Effects of trade barriers

Effects of contend parapetsChapter 1Introduction plow is an alter of service and goods for new(prenominal) services and goods or for money, concern ( 2010). The paper discusses about the effects of mess roadblocks on foreign cope, i.e. to identify one or more(prenominal) variables (inflation, exile hail, responsibility, remittances, population, gross municipal product deflator and exchange rate) in the vignette that effect international stack the most(prenominal).A craft barrier is a commonplace term that describes any government policy or regulation that restricts international interchange (Trade barrier, 2010).The problem discussed is the effect of deal barriers on international handicraft. In order to address the problem, two hypotheses give up been veritable and tested. distributively hypothesis explains the effect of variables as barrier to international trade.Secondary data of deuce-ace geezerhood comprised on year 2005-2007, collected from the sourc e World Trade Organization (WTO). The statistical tool applied to test the hypothesis is multi-variate regression model as there ar more than one independent variable and one dependent variable. The independent variables identified in this paper be (Inflation, Exchange Rate, Remittances, gross domestic product, Tariff, Population and Transportation hail) the dependent variable are (Imports and Exports). The statistical conduce of the hypothesis testing target be seen in the following chapters.InflationGenerally inflation is defined as a rise in the general train of prices of goods and services over time, where as most of the economist define inflation as a rise in the prices of some specific cause of goods or services, it is important to understand that the rise in prices is for specific aline of goods and services and it should be constant, as well as a rise in price of one good or service as compared to other does not mean an make up in inflation it should be summationd for all product or service. Inflation is amountd as the percentage rate of change of a price index (Haq Hussain, 2008).Measures of InflationThere are some(prenominal) measures of inflation each for assorted sector,Consumer Price Indices (CPI)CPI measures the price of goods and services purchased by a consumer (Haq Hussain, 2008).Cost-of-Living Indices (COLI)Are indices similar to the CPI which is often utilise to fix fixed and contractual incomes (Haq Hussain, 2008).Producer Price Indices(PPIs) measures the prices acknowledged by manufacturers. This differs from the CPI in that price subsidization, income, and taxes may cause the amount acknowledged by the producer to differ from what the bribeer paid. Producer price inflation measures the pressure being put on producers by the appeals of their raw materials. This could be passed on as consumer inflation, or it could be absorbed by profits, or offset by increasing productivity (Haq Hussain, 2008).Commodity Price Indice s(CPI) measures the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the all in cost of an employee (Haq Hussain, 2008).GDP DeflatorGDP deflator is a measure of the price of all the goods and services included in Gross municipal Product (GDP) (Haq Hussain, 2008).Capital Goods Price IndexSo far (CGPI) has not been established, where as several economists have recently pointed out the necessity of measuring with child(p) goods inflation (inflation in the price of stocks, real estate, and other assets) separately.Indeed a given up increase in the supply of money back end lead to a rise in inflation ( economic consumption goods inflation) and or to a rise in capital goods price inflation.The appendage in money supply has remained fairly constant through since the 1970s however consumption goods price inflation has been cut because most of the inflation has happened in the capital goods prices , Haq Hussain (2008), where as there are two common known measures widely reported in many countries, i.e. CPI and GDP Deflator.The above chart shows the trade of world developed countries in terms of exports and imports, the amount is in US meg dollars, the next chart is of inflation of the developed countries of the world, the purpose is to compare and analyze the countries inflation rate and trade in order to examine the shock caused by inflation on countries trade.As it can be seen that each commonwealth has different impact of inflation on its imports and exports, for instance Australia inflation rate was 2.30% in year 2007 where as its exports were 142 million dollars and its imports were clx billion dollars, similarly for Canada its inflation rate was 2.10% and its exports were 431.1 billion dollars and its imports were 386.4 billion dollars, therefore if a comparison is made amid these countries it can be seen that every commonwealth has a different impact of inflation on its trade, hence it can be said that the savvy for this difference of change is the size of unsophisticateds economic and financial structure.TariffA tax is a tax forced on an imported or exported commodities. In general dialect, however, it has come