Comparative Advantage, Tariffs & Quick Revision
Theory of comparative advantage, tariff vs non-tariff barriers, dumping, anti-dumping, and complete chapter revision.
📖 Theory of Comparative Advantage
The Theory of Comparative Advantage was developed by David Ricardo (1817). It states that countries should specialise in producing goods where they have a lower opportunity cost — even if one country is better at producing everything.
India has a comparative advantage in IT services and pharmaceuticals — lower wages + skilled English-speaking workforce. USA has comparative advantage in aircraft and financial services. So India exports IT services to USA and imports aircraft — both countries benefit from specialisation and trade. This is comparative advantage in action.
🚧 Trade Barriers
| Type | Description | Examples |
|---|---|---|
| Tariff Barriers | Tax on imports — raises price of foreign goods | India’s import duty on gold (15%), electronics |
| Non-Tariff Barriers (NTBs) | Non-tax restrictions on trade | Quotas, licensing, standards, subsidies |
| Quota | Limit on quantity of imports | India’s sugar import quota |
| Subsidy | Government support to domestic producers | India’s agricultural subsidies (MSP, fertiliser) |
| Embargo | Complete ban on trade with a country | USA embargo on Cuba |
⚠️ Dumping & Anti-Dumping
Dumping occurs when a country exports goods at a price below the cost of production or below the domestic price — to capture foreign markets and destroy local competition.
- Anti-dumping duty: Tax imposed to counter dumping — WTO allows this
- India is one of the world’s largest users of anti-dumping measures
- India frequently imposes anti-dumping duties on Chinese goods (steel, chemicals, electronics)
China sells steel in India at ₹30,000/tonne when Indian steel costs ₹45,000/tonne to produce. This is dumping — it destroys India’s steel industry. India imposes anti-dumping duty of ₹15,000/tonne to level the playing field. WTO allows this under the Anti-Dumping Agreement.
📊 Key Trade Concepts
| Concept | Definition |
|---|---|
| Terms of Trade | Ratio of export prices to import prices — improving ToT means exports buy more imports |
| Free Trade | No barriers to trade — WTO’s goal |
| Protectionism | Using tariffs/NTBs to protect domestic industry |
| FTA | Free Trade Agreement — zero/low tariffs between partner countries |
| CEPA | Comprehensive Economic Partnership Agreement — broader than FTA |
| MFN | Most Favoured Nation — WTO principle: treat all members equally |
✅ Complete Chapter 11 Revision Checklist
✅ India’s trade deficit: ~$265 billion (2022-23); top import = crude oil
✅ India’s top export: Petroleum products, IT services, pharmaceuticals
✅ India = world’s largest remittance recipient (~$100 billion/year)
✅ WTO established: January 1, 1995; replaced GATT; HQ Geneva
✅ India joined WTO: January 1, 1995 (founding member)
✅ WTO DG: Ngozi Okonjo-Iweala — first woman, first African
✅ TRIPS: Intellectual property; GATS: Services; TRIMS: Investment measures
✅ IMF + World Bank: Bretton Woods institutions (1944); HQ Washington D.C.
✅ SDR: IMF’s reserve asset; basket of 5 currencies (USD, Euro, Yuan, Yen, GBP)
✅ World Bank Group: IBRD, IDA, IFC, MIGA, ICSID
✅ BRICS: Brazil, Russia, India, China, South Africa; NDB HQ Shanghai
✅ G20: 19 countries + EU + AU; India’s presidency 2022-23; New Delhi Summit
✅ ASEAN: 10 Southeast Asian nations; India-ASEAN FTA (2010)
✅ India withdrew from RCEP (2019) to protect domestic industry
✅ India’s forex reserves: ~$600 billion (2023); 4th largest in world
✅ India’s exchange rate: Managed float (dirty float)
✅ Comparative advantage: David Ricardo (1817) — specialise in lower opportunity cost goods
✅ Dumping: Exporting below cost; Anti-dumping duty: WTO-permitted counter-measure
✅ India’s FTP 2023-28: Target $2 trillion exports by 2030
✅ India-UAE CEPA (2022): India’s first FTA in a decade