CSS Solved Business Administration Past Papers | How do non-tariff barriers affect international business? Critically discuss with reference to Less Developed Countries.
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Topic Breakdown:
Global trade has overpowered all other dimensions of business administration. The international business determines the fate not only of MNCs but also of the nation’s economy. Trade barriers are a tool to monitor and influence foreign businesses.
Subject: international business
Topic: trade barriers
Introduction
Globalization has given rise to the phenomenon of international trade. Countries trade with each other to facilitate their consumers and allow businesses to flourish. The developed world has been the major importer; hence, they used tariff barriers to discourage imports and above all, protect local business. However, in recent years the trends have changed and countries have started relying more on non-tariff barriers rather than imposing direct tariffs. Such barriers have significantly impacted the businesses in the less developed world as they struggle to tap international market.
Types of non-tariff barriers
- Quota:
Quota limits the number of products of a certain type that can be imported into the country; it might be for a specified time period.
- Impact on international business:
Limiting the amount of product to be imported into the country is without doubt a restriction on free trade. On one hand the companies are barred from trading according to their capacity; on the other hand it leads to rise in prices due to imbalance in demand and supply. Moreover, better terms are often given to countries that enjoy good relations with the importing country. - How it impacts less developed countries:
Majority of the lesser developed nations hope to bank on exporting their goods to the developed world; however, non-tariff barriers such as quotas restrict their exporting quantity. Moreover, it leads to a rise in the price of their goods, the biggest advantage such nations possess; therefore, it becomes difficult for them to compete.
- Embargo:
The embargo is a government order to limit trading for a specific product or all the products from a specific country.
- Impact on international business:
This is another method to restrict free trade; however, it is limited to a particular country. Ironically, diplomatic relations and politics have a critical factor in imposing embargos, e.g. the US has imposed embargos on countries like Cuba, Iran and North Korea due to its fragile diplomatic ties with these countries. Moreover, majority of the fellow countries follow such sanctions to intensify diplomatic efforts. - Impact on less developed countries:
Lesser developed countries suffer the most from such trade restrictions. On the one hand, their trade, especially export, is halted due to embargos. On the other hand, they cannot receive investment from such countries as well, thus resulting in a reduced flow of money.
- Licensing:
The most common form of non-tariff barrier is licensing. It is a permission certificate issued to a foreign company to trade products included in a list of licensed merchandise.
- Impact on business and less developed countries:
It is an instrument to regulate imports so that local industry can be protected. Licensing normally is a difficult task and is also considerably costly in most cases. Moreover, the majority of the licenses issued are for a certain time period that needs to be renewed regularly, thus, complicating the business procedure.
- Subsidy:
Another form of indirect barrier that foreign companies face is that of subsidies. Most countries, mainly the developed ones offer subsidies to local businesses to stay in competition.
- Impact on business and less developed countries:
The subsidy is one method that focuses on increasing the sales of domestic products rather than reducing the sales of imported products. Most of the developing world possesses the core advantage of being cost-effective due to cheap labour and other factors; nonetheless, when the importing country subsidises its domestic products, it becomes difficult for the exporting country to compete.
- Local content Laws:
Local content laws are enforced by countries to ensure that products sold in a particular country be at least partially made there. Thus forcing the foreign companies either to invest there or ally with a domestic partner.
- Impact on business and less developed countries:
Such a law is one of the most considerable and biggest hurdles in discouraging free trade. It has the most significant impact on the developing countries as they have limited resources. One of the main reasons behind such restrictions is to reduce the flow of profit outside the country. In addition, such measures may be a tool to access technology or core competency that the local industry does not possess. Less developed countries suffer the most as their exporters may not have enough resources to invest abroad; moreover, it is a considerable dent in their profit margin.
- Trade Sanctions:
Trade sanctions are trade penalties imposed by one nation on to one or more nations. They may also include increased administrative actions or additional customs and trade procedures.
- Impact on business and less developed countries:
Their main purpose is to slow or limit a country’s ability to trade. Sanctions mainly are politically motivated and may be imposed by a number of countries together, e.g. allies.
- Standards:
One complicated and newly originated form of non-tariff barriers is standards. They could be imposed in form of classification, labelling and testing of products.
- Impact on business and less developed countries:
Importing nations may desire the exporters to meet the standards of domestic products, therefore, adding to the cost of the imported products. Moreover, packaging restrictions and conditions to disclose details about the country of origin etc., are also a challenge for the developing world.
Conclusion:
Recently there has been a significant rise in the use of non-tariff trade barriers. Mostly the developed world is using this to gain maximum economic and political benefits. Ironically, non-tariff barriers have far-reaching implications for the developing world, possessing limited resources and political clout. The type of non-tariff barrier imposed has varying repercussions for the exporting country. From increasing costs to protecting local industry, different tools are available for the host nation.
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