Area VI
International Exchange: Freedom to Trade with Foreigners

A Taxes on International Trade (weight .558)
   (i) Revenue from Taxes on International Trade as a Percent of Exports Plus Imports (weight .214)
   (ii) Mean Tariff Rate (weight .227)
   (iii) Standard Deviation of Tariff Rates (weight .117)

B Non-tariff Regulatory Trade Barriers (weight .303)
   (i) Percent of International Trade Covered by Non-tariff Trade Restraints (weight .198)
   (ii) Actual Size of Trade Sector Compared to the Expected Size (weight .105)

C Difference between the Official Exchange Rate and the Black Market Rate (weight .139)

The primary factors limiting the freedom of individuals and businesses in one nation from trading with parties in another are tariffs, non-tariff trade restraints, and exchange rate controls. The components of this area reflect all of these factors.

Tariffs and taxes on exports drive a wedge between what the seller receives and what the buyer pays, and thereby limit both trade and economic freedom. Large revenue (from taxes on international trade) relative to the volume of trade is indicative of high tariff rates. However, sometimes this figure can be misleading. Prohibitive tariffs--that is, exceedingly high tariffs that effectively prohibit trade--will raise little or no revenue. Inclusion of the mean and standard deviation components will pick up this factor. Working together, the three tariff-related variables allocate higher ratings to countries with low, uniform tariffs and lower ratings to those with high, widely dispersed tariff rates. Since the latter restrains trade by a larger amount, countries with this tariff rate structure are given lower ratings.

Nations may also restrain trade through the use of quotas, monopoly grants, and various other types of non-tariff trade barriers. The components on the share of international trade covered by non-tariff barriers and the actual size of the trade sector relative to what would be expected (given the country's geographic size, population, and location) will identify nations imposing such restrictions and reduce their rating in this area.

Finally, exchange rate controls can also be a major obstacle to trade. If people are going to trade with outsiders, they must be able to convert their domestic currency to foreign exchange (other currencies). The black market exchange rate indicates the degree to which exchange rate controls limit trade with foreigners. The larger the black market premium, the lower the rating.

All of the variables in this area are continuous. They were transformed to the zero-to-10 scale in the manner previously described. (Note: as in the case of the monetary variables, the presence of two or three extreme observations made it necessary to set upper limits for the range in order to avoid concentration of component ratings near 10. See "Explanatory Notes and Data Sources" for additional details.) The numbers above in parentheses e.g., (weight .558), represent the portion of the area rating that is determined by a specific component. These values were determined by principal component analysis. The 1997 ratings for this area are indicated on the following page.

Area VI Graphic: International Exchange: Freedom to Trade with Foreigners, 1997

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Last Modified: Wednesday, October 20, 1999.