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What’s it: Non-tariff barrier is an obstacle to restricting international trade through non-tax or duty instruments. Together with tariff barriers, they form trade barriers.
Non-tariff barriers have an impact on the flow of goods into and out of a country. Some countries use them to protect the domestic economy. While others use them as a political economy strategy to counter similar practices by partner countries.
Critics say non-tariff barriers diminish the benefits of free trade. The allocation of global economic resources is inefficient. Profits in one country become a cost for other countries. Also, compared to tariff barriers, non-tariff barriers do not generate revenue for the government.
Tariff vs. non-tariff barriers
Trade barriers can be broadly categorized into two main groups: tariff barriers and non-tariff barriers (NTBs). While both aim to restrict international trade, they differ in their form, impact, and implementation.
Tariff barriers
Taxes and duties: Tariffs are essentially taxes or duties imposed on imported goods. This additional cost raises the price of the imported product in the domestic market, making it less competitive compared to domestically produced goods. The government collects this revenue, potentially using it to fund social programs or other government initiatives.
Straightforward implementation: Tariff barriers are typically implemented through customs duties, which are relatively straightforward to administer. The import tax rate is usually a fixed percentage of the good’s value, making the process more transparent and predictable for businesses involved in international trade.
Limited Impact on profits: While tariffs increase the price for consumers, the additional cost is not directly captured as profit by the importing companies. The revenue generated goes to the government, not the private sector.
Non-Tariff Barriers (NTBs)
Non-tax measures: Unlike tariffs, NTBs are not direct taxes on imported goods. They can take various forms, such as quotas (restrictions on import volume), licensing requirements (obtaining permits to import), product standards (safety or quality regulations), and subsidies (financial support for domestic industries).
Indirect price impact: While NTBs don’t directly add a tax, they can indirectly affect import prices. For example, quotas that limit the amount of a good that can be imported can create a shortage in the domestic market, driving prices up due to basic principles of supply and demand.
Implementation complexity: NTBs can be more complex to implement and enforce compared to tariffs. Licensing procedures may involve multiple government agencies, and standards compliance can require extensive testing and certification. This complexity can also create uncertainty for businesses, making it difficult to plan and budget for international trade activities.
Profit potential for companies: In some cases, NTBs can create profit opportunities for companies that are able to navigate the regulations and obtain import licenses or meet stringent standards. For instance, if a quota restricts the import of a certain product, domestic companies that can produce that good may benefit from higher prices due to the limited competition.
Reasons for non-tariff barriers
Several reasons why the government imposed non-tariff barriers.
First, the government wants to protect domestic employment. High imports are intensifying competition and threatening domestic industries. When it cannot compete, the industry dies and leaves more unemployed in the country.
Second, barriers aim to protect domestic consumers, security, and the environment. The government restricts imports of dangerous products that do not meet domestic standards. These products harm consumer health or pollute the domestic environment. Likewise, the defense industry often enjoys a significant protection level because it is strategic for national security.
Third, the government is trying to protect the new industry. By limiting imports, the government reduces competitive pressure on the infant industry. That way, the industry can grow, reach a mature stage, and be more competitive in the international market.
Fourth, trade barriers as a retaliatory reaction. The government protects it from unfair competition by partner countries. When partner countries impose barriers, it is in the government’s interest to take similar steps.
Types of non-tariff barriers
Various types of non-tariff barriers exist, and here are some of them:
- License
- Standardization
- Local content requirements
- Import quotas
- Embargo
- Export subsidies
- Exchange rate devaluation
- Voluntary export curbs
- Administrative barrier
License
Governments can use licenses to limit who can import or export goods, acting as a gatekeeper for international trade. To obtain a license, companies may need to meet specific criteria, such as having a proven track record, a minimum level of experience, or financial stability.
This process can be time-consuming and expensive, potentially creating a barrier to entry for smaller businesses or new entrants to the import/export market. Furthermore, licensing requirements can be subject to change, adding an extra layer of uncertainty for businesses involved in international trade.
Standardization
The government requires products to meet specific domestic standards to ensure consumer safety, health, national security, and environmental protection. These standards can cover various aspects of a product, including its classification, labeling, and testing procedures.
While standardization can be beneficial for consumers, overly stringent or complex standards can create significant hurdles for foreign companies. They may need to redesign their products, conduct additional testing, or obtain specific certifications to comply with domestic regulations. This can increase costs and make it difficult for foreign companies to compete in the market.
Local content requirements
The government may require a certain percentage of raw materials used in export products to be sourced domestically. This policy aims to support and develop domestic industries that supply these raw materials.
For instance, a country might require that a certain percentage of the fabric used in garments for export be produced domestically. When local content requirements are implemented, it can boost domestic industries, create jobs in the upstream sector, and potentially generate additional tax revenue.
However, these requirements can also increase production costs for exporters, making their products less competitive in the international market. Additionally, local industries supplying raw materials may not be able to meet the demand or produce high-quality materials, hindering overall export competitiveness.
Import quota
Through quotas, the government requires a limit on the volume of imported products entering the domestic market. To enforce it, the government has granted import licenses to several companies. The government limits the import volume for each company. They can send goods from any country until they reach the quota.
