OE - Barriers to Trade Lesson

Barriers to Trade

Introduction

The Rules of Trading . . .

There are gains from trade. Total output is greater when countries specialize according to their comparative advantage and trade rather than trying to be self-sufficient. The theory of comparative advantage explains the mutual benefits countries receive from free trade. Policies to promote free trade attempt to achieve the efficiency benefits from free trade. Examples of these efforts include the North American Free trade Agreement (NAFTA), the World Trade Organization (WTO), the European Union (EU), and the Asia-Pacific Economic Corporation (APEC) Forum.

However, other policies interfere with free trade and prevent countries from receiving the efficiency benefits of free trade. For example, countries sometimes impose trade barriers to protect domestic industries. Trade barriers include tariffs and quotas. A quota is a limit on the quantity of imports allowed into a country. A tariff is a tax on imports.

 

What is a Trade Barrier?

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

Trade barriers come in the form of two major categories:

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

Some other examples of trade barriers include:

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

 

Barriers.....Why do we have them?

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.

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.

Watch the presentation below to learn more about trade barriers.

 

 

To Trade or Not to Trade

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.

Watch the video playlist below to learn about trade barriers.

  

 

Review

Review what you have learned by completing the activity below.

 

In Summary . . .

• 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.

 

 

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