ICAI Notes- Unit 2: The Instruments of Trade Policy | Business Economics for CA Foundation PDF Download

 Page 1


  
 
BUSINESS ECONOMICS 
a
 
 
9.14 
LEARNING OUTCOMES 
UNIT - 2: THE INSTRUMENTS OF 
TRADE POLICY 
 
 
 
 
After studying this Unit, you will be able to – 
? Define trade policy and describe its objectives  
? Distinguish between different types of trade policy measures  
? Evaluate the use of tariffs as a trade policy instrument  
? Describe the ‘trigger price mechanisms’ for protection of domestic 
industry 
? Outline the different Non-Tariff Measures adopted by countries 
 
 
 
  
International 
Trade
The Instruments of Trade 
Policy
Tariffs
Non-Tariff 
Measures (NTMs)
Export-Related 
Measures
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
Page 2


  
 
BUSINESS ECONOMICS 
a
 
 
9.14 
LEARNING OUTCOMES 
UNIT - 2: THE INSTRUMENTS OF 
TRADE POLICY 
 
 
 
 
After studying this Unit, you will be able to – 
? Define trade policy and describe its objectives  
? Distinguish between different types of trade policy measures  
? Evaluate the use of tariffs as a trade policy instrument  
? Describe the ‘trigger price mechanisms’ for protection of domestic 
industry 
? Outline the different Non-Tariff Measures adopted by countries 
 
 
 
  
International 
Trade
The Instruments of Trade 
Policy
Tariffs
Non-Tariff 
Measures (NTMs)
Export-Related 
Measures
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
a
 
 9.15 
INTERNATIONAL TRADE 
2.1 INTRODUCTION 
Before we go into the subject matter of this unit, we shall take a quick look at a few recent 
developments in India’s international trade strategy.  
• After a decade of eschewing free trade deals, India has embarked on an FTA-signing 
spree that is quickly transforming the country into one of the most FTA-engaged 
countries in the world. 
• The reinvigorated Free Trade Agreement rush began with an agreement with Mauritius 
on 1 April 2021, followed by fast-track negotiations with the United Arab Emirates 
(UAE), Australia, the United Kingdom (UK), Canada and the European Union (EU). 
• On 18 February 2022, a comprehensive economic partnership agreement (CEPA) with 
the UAE was concluded within 90 days of the commencement of negotiations and has 
been in force since 1 May 2022. In addition, an Economic Cooperation and Trade 
Agreement (ECTA) with Australia also concluded on 2 April 2022. 
• The next highly-anticipated Free Trade Agreement in the works is with the UK, which 
is expected to conclude by Diwali (the festival of lights) in October 2022. Free Trade 
Agreement discussions are also on the fast track with Canada, the EU, as well as with 
the Gulf Cooperation Council (GCC – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and 
the UAE) and Israel. 
As we know, under free trade, buyers and sellers from separate economies 
voluntarily trade with minimum of state interference. The free interplay of market forces of 
supply and demand decides prices. Protectionism, on the other hand, is a state policy aimed 
to protect domestic producers against foreign competition through the use of tariffs, quotas 
and non-tariff trade policy instruments. Trade liberalization refers to opening up of domestic 
markets to goods and services from the rest of the world by bringing down trade barriers. 
In unit 1, we have seen that there are clear efficiency benefits from trade in terms of economic 
growth, job-creation and welfare. The persuasive academic arguments for open trade 
presuppose that fair competition, without distortions, is maintained between domestic and 
foreign producers. However, it is a fact that fair competition does not always exist and 
unobstructed international trade also brings in severe dislocation to many domestic firms and 
industries on account of difficult adjustment problems. Therefore, individuals and 
organizations continue to pressurize policymakers and regulatory authorities to restrict 
imports or to artificially boost up the size of exports.  
Historically, as part of their protectionist measures, governments of different countries have 
applied many different types of policy instruments, not necessarily based on their economic 
merit, for restricting the free flow of goods and services across national boundaries. While 
© The Institute of Chartered Accountants of India
Page 3


