Both tariff barriers and non-tariff barriers are a form of international trade barrier. Policymakers use these measures as a tool to regulate or encourage cross-border trade of goods. The severity of tariff measures and non-tariff measures can make or break your international trade business.
As tariff barriers and non-tariff barriers feature heavily in international trade, and therefore international logistics, you may find this information useful to plan on your international trade business.
As for freight forwarders acting as a representative to product importers and exporters, you need to have a resolute understanding of the hurdles of both tariff barriers and non-tariff barriers. This is because you are dealing first-hand in overcoming these trade barriers before importing and exporting cargoes.
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What are Trade Barriers
Trade barriers have an unintended negative connotation that “barriers are bad”. As a matter of fact, some barriers are necessary. Trade barriers exist chiefly to: –
- Regulate Technical Measures of “sensitive” cargoes
- Restrict illegal goods or service
- Control prices of imported goods
- Control quantity of imported or exported goods
- Provide a source of income for the country
The key difference between tariff barriers and non-tariff barriers is that: –
Tariff Barriers are trade barriers that restrict and regulate trade flow with monetary measures.
Non-Tariff Barriers are trade barriers that restrict and regulate trade flow with non-monetary measures.
Why are Tariff Barrier and Non-Tariff Barrier Important?
There is largely a dichotomy of opinion on whether the world is better off by practicing trade liberalization or trade protectionism.
Trade liberalization is practiced by countries that believe in a free-market economy and therefore encourages lowering tariff and non-tariff barriers to trade.
Trade protectionism is practiced by nations that believe in protecting their own interest first by increasing tariff and non-tariff barriers to trade goods with other nations.
Most country’s trade policies fall between the spectrum of trade liberalization and trade protectionism.
This means that despite how open a country’s trade policy is, there are still some forms of necessary trade restrictions in the form of tariff and non-tariff barriers to protect the national interest.
If you’ve reached this point of this article, well allow us to explain further by giving examples of tariff barriers and non-tariff barriers.
Tariff Barriers
The study of tariff barriers is often a study of the economy. But since we are focusing on international trade, tariff barriers are part and parcel of importing and exporting cargoes in and out of a country.
Tariff barriers are implemented regardless of the mode of transportation. Whether you are transporting your goods by air, sea, land, or a combination of transport modes, you need to adhere to tariff barrier requirements once your cargo crosses international trading zones.
Tariff Barriers, as opposed to non-tariff barriers, are monetary levies imposed on products or goods coming in or out of a country.
In other words, based on certain measurements, you pay a tax to the government. The measurement in question can be based on: –
- The percentage of Invoice value of imported goods
- The weight of the imported goods
There are two main tariffs that you most frequently come across, which is: –
- Import Duty/Levy
- Import Tax
Import Duty
Import duty is an additional fee levied by the local customs.
The customs department determines the amount of duty applicable by firstly determining the Harmonized Tariff Code (HTC), or the HS Code of the product. Every product has a determining HS Code that tells the customs officer what is exactly imported.
To learn more about HS Codes click on the link here.
Mostly your customs broker would have the experience to advise the relevant HS/HTC Code to apply on your product.
Once your customs broker or freight agent has determined the HS Code, they can then calculate the applicable duty on the product imported either by: –
- The percentage of invoice value
- The weight of the cargo
Tax
Tax or value-added tax (VAT) is also a fee levied by local customs for importing a product. The key difference is that tax is calculated as such: –
(Invoice Value + Applicable Duty Amount) x Tax Rate = Applicable Tax Amount.
Non-Tariff Barriers
We have looked into the reason why tariff and non-tariff barriers exist, let’s look at some examples of non-tariff barriers.
Experts categorize non-tariff barriers into: –
- Technical Measures
- Non-Technical Measures
This form of categorization of non-tariff barriers is known as the MAST classification, which is under the supervision of UNCTAD. There are certainly many non-tariff measures that cannot be quantifiable or classifiable, but we think that this is a useful way of conceptualizing non-tariff barriers.
Note that non-tariff barriers are concerned with trade restriction that doesn’t involve “direct” monetary barriers. What we mean is that although non-tariff barriers don’t impose duties or levies per se, the cost of adhering to non-tariff barriers is easily be measured in dollars and cents.