to mean import duties supercharged at the time goods are imported (Parkin, 1996).According to Japans customs tariff law a tariff a tax based on the step of measure outment of prices or volume of imported goods (Tariff, 2010). Functions of TariffThere are three major functions of tariffsTo serve as a basis of incomeTo protect domestic industries andTo remedy trade distortions (corrective function) (Functions of Tariff, 2010).The Income FunctionThe income function simply means that the income from tariffs provides governments with a source of tax revenue. In the past, the income function was indeed a major reason for applying tariffs, for instance Japan generates about 845 billion yen in tariff revenue per year, which represent s approximately 1.9 percent of innate tax revenue (Meti, 2010).Protection of home(prenominal) IndustriesTariffs are likewise used as a policy tool to protect domestic industries from competition of merchandise goods, as well as tariffs are also used as a source of protection of market access from foreign exporters (Meti, 2010).Remedy to Trade DistortionsCorrective tariffs are used as a remedy for trade distortions caused by companies to injure domestic industry, for instance anti-dumping agreement is used to impose duties on companies exporting goods that are specifically banned and cause damage to domestic industry of importing terra firma (Meti, 2010).RemittanceRemittance can be defined as sums of money that a migratory worker sends back to his or her clownish of origin (Wimaladharma, Pearce Stanton, 2004).Remittance plays a vital source of income for developing country economies, as well as millions of item-by-item households, predominantly poor women and their children. Unlike aid or concealed investment hangs, remittance reaches the poor directly, and the poor decide how the money is spent. Importantly, remittance services also offer a means for monetary institutions to increase their outreach and significance to poor clients (Wimaladharma, Pearce Stanton, 2004).For instance the openhandedst remitting countries in terms of volume are the United States with remittances amounting to $28.4 billion, Saudi Arabia with remittances amounting to $15.1 billion and Germany with remittances amounting to $8.2 billion (Wimaladharma, Pearce Stanton, 2004).In the break down feather, Ratha (2003), it was tack together that more than three-quarters of remittances go to lower mid-income and low income developing countries. India receives the largest volume of remittance mounting to $10 billion, then Mexico with $9.9 billion, followed by the Philippines with $6.4 billion (Wimaladharma, Pearce Stanton, 2004).Exchange RateThe price of one countrys currency expr essed in another countrys currency. In other words, the rate at which one currency can be exchanged for another. For instance, the higher the exchange rate for one euro in terms of oneyen,the lower the relative repute of the yen (Investopedia , 2010).Exchange Rate and TradeExchange rate is one of the important factors in an open economy since it affects so many business, investment and strategic decisions. Various empirical studies have been conducted to assess the influence of exchange rate on trade balance, with the objective of providing valuable inputs to policy makers on the usefulness of exchange rate policy such as devaluation-based alteration policies (effected through nominal exchange rate) to balance a countrys foreign trade for instance, Greenwood (1984), Himarios (1989), Rose Yellen (1989) provided the evidence of dealingship surrounded by exchange rate and trade balance.In a con, Oskooee (2001) verbalise that appreciation of exchange rate directly affects a count ry trade as it can be used as an effort to increase international competitiveness and help to improve its trade balance. On the other hand it was also reported in the learning that wear and tear of exchange rate increases exports by making exports fairly cheaper, and daunt imports by making imports fairly more expensive, thus improving trade balance(Liew, Lim, Hussain, 2000).Japan and ASEANA lead conducted using trade balance data from year 1986 to 1999 between Japan and 5 ASEAN countries to examine the impact of exchange rate on countries trade balance. It was found in the chew over that the usage of exchange rate changes in initiating changes in the trade balances has been overstated. It is widely expected that the decrease of ASEAN-5 exchange rates with consider to Japanese yen would improve these economies trade balances with Japan during the sample period of poll (Liew, Lim, Hussain, 2000).Gross Domestic ProductGross domestic product is the value of collective or total production of goods and services in a country during a given time period (Parkins, 1996).Measures of GDPThere are two common measures of GDP namelyExpenditure Approach.Factor Income Approach.Expenditure ApproachIn expenditure approach the GDP is measured by adding consumption expenditure, investment, government purchase of goods and services and net exports (Parkins, 1996).Factor Income ApproachIn factor income approach