Understanding Trade Barriers and Tariffs: Impact and Types

Posted on Jan 25, 2025 in Economy

Trade Barriers

  • A government-imposed restriction on the free international exchange of goods or services.
  • Economic areas like the E.U. do not have them.

Tariffs

  • A tax.
  • It adds an extra cost to the cost of imported goods.
  • One of several trade policies that a country can enact.

Tariffs: Most Common Reasons

  • Protecting Domestic Employment
  • Protecting Consumers
  • Infant Industries
  • National Security
  • Retaliation

Protecting Domestic Employment

  • The levying of tariffs is often highly politicized.
  • The possibility of increased competition from imported goods can threaten domestic industries.
  • These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment and a less happy electorate.
  • The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply.
  • In economics, however, countries will continue to produce goods until they no longer have a comparative advantage (not to be confused with an absolute advantage).

Protecting Consumers

  • A government may levy a tariff on products that it feels could endanger its population.

Infant Industries

  • The use of tariffs to protect infant industries can be seen by the Import Substitution Industrialization (ISI) strategy employed by many developing nations.
  • The government of a developing economy will levy tariffs on imported goods in industries in which it wants to foster growth.
  • This increases the prices of imported goods and creates a domestic market for domestically produced goods.
  • Protecting those industries from being forced out by more competitive pricing.
  • It decreases unemployment and allows developing countries to shift from agricultural products to finished goods.
  • This reason can also apply to developed countries that start new industries.

National Security

  • Employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security.
  • Defense industries are often viewed as vital to state interests and often enjoy significant levels of protection.

Retaliation

  • Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules.

Types of Tariffs

Specific Tariffs

  • A fixed fee levied on one unit of an imported good is referred to as a specific tariff.

Ad Valorem Tariffs

  • A percentage of that good’s value.

Licenses

  • A license is granted to a business by the government and allows the business to import a certain type of good into the country.

Import Quota

  • A restriction placed on the amount of a particular good that can be imported.

Voluntary Export Restraints (VER)

  • This type of trade barrier is “voluntary” in that it is created by the exporting country rather than the importing one.
  • A voluntary export restraint is usually levied at the behest of the importing country and could be accompanied by a reciprocal VER.

Local Content Requirement

  • Instead of placing a quota on the number of goods that can be imported, the government can require that a certain percentage of a good be made domestically.

Effects of Tariffs and Trade Barriers Over Time

In the Short Run

  • Businesses will profit.
  • The government will see an increase in revenue from duties.

In the Long Term

  • Businesses may see a decline in efficiency due to a lack of competition.
  • A reduction in profits due to the emergence of substitutes for their products.