For instance, the administrative costs, delay costs, logistics costs, permit fees, and other related costs do add up and impact the final cost of the product sold.
We have looked into the reason why tariff and non-tariff barriers exist, let’s look at some examples of non-tariff barriers.
Experts categorize non-tariff barriers into: –
- Technical Measures
- Non-Technical Measures
This form of categorization of non-tariff barriers is known as the MAST classification, which is under the supervision of UNCTAD. There are certainly many non-tariff measures that cannot be quantifiable or classifiable, but we think that this is a useful way of conceptualizing non-tariff barriers.
Note that non-tariff barriers are concerned with trade restriction that doesn’t involve “direct” monetary barriers. What we mean is that although non-tariff barriers don’t impose duties or levies per se, the cost of adhering to non-tariff barriers is easily be measured in dollars and cents.
For instance, the administrative costs, delay costs, logistics costs, permit fees, and other related costs do add up and impact the final cost of the product sold.
Technical Measures of non-tariff barrier
Sanitary and Phytosanitary (SPS) measures
This technical non-tariff barrier is a document of proof that agricultural products have received treatment to remove environment-damaging pests.
Technical Barriers to Trade
Researchers determine technical barriers to trade as a non-tariff barrier that refers to measures such as labeling, standards on technical specification and quality requirements, and other measures that protect the environment.
An example of a technical barrier to trade can be made with the U.S. Food and Drug Administration (FDA). The FDA works hand-in-hand with the U.S. Customs and Border Protection Agency to prevent illegal and harmful medical products such as drugs and chemicals from entering and exiting the country.
As you can imagine, this is a necessary and important trade regulation. The FDA imposes strict import legal requirements and policies, whereas the CBP enforces those policies.
Non-Technical Measures of Non-tariff barrier
We selected a few more commonly seen non-tariff barriers to discuss in this article. If you are keen on looking to export into a certain country/market, these non-tariff barriers are certainly ones that you should look out for.
Import quotas or other restrictive trading policies
Quotas on import or export control the number of goods allowed into or out of a country of trade. This is perhaps the most straightforward way of restricting trade. This would benefit local manufacturers by artificially making the market less competitive.
There are also other limitations such as price control such as anti-dumping duties, variable levies, and tariff quotas that discourage the import of certain goods by making the price less competitive too.
Competition
Competition is good, it forces producers or manufacturers to come up with ways to compete in the market, and weed out the industry from poor performers. Well, if you are a proponent of the “free market system”, natural competition is always the best form of competition.
On the other hand, policymakers that artificially induce competition as a non-tariff barrier generally serve other purposes, chiefly to protect local manufacturers and producers from outside competition.
Local policymakers can assist local producers by granting exclusive preference or privileges to local economic operators. Policymakers can nationalize importing agents, meaning to say a certain commodity can only be imported by a governing agent or an appointed agent.
Other creative ways of increasing competition for foreign exporters are to mandate national insurance, or transporting agents too.
Finance Measures
Finance measures as a non-tariff barrier refer to measures restricting the payment of imports.
The most common payment restriction that nations deploy is to restrict access to foreign currency account to exporting manufacturers, this exposes exporters to foreign currency risks.
Other measures include restricting the terms of payment, certain countries only allow payment of imported goods with a Letter of Credit.
A letter of credit is issued by local banks that guarantees payment to exporters from foreign countries. Although the guise of using a letter of credit to import or export products is the added financial security for exporters, it increases financing costs as exporters and importers both have to pay administrative fees and financing fees to the trade financing bank.
In addition, using a letter of credit in international trade also increases the shipping document’s complexity, as the type of shipping documents such as the bill of lading is restricted by the trade financing bank.
More Information
Free Trade Agreements
Free trade agreements are essentially the antithesis of tariff barriers, it essentially removes as many monetary restrictions to trade between contracting countries. This free trade agreement’s sole purpose is to promote international trade and a symbiotic relationship between contracting countries that ultimately improve the contracting party’s economic trade.
As an importer or exporter, it is always useful to look at the requirements of the country you wish to trade with and look for countries that have favorable trade agreements to export to.