the GDP is measured by adding all the incomes paid by the firms to household for the services of factor of production, for example compensation of employees, net interest, rental income, and profits paid for entrepreneurship (Parkins, 1996).Chapter 2Literature ReviewTransportation Cost europiumA comparative translate, Conlon (1981), was conducted in 1981 between Australia and Canada to investigate the role of transportation cost as a trade barrier in trade flow of both the countries. It was found in the drive that in Australia nominal transport be contribute over 40 per cent of the trade barrier in its trade flow, where as in Canada transport costs provide over 17 per cent of the total barriers.In the study by, Casas choi (1985), it was found that transportation cost being the trade barrier has two affects on the country economy 1) implicit tariff effect, 2) imaginativeness cost effect.The Implicit Cost EffectIn the implicit cost effect, Casas choi (1985) an increase in transportation costs affects the trade flows by increasing the domestic comparative price of the imported goods.Resource Cost EffectIn the choice cost effect, Casas choi (1985) an increase in transportation cost, shifts productive resources from traded goods to the transport sector, i.e. in case of increase in transportation cost, the resources used to produce goods domestically were allocated for payments of transportation bills repayable to which production of domestic goods suffered.United KingdomSimilarly an empirical study, Binkley Harrer (1981), conducted in the United Kingdom to examine the role of transportation cost as trade barrier, it was found that Transportation costs between countries pose a formidable barrier to trade, similar to other trade barriers such as tariffs. This study was further supported by the study of Sampson and Yeats in which it was concluded that transport costs to be a more noteworthy trade barrier for United Kingdom exports than tariffs, (Sampson Yeats Binkley 1978 Harrer 1981). Similarly another study conducted in the United Kingdom also concluded that transportation cost is more effective trade barrier as compared to tariffs (Sampson yeats, 1978 Binkley Harrer 1981).United StatesA similar study by, Finger Yeats (1976), conducted in the United States gave the similar conclusion that that effective guard through international transportation costs is at least as high as that due to tariffs, Geraci Prewo (1977). In a study it was concluded by the author that progressive reduction in the transportation cost resulted in the harvesting of trade between United States and Europe, Shiue (2002). Similarly another study conducted in the United States also concluded that transportation cost is more effective trade barrier.AfricaA study conducted in Africa to examine the effect of transportation cost on African trade, the results indicated that there is a very little trade flow within the Africa and the rest of the world, due to strict trade policies, for example fit in to, Collier (1995), Collier Gunning (1999), Limo and Venables (2001), There is a common belief that Africa trades too little both with itself and with the rest of the world. The poor performance is typically attributed to protectionist trade policies and high transport costs. Similarly another study concluded that the reason behind the low trade is the poor infrastructure and inappropriate transport policies (Amjadi Yeats 1995 Limo Venables, 2001).AustraliaA study conducted in Australia, Sampson Yeats (1977) to identify t he trade barriers causing decline in Australian exports, it was found in the study that transportation cost is a major contributor to decline in export as compared to tariffs, in other words it can be said that 66 percent of the total Australian exports are decline due to transportation cost. ChinaA study conducted in china by studying various trends in trade barriers, the purpose of the study was to identify trade barriers affecting Chinese exports, and it was found in the study that transportation cost is a major trade barrier as compared to tariffs and local markups (Li, 2007).TanzaniaAn empirical study, Kweka (2001) conducted for developing countries such as Tanzania it was found in the study that transportation cost as a trade barrier have two impacts on the economyIt reduces the export competitiveness, Kweka (2001), since the cost incurred by the producer and cost paid by the buyer is widens by the high transportation cost. In other words it can be said that due to the increas e in transportation cost most of the export orders to developing countries such as Tanzania are declined.The second impact, Kweka (2001) on the economy of developing countries is a imperative impact, due to high transportation cost the trade of locally produced goods increases, this is due to the fact that the gap between the prices of locally produce goods and imported goods become so wide that it becomes nearly impossible for the people of importing country to buy imported goods as a result 95 percent of the purchases are made off locally produce goods. Ultimately leading