  
 
BUSINESS ECONOMICS 
a
 
 
9.14 
LEARNING OUTCOMES 
UNIT - 2: THE INSTRUMENTS OF 
TRADE POLICY 
 
 
 
 
After studying this Unit, you will be able to – 
? Define trade policy and describe its objectives  
? Distinguish between different types of trade policy measures  
? Evaluate the use of tariffs as a trade policy instrument  
? Describe the ‘trigger price mechanisms’ for protection of domestic 
industry 
? Outline the different Non-Tariff Measures adopted by countries 
 
 
 
  
International 
Trade
The Instruments of Trade 
Policy
Tariffs
Non-Tariff 
Measures (NTMs)
Export-Related 
Measures
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
a
 
 9.15 
INTERNATIONAL TRADE 
2.1 INTRODUCTION 
Before we go into the subject matter of this unit, we shall take a quick look at a few recent 
developments in India’s international trade strategy.  
• After a decade of eschewing free trade deals, India has embarked on an FTA-signing 
spree that is quickly transforming the country into one of the most FTA-engaged 
countries in the world. 
• The reinvigorated Free Trade Agreement rush began with an agreement with Mauritius 
on 1 April 2021, followed by fast-track negotiations with the United Arab Emirates 
(UAE), Australia, the United Kingdom (UK), Canada and the European Union (EU). 
• On 18 February 2022, a comprehensive economic partnership agreement (CEPA) with 
the UAE was concluded within 90 days of the commencement of negotiations and has 
been in force since 1 May 2022. In addition, an Economic Cooperation and Trade 
Agreement (ECTA) with Australia also concluded on 2 April 2022. 
• The next highly-anticipated Free Trade Agreement in the works is with the UK, which 
is expected to conclude by Diwali (the festival of lights) in October 2022. Free Trade 
Agreement discussions are also on the fast track with Canada, the EU, as well as with 
the Gulf Cooperation Council (GCC – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and 
the UAE) and Israel. 
As we know, under free trade, buyers and sellers from separate economies 
voluntarily trade with minimum of state interference. The free interplay of market forces of 
supply and demand decides prices. Protectionism, on the other hand, is a state policy aimed 
to protect domestic producers against foreign competition through the use of tariffs, quotas 
and non-tariff trade policy instruments. Trade liberalization refers to opening up of domestic 
markets to goods and services from the rest of the world by bringing down trade barriers. 
In unit 1, we have seen that there are clear efficiency benefits from trade in terms of economic 
growth, job-creation and welfare. The persuasive academic arguments for open trade 
presuppose that fair competition, without distortions, is maintained between domestic and 
foreign producers. However, it is a fact that fair competition does not always exist and 
unobstructed international trade also brings in severe dislocation to many domestic firms and 
industries on account of difficult adjustment problems. Therefore, individuals and 
organizations continue to pressurize policymakers and regulatory authorities to restrict 
imports or to artificially boost up the size of exports.  
Historically, as part of their protectionist measures, governments of different countries have 
applied many different types of policy instruments, not necessarily based on their economic 
merit, for restricting the free flow of goods and services across national boundaries. While 
© The Institute of Chartered Accountants of India
  
