Terms of Trade, Free Trade v/s Protectionism, Commercial Policies-Tariffs, Dumping and Countervailing Measures

1. UNIT-II
TERMS OF TRADE, FREE TRADE V/S PROTECTIONISM,
COMMERCIAL POLICIES-TARIFFS, DUMPING AND
COUNTERVAILING MEASURES
-Dr. Parul Sharda

2. TERMS OFTRADE

3. TERMS OFTRADE
• In India, Terms of Trade (ToT) correspond to the ratio of Price of exportable goods to the
Price of importable goods.
• Since, economies typically export and import many goods, measuring the TOT requires
defining price indices for exported and imported goods and comparing the two. A rise in
the prices of exported goods in international markets would increase the TOT, while a rise
in the prices of imported goods would decrease it.
• A country’s terms of trade measures a country’s export prices in relation to itsimport
prices, and is expressed as:
ToT=(Index of export price/ Index of import price)×100

4. The terms of trade of a nation are defined as the ratio of the price of its
exports to the price of its imports.
Since in a two-nation world, the exports of a nation are the imports of
its trade partner, the terms of trade of the latter are equal to the inverse,
or reciprocal, of the terms of trade of the former.
In a world of many (rather than just two) traded commodities, the
terms of trade of a nation are given by the ratio of the price index of its
exports to the price index of its imports. This ratio is usually multiplied
by 100 in order to express the terms of trade in percentages. These
terms of trade are often referred to as the commodity or net barter terms
of trade to distinguish them from various other measures of the terms of
trade.

5. Terms of trade refers to that rate at which the goods of
one country is exchanged with goods of another country.
It is a measure of purchasing power of a country.

6. CONCEPT OF TERMS OF TRADE
Gerald.M.MEIER CLASSIFIED THE VARIOUS CONCEPTS OF TOT:
1 Classification based on exchange between commodity
A. NET BARTER TOT
B. GROSS BARTER TOT
C. INCOME TOT
2. Classification based on change in factor productivity
A.SINGLE FACTOR TOT
B. DOUBLE FACTOR TOT
3. Classification based on utility analysis
A. REAL COST TOT
B. UTILITY TOT

7. HISTORY
The term (barter) terms of trade was first coined by the US American economist Frank William
Taussigin his 1927book“International Trade”.However,anearlier version of the concept can be
traced back to the English economist Robert Torrens and his book “The Budget: On Commercial
and Colonial Policy” published in 1844, as well as to John Stuart Mill's essay “ Of the Laws of
Interchange between Nations” and “the Distribution of Gains of Commerce among the Countries
of the Commercial World” published in the same year, though allegedly already written in
1829/30.

8. BREAKING DOWN ‘TERMS OFTRADE’
• Terms of trade, when used to help determine how
healthy a country’s economy is, can lead analysts to
draw the wrong conclusions.
• It is essential for analysts to know why exports
increase, in relation to imports, specifically because
terms of trade are impacted by the changes that
occur in the prices of exports and imports.
• Terms of trade measurements are often recorded in
an index so that economic monitoring can be
performed.

9. TYPES OF TERMS OFTRADE
• Main types of terms of trade, according to
Jacob. Viner and Meier are follows:
1) Net barter or commodity terms of trade.
2) Gross barter terms of trade.
3) Income terms of trade.
4) Single factorial terms of trade.
5) Double factorial terms of trade.
6) Real costs terms of trade.
7) Utility terms of trade.

10. I.(BASED ON EXCHANGE BETWEEN COMMODITY)
1.NET BARTER OR COMMODITYTERMS OFTRADE
 Given by F.W Taussig, also called as Commodity ToT by J.Viner
 It is defined as the ratio between the price of a country’s export goods and import goods
 Commodity terms of trade are expressed in a formula as -
TC=PX/PM*100
ie. When PX > PM then price of value of exports is more than imports, it will be
beneficial trade. But when PM > PX then it will be adverse condition.
(Here, TC= commodity terms of trade; PX= index of export prices; pm= index of import prices).
 Commodity terms of trade in different time period can be measured by the following formula:
Px1/pm1 : pxo/pmo
(Here, px1= index of export prices in the current year, pm1=index of import price in the current year; pxo=index of export
price in the base; pmo=index of import prices in the base year).
Commodity ToT generally increases welfare of country if price of export increases and price of import decreases.
It is more useful in measuring short term changes.

