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.
Difference between tariff and non-tariff barriers
Trade barriers fall into two categories: tariff and non-tariff barriers. The following are the differences between the two.
- Take the form of taxes or duties. It becomes a source of income for the government.
- Increase the cost of imported goods. As a result, the price of goods increases when they enter the domestic market and makes them uncompetitive.
- Conducted by the importing country.
- Simpler. The process usually does not involve complex administration.
- Does not contribute to profits for the company. Even though the price is higher, it is a tax and becomes government revenue.
- In the form of non-tax aspects. They may take the form of volume restrictions, product standard requirements, and licensing. Since it does not collect taxes or duties on products, it does not generate revenue for the government.
- Affect trading volume. Sometimes, it also affects the price of imported goods indirectly. For example, lower import quotas reduce supply and raise prices on the domestic market.
- Can be imposed by the exporting country as well as the importing country. For example, in the voluntary export restraints, the exporting country agrees to limit goods to the partner country.
- More complex. Some require complex administration and coordination among more officials.
- Contribute to the importer’s profit. For example, in the case of quotas, the firm captures the benefits of a price increase due to a reduced supply volume.
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 for products that are dangerous and do not meet domestic standards. For example, 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:
- Local content requirements
- Import quotas
- Export subsidies
- Exchange rate devaluation
- Voluntary export curbs
- Administrative barrier
Governments can use licenses to limit who can import or export. To be able to conduct international trade, importers or exporters must have a license from the government.
The government requires products to meet specific domestic standards. They impose standards on product classification, labeling, and testing. Standardization aims to protect consumer safety and health, national security, and the domestic environment.
Local content requirements
The government requires export products to contain a certain percentage of local raw materials. It usually aims to develop the upstream industry.
When increasing local content requirements, the demand for domestic raw materials increases. That spurred business activities, creating more jobs and incomes at home.
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.
In doing so, the government may set a fixed quota. That limits 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%.
An embargo is a total ban on transactions with individual countries. It may aim to limit imports of dangerous goods such as dangerous drugs and endangered species.
More often, embargoes are political and economic measures. Countries with strong economic and political powers such as the United States, often apply them to suppress and isolate other countries. For example, the United States imposes an embargo and prohibits selling aircraft and spare parts to Iranian airlines.
Subsidies can take the form of low-cost loans, direct payments, tax breaks for exporters, or government-financed international advertising. It contributes to reducing operating costs and allows domestic product prices to be more competitive in international markets.
The primary purpose of subsidies is to stimulate exports. When exports increase, domestic industries can absorb more labor and generate more income.
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 exchange rate relatively weak against other currencies and makes export products cheaper for overseas buyers. As a result, it stimulated 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 by exporting countries. The exporting country agrees to limit shipments’ volume, usually because 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 exports of 1.68 million cars to the US per year. The figure then increased to 2.3 million in 1985.
The government imposed complicated bureaucratic procedures to limit imports. Companies have to go through more complicated and expensive customs procedures when shipping products from one country to another. Ultimately, it increases administrative costs and impedes the international flow of goods.
Pros and cons of non-tariff barriers
Some of the positive impacts of non-tariff barriers are:
First, the domestic market creates more jobs. The decline in imports should divert demand for domestic products.
Domestic firms should increase production to make up for the shortfall due to fewer imports. To increase production, they have to invest in capital goods and recruit more local workers. As a result, they create a multiplier effect on the economy.
Second, non-tariff barriers protect new or strategic industrial developments. That provides sufficient room for them to grow, achieve economies of scale, and be competitive in the international market. Finally, they create more jobs and income for the domestic economy.
Third, non-tariff policies are more effective in limiting import volumes. Under quotas, for example, the main target is the quantity of imports. When the government tries to reduce imports, quotas are more effective than tariffs because they directly impact import volumes.
However, non-tariff barriers also have negative impacts, including:
First, the government cannot generate extra income. Under the tariff, the government imposes a tax on imported goods. On the other hand, it does not apply to non-tariff barriers.
Second, non-tariff barriers limit the functioning of the free market. Free market advocates view this as causing the inefficient allocation of resources in global markets.
Countries should specialize and trade products that have a comparative advantage. That way, free trade results in maximum benefits. However, because the government intervened through non-tariff barriers, such benefits diminished.
Third, the cost of running a business increases. The company has to fulfill several administrative requirements, such as product standardization and complicated customs procedures.
Fourth, exporters must face unfair competition in partner countries. Non-tariff barriers are beneficial for domestic companies but put foreign companies at a disadvantage.
Exporters must sell fewer goods under the quota policy. When exposed to quota restrictions, they have to find other markets to sell their products. If not, they have to cut production, lowering their income and profits.
Also, devaluation policies by destination countries make exporters’ products more expensive. They are less competitive in the destination market.
Fifth, the market faces scarcity. When the government limits quotas, the market supply decreases. If domestic companies cannot compensate by increasing production, then market prices will rise to consumers’ detriment.
Sixth, competitiveness weakens in the long term. Competition is essential for promoting innovation, efficiency, and productivity. Indeed, initially, government protection protected industry and domestic jobs.
However, in the long run, the lack of competition hinders the competitiveness of domestic firms. They have no incentive to spur innovation, streamline production, and build competitiveness. The negative effect is a limited selection of goods, low-quality goods, and high prices.
Seventh, non-tariff barriers can lead to trade wars. Partner countries can pursue similar policies to protect their industries. When the escalation of war widened, it upset the balance of the global economy.