 
BUSINESS ECONOMICS 
a
 
 
9.16 
some such measures of government intervention are simple, widespread, and relatively 
transparent, others are complex, less apparent and frequently involve many types of 
distortions.  
In this unit, we shall describe some of the most frequently used forms of interference with 
trade. Understanding the uses and implications of the common trade policy instruments, will 
enable formulation of appropriate policy responses and more balanced dialogues on trade 
policy issues and international trade agreements. 
Trade policy encompasses all instruments that governments may use to promote or restrict 
imports and exports. Trade policy also includes the approach taken by countries in trade 
negotiations. While participating in the multilateral trading system and/or while negotiating 
bilateral trade agreements, countries assume obligations that shape their national trade 
policies. The instruments of trade policy that countries typically use to restrict imports and/ 
or to encourage exports can be broadly classified into price- related measures such as tariffs 
and non-price measures or non-tariff measures (NTMs).  
In the following sections, we shall briefly touch upon the different trade policy measures 
adopted by countries to protect their domestic industries.  
2.2 TARIFFS  
Tariffs, also known as customs duties, are basically taxes or duties imposed on goods and 
services which are imported or exported. Different tariffs are generally applied to different 
commodities. It is defined as a financial charge in the form of a tax, imposed at the border on 
goods going from one customs territory to another. They are the most visible and universally 
used trade measures that determine market access for goods. Instead of a single tariff rate, 
countries have a tariff schedule which specifies the tariff collected on every particular good 
and service. Import duties being pervasive than export duties, tariffs are often identified with 
import duties and in this unit, the term ‘tariff’ would refer to import duties. 
Tariffs are aimed at altering the relative prices of goods and services imported, so as to 
contract the domestic demand and thus regulate the volume of their imports. Tariffs leave the 
world market price of the goods unaffected; while raising their prices in the domestic market. 
The main goals of tariffs are to raise revenue for the government, and more importantly to 
protect the domestic import-competing industries. 
2.2.1 Forms of Import Tariffs  
(i) 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. This 
tariff can vary according to the type of good imported. Example, a specific tariff of 
© The Institute of Chartered Accountants of India
Page 4


  
 
BUSINESS ECONOMICS 
a
 
 
9.14 
LEARNING OUTCOMES 
UNIT - 2: THE INSTRUMENTS OF 
TRADE POLICY 
 
 
 
 
After studying this Unit, you will be able to – 
? Define trade policy and describe its objectives  
? Distinguish between different types of trade policy measures  
? Evaluate the use of tariffs as a trade policy instrument  
? Describe the ‘trigger price mechanisms’ for protection of domestic 
industry 
? Outline the different Non-Tariff Measures adopted by countries 
 
 
 
  
International 
Trade
The Instruments of Trade 
Policy
Tariffs
Non-Tariff 
Measures (NTMs)
Export-Related 
Measures
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
a
 
 9.15 
INTERNATIONAL TRADE 
2.1 INTRODUCTION 
Before we go into the subject matter of this unit, we shall take a quick look at a few recent 
developments in India’s international trade strategy.  
• After a decade of eschewing free trade deals, India has embarked on an FTA-signing 
spree that is quickly transforming the country into one of the most FTA-engaged 
countries in the world. 
• The reinvigorated Free Trade Agreement rush began with an agreement with Mauritius 
on 1 April 2021, followed by fast-track negotiations with the United Arab Emirates 
(UAE), Australia, the United Kingdom (UK), Canada and the European Union (EU). 
• On 18 February 2022, a comprehensive economic partnership agreement (CEPA) with 
the UAE was concluded within 90 days of the commencement of negotiations and has 
been in force since 1 May 2022. In addition, an Economic Cooperation and Trade 
Agreement (ECTA) with Australia also concluded on 2 April 2022. 
• The next highly-anticipated Free Trade Agreement in the works is with the UK, which 
is expected to conclude by Diwali (the festival of lights) in October 2022. Free Trade 
Agreement discussions are also on the fast track with Canada, the EU, as well as with 
the Gulf Cooperation Council (GCC – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and 
the UAE) and Israel. 
As we know, under free trade, buyers and sellers from separate economies 
voluntarily trade with minimum of state interference. The free interplay of market forces of 
supply and demand decides prices. Protectionism, on the other hand, is a state policy aimed 
to protect domestic producers against foreign competition through the use of tariffs, quotas 
and non-tariff trade policy instruments. Trade liberalization refers to opening up of domestic 
markets to goods and services from the rest of the world by bringing down trade barriers. 
In unit 1, we have seen that there are clear efficiency benefits from trade in terms of economic 
growth, job-creation and welfare. The persuasive academic arguments for open trade 
presuppose that fair competition, without distortions, is maintained between domestic and 
foreign producers. However, it is a fact that fair competition does not always exist and 
unobstructed international trade also brings in severe dislocation to many domestic firms and 
industries on account of difficult adjustment problems. Therefore, individuals and 
organizations continue to pressurize policymakers and regulatory authorities to restrict 
imports or to artificially boost up the size of exports.  
Historically, as part of their protectionist measures, governments of different countries have 
applied many different types of policy instruments, not necessarily based on their economic 
merit, for restricting the free flow of goods and services across national boundaries. While 
© The Institute of Chartered Accountants of India
  
