trade regulations are ridiculous: the EU prohibit imports of cattle raised with growth hormones, although this is safe; (10) the US introduced the WRAP (world responsible apparel production) for exports of apparel meaning that in garment factories there should be one toilet for at least 16 employees. (11) In another case, the EU imposes a regulation since September 2001 prohibiting the use of anti-biotic residuals like chloramphenicol, nitrofursi and furazolidon on shrimps. Indonesia protested and is freed from this stipulation since September 2003 because Indonesia gave the argument that all kind of shrimps must contain this element. The EU was protested by Indonesia because other countries are importing meat, flour and milk from the EU, which contains the same element, including shrimps imported from Norway (Kompas, 23 December 2003). (12) Recently the US introduced a new stipulation on "bio-security" which is connected to the traceability of a product. (Kompas, 7 Seotember 2007).

To prevent excessive protection, the WTO has an agreement on the Application of Sanitary and Phytosanitary Measures.

e. Import licensing by developing countries

Not allowed except by state owned enterprises

f. Barriers to trade in services by developing countries

Agreement on Trade in Services (GATS)