11. NET BARTER OR COMMODITYTERMS OFTRADE
CRITICISM:
The principle of commodity terms of trade has been criticized on the following
grounds:
The principle of commodity terms of trade is based on export and import prices
indices. It does not take into consideration the changes in composition of the
foreign trade and quality of the goods. The concept examines short-terms changes
only. It throws no light on long-term changes.

12. 2.GROSS BARTER TERMS OFTRADE
• It is the ratio of physical quantity of import to physical quantity of export.
• Gross commodity terms of trade are expressed in a formula as under:
TG= Qm/Qx*100
(Here, TG= gross barter terms of trade; Qm=quantity of imports; Qx= quantity of exports.)
Higher the ratio between quantities of imports and exports the better the Gross barter ToT
• Gross barter or commodity terms of trade in different time periods can be measured as follows:
Qm1/QX1 : qmo/qxo
(Here, qm1= index of quantity imported in the current year; qx1=index of quantity exported in the
current year; qmo=index of quantity imported in the base year; qxo= index of quantity exported in the
base year.)

13. GROSS BARTER TERMS OFTRADE
CRITICISM:
Gross commodity terms of trade are criticized as under:
According to Taussig, gross commodity terms of trade include unilateral transactions, like
donation, gifts, etc. In balance of payments, but it is not proper because it does not represent
the natural flow of trade.
Gross commodity terms of trade do not provide any clue of payment of capital and its effect.
Like net commodity terms of trade, gross commodity terms of trade also do not attach any
importance to changes in the quality of goods.

14. 3. INCOME TERMS OFTRADE
This concept was given by Dorrence
The income terms of trade is the ratio of index of the prices of exports and index of
prices of imports.
Ty=Px/Pm * (Qc) ie = (Index of Export Price/ Index of Import Price) * (Export Quantity
Price) or When Quantity exported is multiplied in Commodity ToT we get Income ToT
Ty= TCQx=(Px/Pm)*Qx (TC=Px/Pm)
(Here, Ty=Income terms of trade; TC= commodity terms of trade; Px= index of export price;
Qx=index of quantity exported ; Pm=index of import price.)
Income terms of trade are also called capacity to import in relation to capacity to export
It is also known as export gain from trade.
Pxqx= pmqm (pxqx/pm =qm) [qm= quantity of imports]

15. INCOME TERMS OFTRADE
CRITICISM:
Main criticism of income terms of trade is as follows;
 Concept of income terms of trade does not throw any
light on the profits and losses of international trade.
Concept of income terms of trade is a narrow concept.
Index of income terms of trade relates to the capacity of
imports as being dependent only on exports.

16. II. TOT ON THE BASIS OF PRODUCTIVITY CHANGE
1.SINGLE FACTORIAL TERMS OFTRADE (DOMESTIC / FOREIGN EXPORT SECTOR)
Factorial terms of trade depend upon the productive efficiency of the factors
of production. The single factorial terms of trade is calculated by multiplying
commodity terms of trade with productive change in domestic export
industries.
TS= TC * Fx= (Px/Pm)* Fx ; where (TC= Px/Pm), Fx= Factor
productivity of exporting country
Any change in TOT which occurs due to change in Fx.
Ie. If the productivity of a countries export industries increases then the
factorial terms of trade will increase and vice-versa.
With increase in export productivity, the commodity terms of trade will
decrease ( Because, Ts/Tc=Fx)

17. CRITICISM:
According to critics, the greatest shortcoming of single factorial
terms of trade is that it does not take into consideration potential
domestic cost of production of Input industries of importing
country.

18. 2.TWO FACTORIALTERMS OFTRADE
 Double factorial terms of trade takes into account the productivity changes of
the factors of production in the country’s exports as well as the productivity of
the foreign factors of production used in country’s imports. (other country’s
export)
Td= TC * Fx/Fm = (Px/Pm) * (Fx/Fm) where Fm=Productivity
change in importing country (Rest of the world).
where; (Td= Px/Pm)
(Here, Td=double factorial terms of trade; tc= commodity terms of trade; Px=
index of prices of exports; Fx=index of productivity of export goods industries;
Pm=index of prices of imports; Fm= index of productivity of import goods
industries.)