 
BUSINESS ECONOMICS 
a
 
 
9.16 
some such measures of government intervention are simple, widespread, and relatively 
transparent, others are complex, less apparent and frequently involve many types of 
distortions.  
In this unit, we shall describe some of the most frequently used forms of interference with 
trade. Understanding the uses and implications of the common trade policy instruments, will 
enable formulation of appropriate policy responses and more balanced dialogues on trade 
policy issues and international trade agreements. 
Trade policy encompasses all instruments that governments may use to promote or restrict 
imports and exports. Trade policy also includes the approach taken by countries in trade 
negotiations. While participating in the multilateral trading system and/or while negotiating 
bilateral trade agreements, countries assume obligations that shape their national trade 
policies. The instruments of trade policy that countries typically use to restrict imports and/ 
or to encourage exports can be broadly classified into price- related measures such as tariffs 
and non-price measures or non-tariff measures (NTMs).  
In the following sections, we shall briefly touch upon the different trade policy measures 
adopted by countries to protect their domestic industries.  
2.2 TARIFFS  
Tariffs, also known as customs duties, are basically taxes or duties imposed on goods and 
services which are imported or exported. Different tariffs are generally applied to different 
commodities. It is defined as a financial charge in the form of a tax, imposed at the border on 
goods going from one customs territory to another. They are the most visible and universally 
used trade measures that determine market access for goods. Instead of a single tariff rate, 
countries have a tariff schedule which specifies the tariff collected on every particular good 
and service. Import duties being pervasive than export duties, tariffs are often identified with 
import duties and in this unit, the term ‘tariff’ would refer to import duties. 
Tariffs are aimed at altering the relative prices of goods and services imported, so as to 
contract the domestic demand and thus regulate the volume of their imports. Tariffs leave the 
world market price of the goods unaffected; while raising their prices in the domestic market. 
The main goals of tariffs are to raise revenue for the government, and more importantly to 
protect the domestic import-competing industries. 
2.2.1 Forms of Import Tariffs  
(i) 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. This 
tariff can vary according to the type of good imported. Example, a specific tariff of 
© The Institute of Chartered Accountants of India
 
 
a
 
 9.17 
INTERNATIONAL TRADE 
`1000/ may be charged on each imported bicycle. The disadvantage of specific tariff 
as an instrument for protection of domestic producers is that its protective value varies 
inversely with the price of the import. For example: if the price of the imported cycle is 
` 5,000/- and the rate of tariff is 20%; then, if due to inflation, the price of bicycle rises 
to ` 10,000, the specific tariff is still only 10% of the value of the import. Since the 
calculation of these duties does not involve the value of merchandise, customs 
valuation is not applicable in this case. 
(ii) Ad valorem tariff:  When the duty is levied as a fixed percentage of the value of the 
traded commodity, it is called as valorem tariff. An ad valorem tariff is levied as a 
constant percentage of the monetary value of one unit of the imported good. A 20% 
ad valorem tariff on any bicycle generates a ` 1000/ payment on each imported bicycle 
priced at ` 5,000/ in the world market; and if the price rises to `10,000, it generates a 
payment of ` 2,000/. While ad valorem tariff preserves the protective value of tariff on 
home producer, it gives incentives to deliberately undervalue the good’s price on 
invoices and bills of lading to reduce the tax burden. Nevertheless, ad valorem tariffs 
are widely used across the world.  
There are many other variations of the above tariffs, such as: 
(a) Mixed Tariffs: Mixed tariffs are expressed either on the basis of the value of the 
imported goods (an ad valorem rate) or on the basis of a unit of measure of the 
imported goods (a specific duty) depending on which generates the most income (or 
least income at times) for the nation. For example, duty on cotton: 5 per cent 
ad valorem or ` 3000/per tonne, whichever is higher. 
 Compound Tariff or a Compound Duty is a combination of an ad valorem and a 
specific tariff. That is, the tariff is calculated on the basis of both the value of the 
imported goods (an ad valorem duty) and a unit of measure of the imported goods (a 
specific duty).  It is generally calculated by adding up a specific duty to an ad valorem 
duty. Thus, on an import with quantity q and price p, a compound tariff collects a revenue 
equal to tsq + tapq, where t s is the specific tariff and t a is the ad valorem tariff. For 
example: duty on cheese at 5 per cent advalorem plus 100 per kilogram. 
(b) Technical/Other Tariff: These are calculated on the basis of the specific contents of 
the imported goods i.e. the duties are payable by its components or related items. For 
example: ` 3000/ on each solar panel plus ` 50/ per kg on the battery. 
(c) Tariff Rate Quotas: Tariff rate quotas (TRQs) combine two policy instruments: quotas 
and tariffs. Imports entering under the specified quota portion are usually subject to a 
lower (sometimes zero) tariff rate. Imports above the quantitative threshold of the 
quota face a much higher tariff. 
© The Institute of Chartered Accountants of India
Page 5


