Global Financing and Exchange Rate Mechanisms Paper

University Degree Business and Administrative studies

Global Financing/Exchange Rate

Week Three

G. Phillip

Global Business Strategies

MGT 448

November 18, 2006

Global Financing and Exchange Rate Mechanisms Paper

Tariff and Non-tariff barriers

All countries have resources, but not all countries have the same resources in abundance. Since human beings have insatiable wants, it is necessary to trade in order to satisfy this want. This is easier said than done because there are obstacles that may prevent a smooth trading process. These obstacles to trade are referred to as tariff and non-tariff barriers. This paper will analyze the global financing and exchange rate topic called tariff and non-tariff barriers. It will start out by discussing tariffs and non-tariff barriers, and then it will examine tariff rate quotas. It will also incorporate how both tariff and non-tariff barriers are used in global financing operations, and its importance in managing risks.

“A tariff is a tax on foreign goods,” (en.wikipedia.org). It is a form of government intervention in economic activity. There are different types of tariffs and they are used to protect the domestic market of the importing country from foreign competition. Some examples are high customs duty, countervailing duty, and anti-dumping duty. There are generally three types of customs duties, ad valorem, specific duty, and compound duty. Ad valorem duty is assessed as a percentage of the imported product. For example, 10% of free on board (FOB) price. Free on Board (FOB) is a term used in shipping that indicates that the supplier is responsible for shipping costs and shipping until the goods reach a particular location. Specific duty is assessed according to some unit of measurement, for example, $10 per dozen or $4 per pound. Compound duty is assessed as a combination of both ad valerom duty and specific duty. For example, 10% of FOB price plus $10 per dozen.

Countervailing duty is assessed in addition to a regular import duty. “Imposing a countervailing duty is the answer to unfair competition from subsidized foreign good,” (). This actually put the price of these products back to almost what the original price would be before being subsidized.

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The disposal of an oversupply of goods or obsolete stock to different markets is referred to as dumping. This surplus is usually the result of too much goods being supplied in comparison to what is demanded by the consumers of that particular market. These goods are usually sold at a price that is lower that what they are sold for in their domestic market or a price that is lower than their cost. The anti-dumping duty is assessed to rectify the situation that may arise with dumping. It is usually added to the export price of the goods in an attempt to establish fair trade. For example, a few years ago a Jamaican company called “Best Dressed Chicken” argued that chicken parts were being dumped in Jamaica at a price that was far less than what they cost to be produced. This company along with other local chicken producers was losing money and so they argued that the quality of the chicken was not as good as the chicken produced locally and that it was unfair competition. Soon after there was a decrease in the amount of chicken exported to Jamaica because the anti-dumping duty prevented it.

“Non-tariff barriers are government laws, regulations, policies, conditions, restrictions, or specific requirements, and private sector businesses practices or prohibitions, that protect the domestic industries from foreign competition,” (www.export911.com). These barriers are designed to prevent foreign goods from going into the domestic market while abiding by the agreements made through the World Trade Organization (WTO). Non-tariff barriers include quotas, countertrade, import levies, import pre-shipment inspections, consular invoice or legalization or visa of export documents, health safety and technical standards, currency deposit in importations, product labeling in foreign languages, closed market distribution, and advertising restrictions. These barriers are also referred to as “red tape” and have been proven to be more effective than tariffs in several cases.

“A tariff rate quota (TRQ) combines the idea of a tariff with that of a quota,” (www.farmfoundation.org). Under the regulations of the World Trade Organization (WTO), a country may use a combination of two tariffs in the form of a TRQ. TRQ usually include a lower tariff on a fixed quantity of the goods and a higher tariff on the quantity that is over or above the fixed amount. For example, an importer might pay a 10 percent tariff on the first ten laptops he imports in a country and 15 percent for the additional laptops.

In reviewing, both tariff and non-tariff barriers have been used to protect the local market from foreign competition. After doing research a strategy that includes a budget for global financing operations must be done to see a true picture of the total cost of going global. This strategy will ensure a smoother entry for the global business and help to manage some political, legal and regulation risks associated with entering a country.

Reference:

Examples of tariffs and non-tariff barriers retrieved November 18, 2006 from

Use of tariff and non tariff barriers retrieved November 18, 2006 from

Definition of tariff retrieved November 18, 2006 from

Export Department: tariff and non-tariff barriers retrieved November 18, 2006 from