Exchange Control and Tariffs in Forex

Exchange control being generally administered by the executive is more flexible than the tariff which requires legislative approval. It can be adjusted to changing conditions frequently and promptly.

Some of the invisible items in the balance of payments are more easily amenable to exchange control than to other methods of restriction. Tourist expenditure, for instance, can be taxed only if the exact amount spent abroad is known. This can be known better if there exists strict exchange control and money to be spent abroad is sanctioned by the exchange control authority.

This advantage of exchange control over tariffs, of course, does not exist in countries in which the executive is authorized to vary tariffs within broad limits and to levy temporary taxes for taking advantage of the changed circumstances

Discrimination between countries, categories of commodities, categories of importers and exporters can be much finer under exchange control because foreign exchange for each and every transaction has to be sanctioned by the exchange control authorities. Discrimination through tariffs is further handicapped by the most favored nation treaties.

Under exchange control even if it is evident to all that discrimination is being practiced, there is no unambiguous, clear and rational criteria to prove its existence or otherwise; if a country desires, it can evade the most favored nation commitments without much difficulty.

Exchange control is more effective than tariffs as an instrument of commercial bargaining. Imports can be regulated more precisely and promptly with the help of exchange control than with that of tariffs.

Exchange control agreements can be kept secret. This is not possible in case of tariff agreements because generally, they require legislative approval. Further, it is essential that traders should know in advance the rates of duty which they will have to pay on their imports and exports; this requires publication of tariff schedules.

The scope of exchange control is much wider than that of quotas or tariffs. Quotas and tariffs, generally, apply only to merchandise trade. In addition to merchandise trade, exchange control can cover all other international transactions which are not easily amenable to control with tariffs and quotas, viz., services, tourist expenditure, diplomatic expenditure, capital movements etc. Because of its comprehensive nature, exchange control is a better instrument of regulating international payments.

Exchange control, of course, suffers from the disadvantage that it is not so easily amenable to selective control as are the tariffs and quotas.

Selective exchange control in the form of multiple exchange rates requires a cumbersome administrative machinery to collect foreign exchange proceeds from exports, to distribute the same among importers, to see that the foreign exchange is spent on the products for which it is sanctioned and there are no arbitrage dealings (i.e., buying foreign exchange in the cheap market in order to sell it in the dear market) etc.