  
 
BUSINESS ECONOMICS 
a
 
 
9.14 
LEARNING OUTCOMES 
UNIT - 2: THE INSTRUMENTS OF 
TRADE POLICY 
 
 
 
 
After studying this Unit, you will be able to – 
? Define trade policy and describe its objectives  
? Distinguish between different types of trade policy measures  
? Evaluate the use of tariffs as a trade policy instrument  
? Describe the ‘trigger price mechanisms’ for protection of domestic 
industry 
? Outline the different Non-Tariff Measures adopted by countries 
 
 
 
  
International 
Trade
The Instruments of Trade 
Policy
Tariffs
Non-Tariff 
Measures (NTMs)
Export-Related 
Measures
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
a
 
 9.15 
INTERNATIONAL TRADE 
2.1 INTRODUCTION 
Before we go into the subject matter of this unit, we shall take a quick look at a few recent 
developments in India’s international trade strategy.  
• After a decade of eschewing free trade deals, India has embarked on an FTA-signing 
spree that is quickly transforming the country into one of the most FTA-engaged 
countries in the world. 
• The reinvigorated Free Trade Agreement rush began with an agreement with Mauritius 
on 1 April 2021, followed by fast-track negotiations with the United Arab Emirates 
(UAE), Australia, the United Kingdom (UK), Canada and the European Union (EU). 
• On 18 February 2022, a comprehensive economic partnership agreement (CEPA) with 
the UAE was concluded within 90 days of the commencement of negotiations and has 
been in force since 1 May 2022. In addition, an Economic Cooperation and Trade 
Agreement (ECTA) with Australia also concluded on 2 April 2022. 
• The next highly-anticipated Free Trade Agreement in the works is with the UK, which 
is expected to conclude by Diwali (the festival of lights) in October 2022. Free Trade 
Agreement discussions are also on the fast track with Canada, the EU, as well as with 
the Gulf Cooperation Council (GCC – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and 
the UAE) and Israel. 
As we know, under free trade, buyers and sellers from separate economies 
voluntarily trade with minimum of state interference. The free interplay of market forces of 
supply and demand decides prices. Protectionism, on the other hand, is a state policy aimed 
to protect domestic producers against foreign competition through the use of tariffs, quotas 
and non-tariff trade policy instruments. Trade liberalization refers to opening up of domestic 
markets to goods and services from the rest of the world by bringing down trade barriers. 
In unit 1, we have seen that there are clear efficiency benefits from trade in terms of economic 
growth, job-creation and welfare. The persuasive academic arguments for open trade 
presuppose that fair competition, without distortions, is maintained between domestic and 
foreign producers. However, it is a fact that fair competition does not always exist and 
unobstructed international trade also brings in severe dislocation to many domestic firms and 
industries on account of difficult adjustment problems. Therefore, individuals and 
organizations continue to pressurize policymakers and regulatory authorities to restrict 
imports or to artificially boost up the size of exports.  
Historically, as part of their protectionist measures, governments of different countries have 
applied many different types of policy instruments, not necessarily based on their economic 
merit, for restricting the free flow of goods and services across national boundaries. While 
© The Institute of Chartered Accountants of India
  