The government may set a fixed quota to limit the maximum volume that can be shipped from abroad. For example, the government limits sugar imports by 1 million tonnes.
Alternatively, the government applies an additional tariff-rate quota. In this case, the government still allows the import volume to exceed the quota but imposes higher tariffs. For example, sugar imports may exceed 1 million tonnes. Still, importers must pay an import duty of 30%, which is higher than the normal rate of 10%.
Embargo
An embargo is a complete ban on trade with a specific country. This is a severe measure typically implemented for political reasons or to pressure a target country to change its policies.
Embargoes can restrict the import of all goods or target specific products, such as weapons or luxury goods. They can have a significant economic impact on both the imposing country and the target country, disrupting supply chains, limiting access to essential goods, and hindering economic growth. For instance, the US embargo on Cuba has limited the flow of goods and services between the two countries for decades, impacting both economies.
Export subsidies
Export subsidies are financial incentives provided by the government to encourage companies to export their products. These subsidies can take various forms, such as low-cost loans, direct cash payments, tax breaks, or government-funded international advertising campaigns.
By reducing production and export costs, subsidies allow companies to offer their products at lower prices in the international market, making them more competitive. This can lead to increased exports, job creation in the export sector, and a boost to the overall economy. However, export subsidies can distort fair competition in the international market, disadvantage companies from other countries, and lead to trade tensions. Additionally, they can be a significant drain on government resources, raising concerns about the long-term economic sustainability of such policies.
Exchange rate devaluation
The government intervenes in the foreign exchange rate to influence exports and imports. For example, China devalues the Yuan, so its export products are more competitive in the global market.
Devaluation makes the Yuan’s exchange rate relatively weak against other currencies, making export products cheaper for overseas buyers. As a result, it stimulates exports.
On the other hand, devaluation makes imported products more expensive for Chinese people. They then switch to local products. As a result, imports fell.
As a result, devaluations produce a significant trade surplus. In 2019, China reported a trade surplus of $421.9 billion. The trade surplus contributed to China’s ample foreign exchange reserves, reaching $3.2 trillion in September 2020, and is the largest in the world.
Voluntary export restraints
Voluntary export restraints are quota policies adopted by exporting countries. Under these, the country agrees to limit the volume of shipments, usually as part of a political alliance or trade agreement.
Take, for example, the policy between Japan and the United States in 1981. Japan agreed to implement voluntary export restraints and limit its exports to the US to 1.68 million cars per year. The figure then increased to 2.3 million in 1985.
Administrative barriers
The government imposed complicated bureaucratic procedures to limit imports, effectively creating a bureaucratic maze for companies. These procedures can involve extensive paperwork, multiple inspections by different government agencies, and unpredictable wait times. Companies navigate a complex web of regulations that can add significant time and expense to the import process.
Ultimately, these administrative burdens increase the cost of importing goods, making them less competitive with domestically produced products. This can stifle international trade and limit consumer choice, as fewer imported options are available due to the challenges and costs associated with navigating the import bureaucracy.
Impacts of non-tariff barriers
Non-tariff barriers (NTBs) are government-imposed restrictions on international trade that don’t directly involve taxes or duties. While they aim to achieve specific goals, NTBs can have both positive and negative consequences.
Potential benefits of non-tariff barriers
Job creation: One of the main arguments for NTBs is their potential to create jobs. By limiting imports, NTBs can encourage domestic production, leading to increased demand for labor in those industries. This can be particularly appealing to countries with high unemployment rates.
Infant industry protection: NTBs can act as a shield for new or emerging domestic industries. By limiting competition from established foreign companies, NTBs can provide these “infant industries” with time to grow, develop economies of scale, and become more competitive in the global market.
Control over imports: Governments can use NTBs to exert more control over the volume and type of goods entering the country. This can be useful for managing factors like national security concerns or environmental protection. For instance, quotas can limit the import of hazardous materials or restrict the influx of weapons.
Potential drawbacks of non-tariff barriers
Higher costs for consumers: NTBs can often lead to higher prices for consumers. When import quotas or licensing requirements restrict the supply of goods, basic principles of supply and demand take hold. With fewer imported options available, domestic producers may face less competition, potentially raising prices. Additionally, the added costs associated with complying with NTBs, such as licensing fees or complex standards, can be passed on to consumers through higher prices.
Inefficiency and reduced innovation: Sheltered from intense foreign competition by NTBs, domestic industries may have less incentive to innovate and improve efficiency. This can lead to a situation where domestic producers become reliant on protectionist measures rather than focusing on continuous improvement. Consumers may end up with a smaller selection of goods, potentially of lower quality, at higher prices.
Limited choice for consumers: By restricting imports, NTBs can limit the variety and choice of goods available to consumers. This can be a significant drawback, as consumers lose out on the potential benefits of exposure to a wider range of products and potentially lower prices from foreign competitors.
Unfair competition and trade wars: NTBs can create an uneven playing field, favoring domestic companies over foreign competitors. This can lead to trade retaliation from other countries, escalating into trade wars. Trade wars disrupt global supply chains, raise prices for consumers worldwide, and hinder economic growth.
