3 Yardsticks of International Trade Performance. 5 Key Measures to Manage Trade Imbalances. 6 Methods of Protection against Imports in International Foreign Trade.
It is necessary to understand that the reaction of many governments to economic slump was to protect jobs at home by raising the protection against
imports. The most common method of protection is the introduction or
increase of tariffs on imported goods. In the 1920s and 1930s, the widespread
use of tariffs caused job losses, in turn, in other countries – a reiterative
process. In the second half of the 1930s, the prolonged world slump was
alleviated, particularly in Europe, by the heavy public spending on defence
equipment and munitions in the lead-up to the World War II.
After 1945, there were concerted international efforts to put in place
organizations which would reduce the effects of trade protection and any
future reductions in world economic activity. The first of these were the
International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD), now known as the World Bank
which were established by the Bretton Woods Agreement in 1947. These
institutions which have become the cornerstones of international macroeconomic management were largely the brainchild of British economist John Maynard Keynes, who was among the first to recognize that reductions in
government spending and increases in protection had been major causes of
the pre-war depression.
Methods of protection
The tools of protection may be categorized as either tariff or non-tariff
A tariff is a ‘tax’ or import duty levied on goods or services entering a
country. Tariffs can be fixed or percentage levies and serve the twin purposes
of generating revenue for governments and making it more difficult for
companies from other countries to do business in the protected market.
The moves towards ‘free trade’ of the 19th century were largely offset by
the reintroduction of tariffs in the early part of the 20th century at rates
sometimes as high as 33 and 50%. Since 1945, tariffs have been lowered
significantly as a result of eight successive rounds of multilateral trade
negotiations under the General Agreement on Tariffs and Trade (GATT),
the third institution established following the Bretton Woods Agreement,
and its successor the World Trade Organization (WTO).
Although progress was made in dismantling tariff barriers under the GATT
in the period up to 1995 when the WTO was established, the use of non-tariff protection increased during the 1980s, mostly as a substitute for the
tariffs which were outlawed.
The following is a list of non-tariff measures which have been deployed by
both developed and developing countries:
A numerical limit in terms of value or volume imposed on the amount of
a product which can be imported. Chinese quotas on imported automobiles
or French quotas on Japanese VHS equipment during the 1980s are wellknown
• Voluntary export restraints
Agreed arrangements whereby an exporter agrees not to export more
than a specific amount of a good to the importing country (usually to preempt
the imposition of more stringent measures). Such agreements are common for automobiles and electronics, but are also applied to steel and chemicals.
• Domestic subsidies
The provision of financial aid or preferential tax status to domestic
manufacturers which gives them an advantage over external suppliers.
The most obvious examples are agricultur,e where both the EU and US
have consistently employed subsidies to help domestic producers.
• Import deposits
The device of requiring the importer to make a deposit (usually a
proportion of the value of the goods) with the Government for a fixed
period. The effect on cash flow is intended to discourage imports.
• Safety and health standards / technical specifications
This more subtle form of deterrent requires importers to meet stringent
standards or to complete complicated and lengthy formalities. The French
bans on lamb and then beef imported from the UK during the 1990s will
be long remembered by the British farming industry.
International balance of payments ratios
There are three yardsticks of international trade which are quotedcommonly
by economists and others seeking to compare trade performance between
countries relative to their economies:
• ratio of trade at market prices to gross domestic product (GDP). For
example, China now has a surprisingly open economy with a ratio of 44%
in 2001, while Japan’s ratio of trade to GDP was only 18%.
• ratio of current account balance to GDP. The ratios of the UK’s and USA’s deficits to GDP are 1.7% and 5.1% currently while those of some of the
EU accession states exceed 40%.
• terms of trade. This more sophisticated measurement is the ratio of a
country’s prices of exports to those of its imports and is an indicator of
A country with a surplus in its balance of payments is said to be a ‘creditor
nation’. It can add this surplus to its reserves or lend it to other nations to
enable them to improve their economies.
Conversely, if a country incurs a deficit in its balance of payments, it is
said to be a ‘debtor nation’ because it has spent more than it has earned. It
must finance this deficit either by drawing upon its reserves or borrowing
Clearly, a country’s reserves of gold and foreign currencies are not
inexhaustible and, sooner or later, it would have to negotiate loans and
eventually repay them. We have already mentioned the role of the IMF as a
provider of loans for this purpose. IMF loans are generally granted with
stringent conditions attached as to the management of the borrowing
country’s economy. In the 1970s the UK negotiated significant loans from
the IMF in order to cover accumulated deficits. Changes in domestic
economic policy, in agreement wit the IMF, enabled the loans to be repaid
A country with a persistent balance of payments deficit must take
appropriate measures to rectify the situation which would depend upon the
causes of the deficit. If it is due to its imports, measures must be taken to
restrict imports while stimulating exports. If it has been caused by an
excessive outflow of capital, then measures must be taken to control overseas
Some of the measures which a country may take are summarized as
In theory, there are two methods of controlling imports, the protection tools
• import quotas and
• import duties (tariffs)
Import quotas provide restrictions to the total number or value of goods
which may be imported into the country during a specified period.
The imposition of import duties is intended to reduce demand for the
commodities in question by increasing the price to the ultimate user.
As signatories to the GATT and its successor the WTO, the boundaries
within which the UK or the USA can impose import controls or tariffs, even
to address disequilibrium, are severely restricted. As a full member of the
EU the UK can depart from the common external tariff only in the most
A government might grant its exporters generally, or in specific industries,
subsidies or taxation reductions to enable them to reduce their prices and
undercut foreign competitors. Such incentives are also outlawed by theWTO
ad would certainly contravene EU agreements if applied to trade within
Since the use of import controls and export incentives is constrained, the
UK usually resorts to monetary measures when there is a balance of
Recognising that the fundamental cause of current account deficits is
usually excessive home demand for imported goods and the absorption of
home-produced goods which may otherwise have been exported, the
government may adopt one or more of the following measures:
• increase interest rates – thereby discouraging borrowing and consequently
tightening and reducing spending power. Higher interest rates also
attract foreign short-term capital.
• open market operations – by selling securities in the open market the
government reduces the amount of money in circulation which diminishes
• special deposits – in the form of directive to the banks to deposit a certain
proportion of their funds with the Bank of England where they are frozen.
This reduces the liquidity of the banks, which in turn restricts bank
lending and diminishes purchasing power
A government can also reduce spending power more directly by means of
higher taxation, hire-purchase controls, etc.
The purpose of devaluing a currency is to make a country’s exports cheaper
to overseas buyers and, at the same time, its imports dearer. This method is
applicable when a system of fixed exchange rates is in place, but is usually
the measure of last resort.
Under a system of floating exchange rates, the exchange value of a
currency will gradually depreciate if it is overvalued, which will have the
same effect as a devaluation. The currencies of developing countries which
are ‘pegged’ by a fixed rate (or within a narrow fixed band) to a more stable
‘hard’ currency, such as the US dollar, are effectively insulated from the
market forces related to its own country’s economy.