19. TWO FACTORIAL TERMS OFTRADE
CRITICISM:
• Main criticism of the concept of double factorial terms are as under:
I.It is very difficult to estimate the index of double factorials terms of trade of a
country, because to do so it is necessary to measure the productivity of import
goods produced in the country.
II.It is not possible to measure gains of international trade by this concept, because
no importance is given to the utility of the goods exported and imported.

20. III. TOT ON THE BASIS OF UTILITY
1.REAL COST TERMS OFTRADE
• It was developed by J.Viner
• It is used to measure real gains from trade.
• Import and export goods are compared according to their utility. Real cost terms of trade is calculated by
multiplying the single factorial terms of trade with the index of the amount of disutility per unit of productive
resource used in producing exports.
TR= TS * RX = Px/Pm x Fx* Rx
(Here, TR= real cost terms of trade; = single factorial terms of trade; Px=index of export
prices; P m=index of import prices; Fx=index of productivity of export good industries
Rx= amount of disutility (dissatisfaction) per unit of productive resource.)
Whenever there is a positive change in production we tend to export more in quantity, It is not sufficient to only
export in quantity , it is advisable to check the satisfaction.
CRITICISM:
• Main defect of real cost terms of trade is that it is concerned only with the quantity of foreign goods obtained with the
real costs inherent in exports.

21. 2. UTILITY TERMS OFTRADE
• Utility terms of trade is the index of relative utility of import and domestic
commodities foregone to produce exports. Ie it considers the satisfaction of exported
goods as well the satisfaction received by imported goods as well
TU= TR x u = (Px/Pm * Fx * Rx) * u
(Here, TU=utility terms of trade; TR=real cost terms of trade; Px=index of export prices;
• Pm=index of import prices; Fx=export productivity; Rx= utility foregone to exports, u= Change in
the relative satisfaction yielded by imports.)
• Real Cost ToT and Utility ToT doesn’t exist practically, because of its applicability.
CRITICISM:
• it is an unrealistic concept. Utility and disutility cannot be measured precisely. Both concepts are
subjective. This concept has no practicalsignificance.

22. FACTORSINFLUENCING TERMS OFTRADE
1. Reciprocal demand:
(i) Elasticity of demand:
The following effect on terms of trade:
(a) Elasticity of demand of export goods: the demand of exports of a country is less
elastic then terms of trade will be in its favour.
(b)Elasticity of demand of import goods: terms of trade will be favourable to a country
whose demand for imports is more elastic. On the other hand, if the demand for
imports is less elastic, terms of trade will be unfavourable.
.

23. FACTORSINFLUENCING TERMS OFTRADE
(ii) Elasticity of supply:
Elasticity of supply has the following effect on terms of trade:
(a) The supply of export is less elastic terms of trade will be unfavourable and if more
elastic the same will be favourable. (b) Supply of imports is less elastic, terms of trade will
be favourable and if supply of import is more elastic, terms of trade will be unfavourable
2. Size of demand:
With the increase in demand for the exports of a country, prices of export will increase as
against the prices of imports and hence, terms of trade become favourable. If demand for
imports increase, their prices will also increase as against the prices of export and so the
term of trade become unfavorable.

24. SIGNIFICANCE OF TERMS OFTRADE
Standard Of Living:
• Changes in the prices of the items we have to import. Imported terms of trade might mean we
are able to import cheaper GOODS.
Prices Of Imported Technology:
• Prices of imported technology affect relative prices of capital inputs needed to sustain growth.
A weak exchange rate increases the price of import, worsens the terms of trade and makes
imports of new technology more expensive.
Balance Of Payments:
• Export and import prices affect the value of trade flows.

25. TERMS OF TRADE TRENDS ANDECONOMIC GROWTH
 The most common view is that the terms of trade has a positive impact
on economic growth.
 An increase in export prices relative to import prices allows a larger
volume of imports to be purchased with a given volume of exports.
 The implied increase in the real purchasing power of domestic
production is equivalent to a transfer of income from the rest of the
world and can have large impacts on consumption, savings and
investment.
 The terms of trade can also be thought of as a rate of return on
investment and therefore a secular improvement in the terms of trade
leads to an increase in investment and hence economic growth.

