BUS101: Introduction to Business

Trade barriers are government-induced restrictions on international trade, which generally decrease overall economic efficiency.

LEARNING OBJECTIVES

Explain the different types of trade barriers and their economic effect

KEY TAKEAWAYS

Key Points

• Trade barriers cause a limited choice of products and, therefore, would force customers to pay higher prices and accept inferior quality.
• Trade barriers generally favor rich countries because these countries tend to set international trade policies and standards.
• Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency, which can be explained by the theory of comparative advantage.

Key Terms

• quota: a restriction on the import of something to a specific quantity.
• tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.

Trade barriers are government-induced restrictions on international trade. Man-made trade barriers come in several forms, including:

• Tariffs
• Non-tariff barriers to trade
• Import licenses
• Export licenses
• Import quotas
• Subsidies
• Voluntary Export Restraints
• Local content requirements
• Embargo
• Currency devaluation
• Trade restriction

Most trade barriers work on the same principle–the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results.

A port in Singapore: International trade barriers can take many forms for any number of reasons. Generally, governments impose barriers to protect domestic industry or to "punish" a trading partner.

Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency. This can be explained by the theory of comparative advantage. In theory, free trade involves the removal of all such barriers, except perhaps those considered necessary for health or national security. In practice, however, even those countries promoting free trade heavily subsidize certain industries, such as agriculture and steel. Trade barriers are often criticized for the effect they have on the developing world. Because rich-country players set trade policies, goods, such as agricultural products that developing countries are best at producing, face high barriers. Trade barriers, such as taxes on food imports or subsidies for farmers in developed economies, lead to overproduction and dumping on world markets, thus lowering prices and hurting poor-country farmers. Tariffs also tend to be anti-poor, with low rates for raw commodities and high rates for labor-intensive processed goods. The Commitment to Development Index measures the effect that rich country trade policies actually have on the developing world. Another negative aspect of trade barriers is that it would cause a limited choice of products and, therefore, would force customers to pay higher prices and accept inferior quality.

In general, for a given level of protection, quota-like restrictions carry a greater potential for reducing welfare than do tariffs. 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. Export subsidies tend to have a particularly strong negative effect because in addition to distorting resource allocation, they reduce the economy's terms of trade. In contrast to tariffs, export subsidies lead to an over allocation of the economy's resources to the production of tradeable goods.

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Source: Boundless
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