a growth in the overall economy. TariffThere are number of studies conducted to examine the impact of tariff as a trade barrier, for instance in a study it has been found that tariff and capital controls lead to trade deformation. Where as on the other hand it has also been that found tariff barriers in the importing countries tend to have a disallow, though insignificant, effect on exports of countries (T. Tam irisa, 1999).Another study examining the impact of tariff as barrier on trade found that tariff has a significant banish effect on mutual exports, in part because of significant trade cost, where as in presence of tariff barrier the impact on imports is comparatively weak (T. Tamirisa, 1999).One more study examining the impact of tariff as a barrier in trade found that tariff is one of the significant factor of mutual trade mediate countries, as compared to country size wealth, exchange and capital controls, while tariff rate significantly reduce export of developing and transition economy (T. Tamirisa, 1999).A study conducted to examine the relationship between trade barriers and trade flow. The study identified number of barriers such as exchange control, tariff, NTBs, it has been found that tariff is one of the major trade barrier as compared to exchange control and NTBs. The study also concluded that tariff with other barriers of trade tend to reduce the volume of trade, as w ell as tariff alone have a depressing impact on the mutual trade of countries (Lee Swagel, 1997).The study also provided the evidence that country having bi-lateral trade is affected by tariff charges as a result it does not only have a strong negative effect imports but it acts as a substantial barrier to export also. last study concluded that tariff act as a barrier to both imports and exports of a country (Lee Swagel, 1997).Another study conducted in year 1993 by lee to examine the distortion caused by tariff in international trade found that tariffs charges lower the long-run growth rates more significantly in a country that needs to import more under a free trade regime. As well as government discourse in terms of imposing a tariff on the imports of foreign goods leads to the increase in price paid by the domestic purchaser i.e. (1 + 7) multiplication the price received by foreign exporters (lee, 1993).Therefore it can be said that, tariff has two effects on the economy, na mely the deformation of resource distribution and the transfer of income, distortion effect of tariffs always decrease the steady-state levels of the capital stock, output, and consumption. Where as transfer of income help to retain the income earned through exports within the country, in presence of tariff where as in absence of tariff same income earned through export is used to settle import bills. On the other hand the study also concluded that when the tariff rates are high, the productivity of public input diminishes thus, higher tariffs always lead to lower growth rates (lee, 1993).Empirical studies have found that tariff liberalization would transfer trade from the rich to the poor and from the local to the global. It has been estimated that the elimination of tariffs would create more trade for poor countries than for richer countries. They also imply that tariff elimination would divert trade away from continental preferential trading areas (lai zhu, 2004).The study provi ded the evidence that tariffs, and distance-related barriers and production costs are important factors affecting bilateral trade flow, where as tariff being the major element affecting the trade flow (lai zhu, 2004).For instance the trade among OECD countries is free form tariff charges where as non OECD countries have the highest tariff charges. As a result, the impact of tariffs on trade within OECD countries is likely little(prenominal) than 3.7% whereas the impact of tariffs on trade among non-OECD countries likely exceeds 3.7% (lai zhu, 2004).PopulationThere are number of studies conducted to examine the impact of population on trade. These studies discussed various questions regarding the benefits of openness of trade between countries for instance, who gains from an opening of the borders between two neighboring countries? Will any country lose as borders are opened? Is it the small country or the large country that benefits most? (Shachmurove Spiegel, 2004)It is general perception that countries with large populations having no trade tend to have larger profits at the expense of consumers i.e. since there is no foreign producer in the country all the profits earned through production is solely taken by the country it self in simple words it can be said monopoly. Where as if the same country having trade with other countries or foreign producers are trading in the country tends to reduce its profits, as part of the profit is taken by foreign exporter. On the other hand keeping the same scenario for a country with small population tend to have lower profits in the absence of trade and it will further see a decline in its profits with the presence of foreign producer (Shachmurove Spiegel, 