26. TERMS OF TRADE TRENDS ANDECONOMIC GROWTH
• Changes in the terms of trade can have different macroeconomic
impacts depending on the composition of the relative price
movements.
• If a fall (rise) in the terms of trade is due to a decrease (increase) in
export prices, then this will initially impact on exporters before
indirectly affecting households.
• However, if a fall (rise) in the terms of trade is a result of an
increase (decrease) in import prices (for example, oil prices), this is
likely to affect households and businesses more directly and the
macroeconomic shock will be different.

27. TERMS OF TRADE IN INDIA
Terms of Trade in India increased to 73.70 points in 2019 from 73.30 points in
2018. source: Reserve Bank of India

28. LIMITATIONS
Terms of trade should not be used as synonymous with social welfare, or even *pareto economic
welfare
Terms of trade calculations do not tell us about the volume of the countries' exports, only relative
changes between countries.
 This may not necessarily mean an improved standard of
living for the country.
 Terms of trade calculations can get very complex.
*The Italian economist Vilfredo Pareto (1848-1923) said that if a change in the economic state
makes at least one individual better off without making anyone worse off, then the change is for
the betterment of social welfare, i.e., the change is desirable.

29. COMMERCIAL POLICY : FREE TRADE V/S
PROTECTIONISM
The policy of free trade is one which does not impose any tariff or non-
tariff restrictions upon free exchange of goods and services between the
trading countries like tariffs, quota restrictions and other such activities
which creates obstruction in the movement of goods and services.
According to Adam Smith, the policy of free trade is “a system of
commercial policy which draws no distinction between the domestic and
foreign commodities and thus neither imposes additional burden on the
latter nor grants any special favour to the former.” The free trade, therefore,
signifies a non-discriminatory trade policy that places no artificial barriers
upon free international movement of goods and services.
R.G. Lipsey writes, “A world of free trade would be one with no tariffs and
no restrictions of any kind on importing or exporting. In such a world, a
country would import all those commodities that it could buy from abroad at
a delivered price lower than the cost of producing them at home.”

30. A policy of free trade, no doubt, implies an absence of trade barriers but the
imposition of import duties for the consideration of obtaining revenues
may be consistent with free trade, when these are not meant either to
provide protection to home industries or to discriminate against
the cheap imports from abroad.

31. ARGUMENTS IN SUPPORT OF FREE TRADE
(i) Maximisation of World Output:
If there is no tariff or non-tariff restriction upon international trade, every
country is likely to specialise in the production and export of that
commodity in which it has the greater comparative advantage or the
least comparative disadvantage. The benefits of specialisation and division of
labour can become available to all the trading countries and they will be able to
make the optimum use of their productive resources.
As a consequence, the world output is likely to get maximised. When each
trading country produces those commodities in the production of which it is
most suited and imports those commodities, which it can procure more cheaply
from abroad rather than producing them itself, the real incomes of all the trading
countries are likely to rise. In this context Ellsworth remarked, “…. Since the
income of any community or nation is large just in proportion to the extent to
which it specialises, the greater possible freedom of trade is justified.”

32. II : OPTIMUM USE OF RESOURCES
The free trade leads not only to specialisation in production but also to factor
specialisation. The diversion of all scarce productive resources to such
industries where their productive efficiency is the maximum implies their
ideal or optimum utilisation.
In the conditions of free trade, there is little possibility of under-utilisation
or wastage of scarce resources. Any scarcity of productive factors, at the same
time, can be easily off-set through their import from foreign countries. Thus
free trade paves the way for the optimisation of productive factors
throughout the world.

33. III: LARGE FACTOR INCOMES
In the condition of free trade, the factor units can easily and quickly move
either within the same country or between different countries for securing
larger remuneration for their services.
It is, therefore, possible that factor incomes such as wages, rents, interests
and profits are higher under free trade than otherwise.