 
BUSINESS ECONOMICS 
a
 
 
9.16 
some such measures of government intervention are simple, widespread, and relatively 
transparent, others are complex, less apparent and frequently involve many types of 
distortions.  
In this unit, we shall describe some of the most frequently used forms of interference with 
trade. Understanding the uses and implications of the common trade policy instruments, will 
enable formulation of appropriate policy responses and more balanced dialogues on trade 
policy issues and international trade agreements. 
Trade policy encompasses all instruments that governments may use to promote or restrict 
imports and exports. Trade policy also includes the approach taken by countries in trade 
negotiations. While participating in the multilateral trading system and/or while negotiating 
bilateral trade agreements, countries assume obligations that shape their national trade 
policies. The instruments of trade policy that countries typically use to restrict imports and/ 
or to encourage exports can be broadly classified into price- related measures such as tariffs 
and non-price measures or non-tariff measures (NTMs).  
In the following sections, we shall briefly touch upon the different trade policy measures 
adopted by countries to protect their domestic industries.  
2.2 TARIFFS  
Tariffs, also known as customs duties, are basically taxes or duties imposed on goods and 
services which are imported or exported. Different tariffs are generally applied to different 
commodities. It is defined as a financial charge in the form of a tax, imposed at the border on 
goods going from one customs territory to another. They are the most visible and universally 
used trade measures that determine market access for goods. Instead of a single tariff rate, 
countries have a tariff schedule which specifies the tariff collected on every particular good 
and service. Import duties being pervasive than export duties, tariffs are often identified with 
import duties and in this unit, the term ‘tariff’ would refer to import duties. 
Tariffs are aimed at altering the relative prices of goods and services imported, so as to 
contract the domestic demand and thus regulate the volume of their imports. Tariffs leave the 
world market price of the goods unaffected; while raising their prices in the domestic market. 
The main goals of tariffs are to raise revenue for the government, and more importantly to 
protect the domestic import-competing industries. 
2.2.1 Forms of Import Tariffs  
(i) 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. This 
tariff can vary according to the type of good imported. Example, a specific tariff of 
© The Institute of Chartered Accountants of India
 
