Instruments of Trade Policy

Tariffs have been one of classical methods of regulating trade. Tariffs can be classified into two categories: (1) revenue tariffs and (2) protective tariffs. Revenue tariffs are basically intended to collect revenues. These are, therefore fairly low and do not obstruct the free flow of imports. Protective tariffs, on the other and, are basically intended to protect domestic industries. These are, in fact, fairly high so that they can obstruct the flow of imports.

Tariffs have also at times been used to discriminate between countries. Tariffs are imposed on goods having certain specifications which are supplied by a particular country only.

Tariffs may be either ad valorem or specific. Ad valorem tariffs are based on value and are in the form a specific percentage of the value of the goods. Specific tariffs, on the other hand, relate to some particular attribute of the goods namely weight, quantity, volume, and so on. If import prices rise ad valorem duties also rise and this aggravates the protective effect. On the other hand, if prices fall, ad valorem duties may not afford adequate protection because they tend to fall with the fall in import prices. Ad Valorem also create problems of valuation. Importers tend to put a lower value on their imports while revenue authorities tend to put a higher value. If the customer’s authorities put a high value on the goods, importers have a right of abandoning the goods, i.e. they can force the customs authorities to purchase goods at their own valuation. On the other hand, if the customs authorities doubt the value mentioned by the importers, the customs authorities may exercise a right of pre-emption, i.e. they can force the importer to surrender the goods at his own valuation plus a reasonable margin of profit.

Tariffs operate through the price mechanism. Therefore, if there is an increase in the domestic costs and prices, or decreases in the foreign costs and process, tariffs may not afford adequate protection to the domestic industries.

In modern theory of tariffs there is a concept of effective protection. Effective protection denotes the relation of nominal tariff rate to the value-added in the process of manufacture. For example, the cost of producing 100 yards of cloth is Rs. 400 consisting of Rs. 300 worth of cotton and Rs. 100 as the cost of processing. If the import duty imposed is 20%, the total duty to be paid would be Rs. 80 is related to value added in manufacturing it would amount to 80%In other words the effective protection comes top 80%. In others words, the effective protection comes to 80%. One other charge against the developed countries is that though their nominal rates of tariffs seem to be low, the effective protection is fairly high.


Due to progressive reduction in tariffs and complete removal of quantitative restrictions what effect from April, 2001, Indian industry is now exposed to competition from imports from all sources. To provide relief in appropriate cases, the Government of India has decided to impose anti-dumping duties.

Dumping is said to occur when goods are exported by a country to another country at a price lower than its normal. An anti-dumping duty is imposed to rectify the trade distorting effect of dumping and to reestablish fair trade and is permitted by the WTO.

The various parameters relating to injury are: quantum of imports, market share, import price and various indicators affecting domestic industry such as production and capacity utilization and price undercutting.

Quantitative Restrictions:

Quantitative restrictions constitute an unorthodox instrument of trade policy. As pointed out above, unforeseen changes in prices and costs both at home and abroad may affect the effectiveness of tariffs ad thereby nullify the objective of the government to regulate imports. The governments therefore resort to quantitative restrictions on imports. Quantitative restrictions are laid down in advance and fix the maximum quantity of imports that may be permitted over a period of time. Thus whatever may be the changes in domestic or foreign price levels, the government is in a position to regulate the flow of imports over the quota period as also to allocate them between various importers and supplying countries.

The only way an international marketer may adopt to overcome quotas is to set up local production facilities.