34. IV : OPTIMIZATION OF CONSUMPTION
The free international trade enables a country to import products from the
cheapest market at less price and relieve the domestic shortages of goods. It
also provides opportunities for the consumers to import and use superior
varieties of products.
The increased availability of consumable goods of better varieties at low
prices assures the optimisation of consumption in the trading countries.

35. V: ENLARGEMENT OF MARKET (WIDE MARKET)
The absence of restrictions upon trade results in an enlargement of the size of
market as every country can dispose of its surplus production in foreign
markets.
Products of all countries can have global demand. The extension in the size of
market gives strong inducement to raise production and investment, to
introduce improved techniques, and to introduce new, superior and cheaper
varieties of products.

36. VI: CHECK ON MONOPOLIES
Free trade implies free competition. The producers from different countries
try to expand their sales in the markets of other countries. The price
competition and introduction of newer varieties of products prevent the
emergence of exploitative monopolies.
In this connection, it must be pointed out that free trade does not provide a
complete safeguard from monopolies. Even under free trade, there can be
emergence of natural monopolies or strong local or international cartels
capable of restricting output and manipulating prices.

37. VII: EDUCATIVE EFFECTS
Haberler explained that free international trade can inculcate in the
population of a country such qualities as competitiveness, inventiveness,
urge for excellence, efficiency, acquisition of advanced skills in production,
management and organisation.
These educative effects emanating from free trade make the trading countries
to achieve higher production frontiers.

38. VIII: ACCELERATED DEVELOPMENT ( BEST POLICY
FOR ECONOMIC DEVELOPMENT)
Haberler has greatly emphasized upon free trade as a means for accelerating the
process of economic transformation in the developing countries. According to him,
free trade can contribute in the process of growth in different ways.
Firstly, it enables the unrestricted import of raw materials and capital goods, which
are essential for industrial expansion.
Secondly, free trade assists in an easy transfer of advanced technical know-how and
entrepreneurship from the advanced to the less developed countries.
Thirdly, free trade facilitates large scale international capital movements to speed up
the process of growth.
Fourthly, free trade promotes competition, efficiency and productivity and can create
such capacities in the poor countries, which enable them to achieve higher levels of
production, employment and income.

39. ARGUMENTS AGAINST FREE TRADE
(i) Absence of Pre-Requisites of Free Trade:
The theoretical objection against the policy of free trade is that conditions
necessary for it do not actually exist in the real life.
Some of pre-requisites of free trade policy are prefect competition,
perfect factor mobility, free working of price system and laissez
faire (no government intervention). The absence of these requirements
invalidates this policy altogether.

40. II: CUT-THROAT COMPETITION
The free international trade leads to chaotic trade conditions because the
advanced countries try to capture more and more foreign markets for their
products by dumping their products at very low prices in other countries.
This intense competition has serious destabilising effects particularly upon
the LDC’s.
For instance, flourishing Indian handicrafts were completely wiped
out in the nineteenth century on account of relentless competition
from the British mill-made manufactures.

41. III: LOP SIDED DEVELOPMENT
Free trade underlines the specialisation in production and export in these
industries in case of which a given country has comparative cost advantage
over others.
The adoption of this principle means that other industries and sectors should
remain undeveloped.
The less- developed countries, which have comparative advantage in
agriculture, will remain condemned as agricultural countries alone. Such lop-
sided or unbalanced growth has serious economic and social consequences.

42. IV: EXCESSIVE FOREIGN DEPENDENCE
When a country adopts a policy of free trade on the basis of the principle of
comparative cost advantage, it becomes excessively dependent upon the foreign
country for the disposal of its production and for the import of varied products. Such
an excessive dependence is detrimental to its interests both in the times of peace and
war.
V: Import of Harmful Products:
Where there are no restrictions upon trade, there is a danger of large inflow of
harmful and sub-standard products from abroad. The unrestricted import of such
commodities is injurious for the health and efficiency of the people. It will have the
effect of reducing the welfare of the society. In view of such adverse implications of
free trade on social welfare function, the countries, at some stage, feel compelled to
adopt restrictive measures.

43. VI:EMERGENCE OF MONOPOLIES
The free international trade and intense foreign competition eliminate many
business firms. Consequently, local monopolies emerge.
Their manipulation of supply and price to maximise profits results in the
exploitation of people and hinders the free working of price system.
The possibility of emergence of monopolies necessitates the imposition of
restrictive measures upon trade.