2004).There are number of studies conducted that provided the evidence that countries having population aging problems have direct impact on the country trade, for instance a study by, Kenc Sayan (2001), showed that changes in age composition of population are lik ely to affect saving and expenditure patterns, the resulting changes in composition of rent are expected to affect comparative prices between expenditure and investment goods. On the supply side, the decline in labor supply and the slow down in capital formation associated with population aging had cause changes in capital-labor ratios. As a result it alters relative factor prices and leads to second-round effects on resource allocation. Furthermore, since the changes in the relative capital intensities across traded and non-traded sectors affect real exchange rates and trade patterns, they are expected to create additional effects on partner country economies as well (Sayan Uyar, 2002).On the other hand if the countries experiencing population aging are large in the international trade, where as their partners are small and have not yet faced a population aging problem themselves. In other words, commodities and capital traded at the terms set by large economies may make these sm all countries vulnerable to the effects of population aging even if they have relatively young populations (Sayan Uyar, 2002).Gross Domestic Product (GDP)There are number of studies conducted to examine the impact of gross domestic product (GDP) on trade (imports exports) of a country, for instance a study conducted using gravity equation to examine the impact of gdp on exports of a country, the study classified the sample into three categories a) homogeneous goods, b) differentiated goods, and c) an in-between category (Feenstra, Markusen Rose, 2001).It found in the study that if a trade of one country with another move from homogeneous goods to differentiated goods, then the stretch of exports with take note to GDP rises considerably (Feenstra, Markusen Rose, 2001).The finding of the study is empirically strong and significant both economically and statistically, as well as the study also stated that the GDP of the exporting country is found to be a powerful illustrative vari able in the comparative strength of bilateral trade relations (Feenstra, Markusen Rose, 2001).Another study conducted in India to examine the impact of various economic variables such as (distance, GDP, population, tariff, and exchange rate) on Indian trade flows. Previous studies have also been conducted using gravity model to examine the impact of economic variables on trade flows, it was reported in the forward studies that distance has a negative and significant impact on trade where as GDP and population have a positive and significant impact on trade flows (Srinivasan Archana, 2008). overly the preceding(prenominal) studies, the study conducted in India reported the similar findings, i.e. larger distance reduces mutual trade and a larger GDP and population of the trading countries increase trade. It was also found in the study that size of the economy is an important influential factor explaining the inflow and outflow of goods and services.A study similar to previous stud ies was conducted to examine the impact of gdp on trade flows of a country. The study supported the findings of the previous studies that tariff barrier of importing country have a negative and significant impact on exporting countries, where as the study also reported that the larger gdp and population have a positive impact on bilateral exports of countries (Tamirisa, 1999).A study conducted by, Ghartey (1993), using economic data of three countries (United States, Japan and Taiwan) to examine the impact of gdp of each country on its trade flows, it was found in the study that United states GDP promoted its exports, where as for Japan and Taiwan the impact was opposite (Chen, 2009).Similarly another study conducted by, Jung Marshall (1985), to examine the relationship between GDP and exports, the study used thirty one years of GDP and exports data from year 1950 to year 1981 for 37 developing countries, it was found in the study that there is no relationship between GDP and expor ts of 37 developing countries except Israel (Chen, 2009).ChinaA study conducted in china by, Shen (1999) to examine the relationship between exports and GDP, the study used twenty one years of exports and GDP data from year 1977 to year 1998, the study found that there is a short term relationship between the Chinese GDP and exports, where there is no long term relationship between the two variables (Chen, 2009).PakistanA study conducted in Pakistan to examine the impact of GDP on Pakistan trade flows, it was found in the study that an increase in GDP i.e. increase in domestic income results in increase in imports, for instance a one-percent increase in Pakistan GDP increases imports from US and Japan by an equivalent percent. Where as if compared to UK and Germany the trade flow is positive and small but not significant (Akhtar Malik, 2000).InflationWhat