A trade barrier is any obstacle that limits the movement of trade flows between countries. Generally, the purpose of this measure is to protect the domestic economy.
- The government-imposed barriers. This is a deliberate action to make trading more difficult. See rates, quotas, embargoes, and standards.
- Natural resistance, such as inaccessible geographic areas.
And, in economic textbooks, trade barriers usually refer to the first point.
Types of trade barriers
Several types of trade barriers are deliberately designed. For example, the government could issue tariffs – special taxes imposed on imported goods – to limit goods from abroad.
Other barriers, such as quota restrictions and Voluntary Export Restraints (VER) agreements, have also become increasingly common.
Other nontariff barriers can also take forms such as health and safety standards, labeling requirements, and weights and measurement rules. Although these barriers are not always intended to restrict trade, the need to modify products to conform to requirements comes with costs.
Trade barriers are also often imposed by public procurement policies, which often give domestic suppliers preferential treatment over foreign suppliers due to legal requirements.
Furthermore, certain types of barriers prevent trade completely, for example, a trade embargo.
Import tariffs are taxes imposed on imports.
Imports are a source of supply in an economy. In an open economy, there are two sources of goods and services, namely domestic and import, to meet domestic needs. If domestic production does not fit domestic demand, the shortage is met by imports.
When the government imposes import tariffs, import product prices go up. As prices become more expensive, domestic consumers reduce import demand.
For exporters, tariffs are detrimental because their goods are less competitive. Conversely, for domestic producers, it is an opportunity to increase production and become more competitive. That way, they have better competitiveness in meeting domestic needs.
Nontariff barriers involve rules and regulations that make trading more difficult. For example, quotas, licensing, packaging, and labeling requirements; sanitary restrictions; and standard domestic inspection.
Quotas restrict the number of goods imported by a country for a certain period. When quotas are enforced, each importing company receives an import license, which determines the amount imported.
Voluntary Export Restraints (VERs)
Voluntary export curbs are similar to quotas. In this case, the partner countries agree to limit the number of exports. While the quota is imposed by the importing country, VER is set by the exporting country.
For example, in 1981, the United States and Japan adopted this agreement. Japan agreed to limit exports of 1.68 million cars to the US per year.
But, ironically, such restrictions make Japanese exporters more profitable. They can raise prices because the quantity of supply is more limited. Another consequence was that Japanese companies began assembling cars in the US and forging partnerships with American automakers.
Government subsidies can provide a competitive advantage for local producers. For example, the European Union offers EUR39 billion to farmers in the form of direct subsidies. The provision of these subsidies makes the EU’s agricultural exports more competitive in international trade.
Furthermore, there are also export subsidies. This is a payment made by the government to domestic exporters for certain goods. Its main objective is to stimulate exports.
On the negative side, export subsidies interfere with free-market mechanisms and may result in a trade pattern that differs from that determined by comparative advantage. Furthermore, domestic producers will be more inclined to export their output than to sell it in the domestic market.
This is a prohibition to transact with certain countries. The main reason is usually political and aims to suppress the government of a nation. For example, after Fidel Castro came to power, the US imposed a trade embargo on Cuba. No goods entered from Cuba into the United States or vice versa.
Trade barrier arguments
Trade barriers are usually used to protect the domestic economy, especially strategic industries. Obstacles such as tariffs or taxes can benefit governments, domestic producers, and national interests.
However, trade restriction policies often come at the expense of consumers. They are more likely to bear higher prices for goods because of less supply.
Apart from economic reasons, the imposition of restrictions is also in response to partner countries’ similar actions. For example, in the case of dumping, a country will fight it through anti-dumping policies.
Protecting domestic employment
Some industries are highly strategic for an economy because they absorb a lot of labor. An example is the car industry.
The abundance of imported goods threatens the domestic industry. If the pressure on imports is so great, domestic companies can go bankrupt and close down. As a consequence, unemployment has increased.
This pressure can be very populist. I mean, a high increase in the unemployment rate can put pressure on the government. High unemployment is very unpopular in society and can worsen the electability of the government in power. As a result, like it or not, the government will intervene to secure the domestic industry and employment.
The government can impose tariffs on products that are considered to be harmful to society. Apart from going through tariffs, the government can also set stricter health requirements and product standards.
Save national security
Trade barriers also aim to protect strategic industries for national security reasons. For example, the trade war between China and the United States under Donald Trump’s administration started with concerns about the United States’ national security.
Retaliation against trading partners
A country can also impose trade restrictions in retaliation for unfair competitive behavior by trading partners. For example, a government imposes tariffs on products suspected of being dumping. We call such a policy anti-dumping.
Dumping is the practice of selling at a lower price abroad than the price at home. Because the foreign market is usually more massive than the domestic market, dumping practices allow exporters to generate higher profits.
Dumping can be predatory pricing by large multinational companies to gain market share. Such large companies can bear losses in the short term compared to smaller players.
The purpose of dumping is to force companies in the destination country to bankruptcy. Exporters push down market prices below the average cost of producers in the destination country. Once they are gone, the exporter enjoys monopoly power and is likely to increase profits.
Because dumping is very detrimental to domestic producers, the government would impose trade tariffs. Tariffs increase the price of imported goods.
The increased price of imported goods keeps domestic producers competitive. That prevents them from going bankrupt. If these tactics are ineffective, the government can impose sanctions on certain companies and prohibit them from doing business with the domestic economy.
Support for early-stage industry (infant industry argument)
Early-stage industries are vulnerable to competitive pressures, especially from foreign players (through imports). Hence, this industry often requires high commitment and support from the government to grow. Support becomes even more significant if the industry is up-and-coming economically in the future.
To protect the industry, the government could impose trade tariffs. Apart from that, the government can also subsidize players so that they can grow big and be able to compete with foreign players.