44. VII: DETRIMENTAL FOR ECONOMIC DEVELOPMENT
Haberler’s viewpoint that free trade stimulates development process in LDC’s
is difficult to be accepted by their economists and statesmen. The
international exploitation of the raw materials and markets of the poor
countries by the advanced countries through free trade for the last two
centuries is ample evidence of the fact that it has serious adverse effects upon
the growth process of the former.
The development of infant industries and subsequent industrial
diversification are unlikely to take place unless effective restraints upon
foreign imports are enforced by the less developed countries.
In view of the reasons given above, both advanced and less developed
countries have continued to drift away from the policy of unrestricted
international trade since the First World War.

45. PROTECTIONISM
Protection refers to those trade policies which are imposed by local or home government in
order to protect the home industries from foreign competitor, like quota restrictions, tax,
tariff etc.
When tariffs, duties and quotas are imposed to restrict the inflow of imports then we have
protected trade. This means that government intervenes in trading activities.
Thus, protection is the anti-thesis of free trade or unrestricted trade. Government imposes
tariffs on ad valorem basis or imposes quota on the volume of goods to be imported.
Sometimes, export taxes and subsidies are given to domestic goods to protect them from
foreign competition. These are the various forms of protection used by modern
governments to restrict trade.

46. ARGUMENTS IN FAVOR OF PROTECTION
1. INFANT INDUSTRY
The infant industry argument suggests that new industries should be given
temporary protection in order to enable them to build up this experience.
This argument applies where the industry is small and young, and where
costs are high but fall as the industry grows.
The central idea of this argument is embodied in the saying- Nurse the baby,
protect the child, and free the adult’. This argument s now widely accepted in
India as a good ground of protection for a temporary period for promoting
home industries at the early stages.
Critics, however, argue that most infant industries never grow up- that they
continue to demand protection; so their customers continue to pay high
prices.

47. 2. DIVERSIFICATION OF
INDUSTRIES ARGUMENT:
A policy of production is also advocated to diversify a
developing country’s industrial structure. A country cannot
rely on one or a few industries only; it is necessary that a
large number of industries of diverse varieties develop in the
long run.
This strategy will reduce the risk of losing foreign markets;
for, in case of failure to export one commodity, other goods
may be exported.

48. 3. EMPLOYMENT PROTECTION:
The dynamics of the world economy mean that at
any time some industries will be in decline. If those
industries were responsible for a significant amount
of employment in a country in the past, their
decline would cause problems of regional
unemployment. There is justification for a country
to protect a contracting industry to slow down its
rate of decline so that time is given for people to find
jobs elsewhere in the economy.

49. 4. EMPLOYMENT CREATION:
Protection to home industries may create employment opportunities in the
country, and thus reduce the magnitude of unemployment. But this
argument is also fallacious; for protection may create employment in some
home industries, but by reducing imports it reduces employment
opportunities in the foreign countries.
So, such a beggar-my-neighbour high-tariff policy might create employment
in the short run only before other nations retaliate. Protection can of course
increase employment in another way. By improving the balance of trade it
can increase employment and income provided the other countries do not
retaliate. But even this argument is not convincing as protection cannot
maintain high employment indefinitely through export surplus.

50. 5. BALANCE OF TRADE:
Some countries experience imbalance in their trade with the rest of the world. If they
are importing too many goods they may correct a temporary problem by imposing
tariffs on imports. A suitable tariff policy can create and maintain a favourable
balance of trade.
The restrictions on imports for the purpose of protection will create a surplus in the
balance of trade of the country. But this argument is wrong. If all countries
simultaneously follow this policy, none would find foreign buyers for the sale of
goods and so none would gain. However, Sir Arthur Lewis has put forward a counter
argument here.
As he says: “National income cannot be increased by adding imports, since
this would result only in diverting resources to the production of articles
of domestic consumption, thereby withdrawing them from the most
profitable export markets. Nor can domestic employment be increased
by reducing imports because this would reduce exports to the same
extent”.