exactly is inflation? A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services. Inflation occurs when the price level rises from one period to the next (Robinson, 2007).The Impact of Inflation on International TradeA study conducted in U.S, Robinson (2007) to investigate the impact of inflation on international trade and small business. It was found that inflation creates uncertainty that discourages productive activity, savings and investing and in the long run reduces the competitiveness of a country in international trade. It was also found that if inflation is not offset by a nation with a less valuable currency, the U.S.s exports become more expensive and less attractive. This makes other countries imports more attractive. As a result this forms an economy of unbalanced trade with more minify U.S. economy and international trade (Robinson, 2007).Inflation has many disadvantages it creates uncertainty, in that people do not know what the m oney they earn today buy tomorrow. This uncertainty discourages productive activity, saving and investing. Inflation reduces the competitiveness of the country in international trade. If inflation is not offset by a nation with a less valuable currency, the U.S.s exports become more expensive and less attractive. This makes other countries imports more attractive. This forms an economy of unbalanced trade which results in a much more reduced U.S. economy (Robinson, 2007).Inflation and TradeA study conducted, Fitoussi (2007), to investigate the impact of inflation on trade found that in the last 15 years or so, disinflation and the increase of world trade seem to have gone hand in hand. It was found that in the past three decades a downwards trend in inflation caused an inward trend in world trade (Fitoussi, 2007).The first fact that can be observed is that the past three decades were characterized both by an upward trend in world trade (measured as exports over GDP) and a downward trend in inflation (measured as yearly change in CPI) (Fitoussi, 2007).RemittancesIn general remittances are defined as a portion of the earnings a migrant sends to relatives back home, IMF (2010). It has been estimated that workers migrated to different countries send home between US$ 2000 to US$ 5000 a year, i.e. in terms of percentage around 20% to 30% of their income. It has been found in the previous researches that poor countries receive larger amount of remittances as compared to high income countries for instance In 2007, the top three recipients of remittances India, China, and Mexico-each received over $25 billion. But small and poorer countries tend to receive relatively larger remittances when the size of the economy is taken into account. Expressing remittances as a administer of GDP, the top recipients were Tajikistan (36 percent), Moldova (36 percent), Tonga (32 percent) and Kyrgyz Republic (27percent).Remittances as a share of GDP amounted to 3.6 percent of GDP in low-income countries in 2006 compared to 1.7 percent in middle-income countries (Ratha Mohapatra, 2007).Numbers of studies have been conducted to examine the impact of remittances on the trade of a country these studies provided a mix of evidence regarding the impact of remittances on countries trade, for instance some studies provided the evidence that remittances can improve a countrys creditworthiness and thereby enhance its access to international capital markets for financing infrastructure and other development projects, in other words it can be said that increase in inflow of remittances increase the foreign reserves of a country, hence it enhances the ability of a country to meet its foreign trade obligations (paying of import bills).This enhancement of country ability indicates a sign of increase in its economic activity as a result it attracts foreign investors and foreign export orders (Ratha Mohapatra, 2007).For instance the ratio of debt to exports of goods and servic es, a nominate indebtedness indicator, would increase significantly if remittances were excluded from the denominator.Exchange RateTurkeyA study conducted, Vergil (2001), to investigate the impact of exchange rate volatility on Turkish trade flows comprising on 10 years data from year 1990 to year 2000. It was found in the study that exchange rate volatility has a negative impact on Turkish trade flows. AfricaA study conducted to analyze the impact of exchange rate volatility on African countries trade flows. The study used 33 sub-Saharan African countries exchange rate macro-economic performance indicators data. It was found in the study that exchange rates contributed a great deal towards Africas poor economic performance, Ghura Grennes (1993), i.e. overvaluation in exchange rate resulted in lower level of exports, lower level of real GDP per Capita and lower level of Savings (Shatz Tarr 1990).G-7 CountriesA study conducted by international monetary fund to investigate the impa ct of exchange fluctuation on world trade, in the study the G-7 countries trade was taken as world trade. The purpose of the study was to compare the results of IMF 1984 study a