 
a
 
 9.17 
INTERNATIONAL TRADE 
`1000/ may be charged on each imported bicycle. The disadvantage of specific tariff 
as an instrument for protection of domestic producers is that its protective value varies 
inversely with the price of the import. For example: if the price of the imported cycle is 
` 5,000/- and the rate of tariff is 20%; then, if due to inflation, the price of bicycle rises 
to ` 10,000, the specific tariff is still only 10% of the value of the import. Since the 
calculation of these duties does not involve the value of merchandise, customs 
valuation is not applicable in this case. 
(ii) Ad valorem tariff:  When the duty is levied as a fixed percentage of the value of the 
traded commodity, it is called as valorem tariff. An ad valorem tariff is levied as a 
constant percentage of the monetary value of one unit of the imported good. A 20% 
ad valorem tariff on any bicycle generates a ` 1000/ payment on each imported bicycle 
priced at ` 5,000/ in the world market; and if the price rises to `10,000, it generates a 
payment of ` 2,000/. While ad valorem tariff preserves the protective value of tariff on 
home producer, it gives incentives to deliberately undervalue the good’s price on 
invoices and bills of lading to reduce the tax burden. Nevertheless, ad valorem tariffs 
are widely used across the world.  
There are many other variations of the above tariffs, such as: 
(a) Mixed Tariffs: Mixed tariffs are expressed either on the basis of the value of the 
imported goods (an ad valorem rate) or on the basis of a unit of measure of the 
imported goods (a specific duty) depending on which generates the most income (or 
least income at times) for the nation. For example, duty on cotton: 5 per cent 
ad valorem or ` 3000/per tonne, whichever is higher. 
 Compound Tariff or a Compound Duty is a combination of an ad valorem and a 
specific tariff. That is, the tariff is calculated on the basis of both the value of the 
imported goods (an ad valorem duty) and a unit of measure of the imported goods (a 
specific duty).  It is generally calculated by adding up a specific duty to an ad valorem 
duty. Thus, on an import with quantity q and price p, a compound tariff collects a revenue 
equal to tsq + tapq, where t s is the specific tariff and t a is the ad valorem tariff. For 
example: duty on cheese at 5 per cent advalorem plus 100 per kilogram. 
(b) Technical/Other Tariff: These are calculated on the basis of the specific contents of 
the imported goods i.e. the duties are payable by its components or related items. For 
example: ` 3000/ on each solar panel plus ` 50/ per kg on the battery. 
(c) Tariff Rate Quotas: Tariff rate quotas (TRQs) combine two policy instruments: quotas 
and tariffs. Imports entering under the specified quota portion are usually subject to a 
lower (sometimes zero) tariff rate. Imports above the quantitative threshold of the 
quota face a much higher tariff. 
© The Institute of Chartered Accountants of India
  
 
BUSINESS ECONOMICS 
a
 
 
9.18 
(d) Most-Favoured Nation Tariffs: MFN tariffs refer to import tariffs which countries 
promise to impose on imports from other members of the WTO, unless the country is 
part of a preferential trade agreement (such as a free trade area or customs union). 
This means that, in practice, MFN rates are the highest (most restrictive) that WTO 
members charge each other. Some countries impose higher tariffs on countries that 
are not part of the WTO. 
(e) Variable Tariff: A duty typically fixed to bring the price of an imported commodity up 
to level of the domestic support price for the commodity. 
(f) Preferential Tariff: Nearly all countries are part of at least one preferential trade 
agreement, under which they promise to give another country's products lower tariffs 
than their MFN rate. These agreements are reciprocal.  A lower tariff is charged from 
goods imported from a country which is given preferential treatment. Examples are 
preferential duties in the EU region under which a good coming from one EU country 
to another is charged zero tariff rate. Another example is North American Free Trade 
Agreement (NAFTA) among Canada, Mexico and the USA where the preferential tariff 
rate is zero on essentially all products. Countries, especially the affluent ones also grant 
‘unilateral preferential treatment’ to select list of products from specified developing 
countries. The Generalized System of Preferences (GSP) is one such system which is 
currently prevailing.   
(g) Bound Tariff: Under this, a WTO member binds itself with a legal commitment not to 
raise tariff rate above a certain level.  By binding a tariff rate, often during negotiations, 
the members agree to limit their right to set tariff levels beyond a certain level.  The 
bound rates are specific to individual products and represent the maximum level of 
import duty that can be levied on a product imported by that member.  A member is 
always free to impose a tariff that is lower than the bound level. Once bound, a tariff 
rate becomes permanent and a member can only increase its level after negotiating 
with its trading partners and compensating them for possible losses of trade.  A bound 
tariff ensures transparency and predictability.   
(h) Applied Tariffs: An 'applied tariff' is the duty that is actually charged on imports on a 
Most-Favoured Nation (MFN) basis.  A WTO member can have an applied tariff for a 
product that differs from the bound tariff for that product as long as the applied level 
is not higher than the bound level.   
(i) Escalated Tariff structure refers to the system wherein the nominal tariff rates on 
imports of manufactured goods are higher than the nominal tariff rates on 
intermediate inputs and raw materials, i.e. the tariff on a product increases as that 
product moves through the value-added chain.  For example, a four percent tariff on 
iron ore or iron ingots and twelve percent tariff on steel pipes.  This type of tariff is 
© The Institute of Chartered Accountants of India