51. 6. DUMPING TO REFLECT LOW
MARGINAL COST OF PRODUCTION:
Dumping is a problem which confronts many countries. It is an example of price
discrimination at the international level. By following the practice of dumping
foreign sellers try to capture the home market by selling their goods at low
prices.
Protection of home industries is necessary to resist such a policy. It refers to the
selling of products on overseas markets at prices below those prevailing on domestic
markets. The danger here is that the dumping of products could cause prices to drop
drastically.
This could benefit the consumers in the short run. But, in the long run, domestic
producers could be forced out of business making room for the foreign suppliers in
the future. Producers may be off-loading products on foreign markets to keep prices
up in their home markets. The price of a Japanese camera, for example, is higher in
Tokyo than in New York.
Therefore, the effects of dumping are undesirable and, if it can be detected,
some protection against its adverse effects is justified.

52. ARGUMENTS AGAINST PROTECTION:
(a) It creates obstacles or barriers to free multinational trade. Due to high tariffs
imposed by other countries, a country is not allowed to produce goods in which it has
cost advantages. So, protection reduces world production and consumption of
internationally traded goods,
(b) Owing to higher tariff on imports, the consumers are compelled to buy home
goods, often of inferior quality and often at higher prices,
(c) Protection gives shelter to weak home industries. If it is permanent, home
industries would not get any incentive to compete freely with their foreign
counterparts. There would be need for continuation of protection for an indefinite
period, those industries will forever be dependent industries.
(d) Protection may lead to trade wars and international conflicts among trading
nations,
(e) Protection give rise to such abuse as ‘wire-pulling’ in political quarters, vested
interest in the protected sector, etc.

53. COMMERCIAL POLICY
Commercial policy is an umbrella term that describes the regulations and
policies that dictate how companies and individuals in one country
conduct commerce with companies and individuals in another country.
Other policies that fall under the umbrella of commercial policy include tariffs,
import quotas, export constraints, and restrictions against foreign-owned
companies operating domestically.

54. TARIFFS
Tariffs are taxes that are levied on the sale of foreign goods in a home country.
Tariffs are just one element of commercial policy.
A tariff is a duty or tax imposed by the government of a country upon the traded
commodity as it crosses the national boundaries. Tariff can be levied both upon
exports and imports. The tariff or duties imposed upon the goods originating in the
home country and scheduled for abroad are called as the export duties. Countries,
interested in maximising their exports generally avoid the use of export duties. Tariffs
have, therefore, become synonymous with import duties.

55. TYPES
(a) Specific Tariff:
Specific tariff is the fixed amount of money per physical unit or according to the
weight or measurement of the commodity imported or exported. Such duties can be
levied on goods like wheat, rice, fertilisers, cement, sugar, cloth etc. Specific duties
are quite easy to administer, as they do not involve the evaluation of the goods.
However, the specific duties cannot be levied on high valued goods such as diamonds,
jewellery, watches, T.V. sets, motor cars, works of arts like paintings etc. These articles
can be taxed either on the basis of weight, surface area covered or the number of
articles.

56. (B) AD VALOREM TARIFF:
‘Ad Valorem’ is the Latin word that means ‘on the value.’ When the duty is levied as
a fixed percentage of the value of the traded commodity, it is called ad valorem
tariff. Such duties are levied on the products the value of which is disproportionately
higher compared to their physical characteristics such as weight or measurement.
These duties are more equitable as the costly goods, generally consumed by the rich,
bear greater burden of duty, while the cheaper goods bought by the poor, bear lesser
burden of tariff. For instance, if the import of watches is subject to 70 percent ad
valorem tariff, a watch valued at Rs. 1000 will be subject to a duty of Rs. 700 and a
watch valued at Rs. 1200 will be subject to a tariff amounting to Rs. 840. The ad
valorem duties have an additional advantage that the international comparison of
tariffs, in their case, can be easily made.

57. (C) COMPOUND TARIFF:
The compound tariff is a combination of specific and ad valorem tariff. The
structure of compound tariff includes specific duty on each unit of the
commodity plus a percentage of ad valorem duty. The compound tariffs not
only impart a greater elasticity to revenues but also assure a more effective
protection to the home industries.

