REV - International Economics

International Economics

Barriers to Trade

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

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.

Balance of Trade

If exports exceed imports, you get a trade surplus which is considered a “favorable balance of trade”.
If imports exceed exports, you get a trade deficit which is considered an “unfavorable balance of trade”.

Favorable/unfavorable trade balances

A “favorable” balance of trade is not entirely good, however. We cannot buy as much foreign goods now (since our dollar is worth less) so foreign companies don’t get as much business from us.
However, when foreign prices rise, Americans turn to American companies to buy things from, helping American companies make more money.
Likewise, a “unfavorable” balance of trade isn’t entirely bad either. Since our dollar has grown in value, we can buy more foreign goods, so foreign companies get more money.
However, because of cheaper foreign goods, American companies won’t get as much business (or they have to lower prices), so they don’t get as much money.

If exports exceed imports, you get a trade surplus which is considered a “favorable balance of trade”. If imports exceed exports, you get a trade deficit which is considered an “unfavorable balance of trade”.

A “favorable” balance of trade is not entirely good, however. We cannot buy as much foreign goods now (since our dollar is worth less) so foreign companies don’t get as much business from us. However, when foreign prices rise, Americans turn to American companies to buy things from, helping American companies make more money.

Likewise, a “unfavorable” balance of trade isn’t entirely bad either. Since our dollar has grown in value, we can buy more foreign goods, so foreign companies get more money. However, because of cheaper foreign goods, American companies won’t get as much business (or they have to lower prices), so they don’t get as much money.

Exchange Rates

When the currency depreciates, then American goods seem cheaper to foreigners, so they will buy more, increasing exports, and making the trade balance “more favorable”.
Likewise, when the currency appreciates, American goods seem more expensive to foreigners, and foreign goods seem cheaper to Americans, so imports increase and the trade balance becomes “less favorable”.

Flexible exchange-rate system: rates at which national currencies are exchanged for one another are determined by demand and supply and in which no government intervention occurs.

Fixed exchange-rate system: governments determine rates at which currencies are exchanged and make necessary adjustments in their economies to ensure that these rates continue.

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