Most economists agree that free and open trade benefits all countries that participate. Sometimes, however, countries believe it is to their advantage to restrict trade with other countries. Usually this results from a desire to show preference to domestic industries or to punish other countries for some political or economic reason. When countries desire to limit trade with another country or group of countries, they do so by erecting a trade barrier. Trade barriers take many forms but the most common are these:
Tariffs are a tax on imports. They operate by imposing an extra cost, or tax, on each unit of some specific good that is brought into a country from the targeted country. In March 2018, the United States placed a 25% tax on imported steel from most countries to encourage steel consumers to buy from U.S. companies.
Quotas are a limit on the number of a certain good that can be imported from a certain country. For example, the U.S. might limit the number of Japanese cars that can be imported to 1 million units.
Embargoes occur when one country bans trade with another country. This can be limited to one specific good like oil or can include all goods from a specific country. Embargoes are relatively rare, but the U.S. imposed a trade embargo on Cuba in 1962.
Standards involve making sure that all goods imported from a country or region meet specific criteria. The criteria may relate to health and safety issues, like not allowing the use of certain pesticides, or require certain labor conditions or ban products containing materials like ivory.
Subsidies are a direct payment from a government to industries within their own country. For example, farmers might receive financial help from the U.S. government to make sure they can grow crops at a competitive price.
Trade barriers are often enacted to protect industries and workers within a country. This is referred to as protectionism. For example, tariffs, quotas and embargoes make foreign goods more expensive and less available. Goods produced domestically, which are exempt from the barriers, are more competitive in this environment. Subsidies protect domestic industries by giving them direct payments to help them lower production costs. Trade barriers allow domestic industries to survive and compete with foreign producers that might be able to produce a good at a lower cost.
There are some compelling reasons to enact trade barriers. Sometimes they are used by countries to encourage and protect domestic industries that are just developing and that will take some time to become globally competitive. Other times they are used to punish countries for unfair trade practices such as intellectual property theft or distributing unsafe products. But trade barriers have costs as well, making foreign goods more expensive and less available for domestic consumers who may prefer them. Additionally, trade barriers may stifle domestic innovation and efficiency by limiting the foreign competition that domestic industries must face.
There are also very significant reasons not to enact trade barriers. Sometimes trade barriers are put in place simply as political favors. These barriers often have little economic principal behind them. Barriers like subsidies can also artificially lower the global price of goods and services to a point that drives some producers out of business. Once enacted, trade barriers can be extremely difficult to remove because the industries protected have high incentives to keep them in place.
Advanced
Trade barriers can be shown graphically. Graph 38-1 shows a market for grain in free trade. With no trade, the market price of grain would be P1. Because of free trade, however, the global price is P2 and the quantity of grain between Q1 and Q2 is imported. Consumers get more grain at a cheaper price. However, domestic producers of grain cannot compete as well at that low price.
If the producers successfully lobby for a tariff, then a tax will be placed on imported grain, thus raising the price of world grain. Graph 38-2 demonstrates the effects of this tariff. Now, the price of the grain in this country is P3. At this price, more producers are willing and able to provide grain and the quantity of grain imported shrinks to the difference between Q4 and Q3. You may also observe that at the higher price consumers will purchase less grain. For more on why this occurs, please visit Concept 17 – the Law of Demand.
In general, trade barriers keep firms from selling to one another in foreign markets. The major obstacles to international trade are natural barriers, tariff barriers, and nontariff barriers.
Popular myth: Trade barriers are good for the economy. Economic reality: Trade barriers benefit some people—usually the producers of the protected good—but only at even greater expense of others—the consumers. See this satire on lobbying: “A Petition”, by Frédéric Bastiat (pronounced bas-tee-AH).
TANC classifies foreign trade barriers within four broad types: Border Barriers, Technical Barriers to Trade, Government Influence Barriers, and Business Environment Barriers.
Trade barriers are restrictions or limitations faced by parties involved in a trade. In economics, these barriers can be tangible or induced by governments, and they include border blockades, demonstrations, tariffs, quotas, embargoes, and subsidies.
The most common barrier to trade is a tariff–a tax on imports. Tariffs raise the price of imported goods relative to domestic goods (good produced at home). Another common barrier to trade is a government subsidy to a particular domestic industry. Subsidies make those goods cheaper to produce than in foreign markets.
Advantages to trade protectionism include the possibility of a better balance of trade and the protection of emerging domestic industries. Disadvantages include a lack of economic efficiency and lack of choice for consumers. Countries also have to worry about retaliation from other countries.
Skilled workers in the exporting sector, however, lose in the long run and lose even more so in the short run. The workers who benefit most from an increase in tariffs are the unskilled workers in the import-competing sector.
Tariffs hurt consumers because it increases the price of imported goods. Because an importer has to pay a tax in the form of tariffs on the goods that they are importing, they pass this increased cost onto consumers in the form of higher prices.
In short, tariffs and trade barriers tend to be pro-producer and anti-consumer. The effect of tariffs and trade barriers on businesses, consumers, and the government shifts over time. In the short run, higher prices for goods can reduce consumption by individual consumers and by businesses.
Trade contributes to global efficiency. When a country opens up to trade, capital and labor shift toward industries in which they are used more efficiently. That movement provides society a higher level of economic welfare.
When countries erect barriers to trade, such as tariffs, they raise prices and divert resources away from relatively efficient economic activities towards less efficient economic activities.
Define trade barriers such as tariffs, quotas, embargoes, standards, and subsidies. Identify costs and benefits of trade barriers to consumers and producers over time.
Instruments of trade policy, such as tariffs, quotas, and subsidies, can significantly impact a national economy. They can protect domestic industries from foreign competition, affect the balance of trade, influence the price level of goods, and impact jobs and income distribution within the economy.
There are three types of trade barriers: Tariffs, Non-Tariffs, and Quotas. Tariffs are taxes that are imposed by the government on imported goods or services. Meanwhile, non-tariffs are barriers that restrict trade through measures other than the direct imposition of tariffs.
What Are the Main Types of Trade Barriers? The main types of trade barriers used by countries seeking a protectionist policy or as a form of retaliatory trade barriers are subsidies, standardization, tariffs, quotas, and licenses.
There are three main barriers on the way to international communication: linguistic, cultural and psychological. All are extremely difficult for non-native speakers.
Tariffs, quotas, and non-tariff barriers lead too few of the economy's resources being used to produce tradeable goods. An export subsidy can also be used to give an advantage to a domestic producer over a foreign producer.
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