58. DUMPING
Dumping is an international price discrimination in which an exporter firm
sells a portion of its output in a foreign market at a very low price and the
remaining output at a high price in the home market.
Haberler defines dumping as: “The sale of goods abroad at a price which
is lower than the selling price of the same goods at the same time and in the
same circumstances at home.

59. TYPES
1. Sporadic or Intermittent Dumping:
It is adopted under exceptional or unforeseen circumstances when the
domestic production of the commodity is more than the target or there are
unsold stocks of the commodity even after sales. In such a situation, the
producer sells the unsold stocks at a low price in the foreign market without
reducing the domestic price.
This is possible only if the foreign demand for his commodity is elastic and
the producer is a monopolist in the domestic market. His aim may be to
identify his commodity in a new market or to establish himself in a foreign
market to drive out a competitor from a foreign market. In this type of
dumping, the producer sells his commodity in a foreign country at a price
which covers his variable costs and some current fixed costs in order to
reduce his loss.

60. 2. PERSISTENT DUMPING:
When a monopolist continuously sells a portion of his commodity at a high
price in the domestic market and the remaining output at a low price in the
foreign market, it is called persistent dumping. This is possible only if the
domestic demand for that commodity is less elastic and the foreign demand
is highly elastic. When costs fall continuously along with increasing
production, the producer does not lower the price of the product more in the
domestic market because the home demand is less elastic.
However, he keeps a low price in the foreign market because the demand is
highly elastic there. Thus, he earns more profit by selling more quantity of
the commodity in the foreign market. As a result, the domestic consumers
also benefit from it because the price they are required to pay is less than in
the absence of dumping.

61. 3. PREDATORY DUMPING:
The predatory dumping is one in which a monopolist firm sells its
commodity at a very low price or at a loss in the foreign market in order to
drive out some competitors. But when the competition ends, it raises the
price of the commodity m the foreign market. Thus, the firm covers loss and
if the demand in the foreign market is less elastic, its profit may be more.

62. OBJECTIVES OF DUMPING
1. To Find a Place in the Foreign Market:
A monopolist resorts to dumping in order to find a place or to continue
himself in the foreign market. Due to perfect competition in the foreign
market he lowers the price of his commodity in comparison to the other
competitors so that the demand for his commonly may increase. For this, he
often sells his commodity by incurring loss in the foreign market.
2. To Sell Surplus Commodity:
When there is excessive production of a monopolist’s commodity and he is
not able to sell in the domestic market, he wants to sell the surplus at a very
low price in the foreign market. But it happens occasionally.

63. 3. Expansion of Industry:
A monopolist also resorts to dumping for the expansion of his industry. When he
expands it, he receives both internal and external economies which lead to the
application of the law of increasing returns. Consequently, the cost of production of
his commodity is reduced and by selling more quantity of his commodity at a lower
price in the foreign market, he earns larger profit.
4. New Trade Relations:
The monopolist practices dumping in order to develop new trade relations abroad.
For this, he sells his commodity at a low price in the foreign market, thereby
establishing new market relations with those countries. As a result, the monopolist
increases his production, lowers his costs and earns more profit.
Price Determination under Dumping:
Under dumping, the price is determined just like discriminating monopoly. The only
difference between the two is that under discriminating monopoly both markets are
domestic while under dumping one is a domestic market and the other is a foreign
market. In dumping, a monopolist sells his commodity at a high price in the
domestic market and at a low price in the foreign market.

64. DUMPING AFFECTS BOTH THE IMPORTER
AND EXPORTER COUNTRIES IN THE
FOLLOWING WAYS:
1. Effects on Importing Country:
The effects of dumping on the country, in which a monopolist dumps his commodity,
depend on whether dumping is for a short period or a long period and what are the
nature of the product and the aim of dumping.
1. If a producer dumps his commodity abroad for a short period, then the industry of
the importing country is affected for a short while. Due to the low price of the
dumped commodity, the industry of that country has to incur a loss for some time
because less quantity of its commodity is sold.
2. Dumping is harmful for the importing country if it continues for a long period.
This is because it takes time for changing production in the importing country and
its domestic industry is not able to bear competition. But when cheap imports stop or
dumping does not exist, it becomes difficult to change the production again.