Countries put up many barriers to trade in order to protect domestic industries from foreign competition.
Tariffs are taxes that are levied on imports.
Quotas are limits on the number of units/weight (or sometimes the value of goods) imported into a country. The quota might be on the products from all countries of the world, products from a particular region or products from a particular country.
Voluntary restraint is just another way of saying quotas. For political reasons countries “choose” to put limits on the amount of goods they export to another country.
Embargoes are bans on imports/exports to or from a country usually in times of war or diplomatic stress.
A subsidy is a payment to a supplier to produce the supply or to export the supply. Subsidies have trade distortion effects.
Other non –tariff barriers can take various forms
- Licenses: companies are required to obtain licenses to import, invest or trade in an economy. The licenses may be restricted in number, costly, require special conditions or generally be difficult to obtain.
- Standards: an importer may be required to meet certain standards before being allowed to sell in a country. These might environmental standards, safety standards, content standards, size standards and so forth. There are often very good reasons for standards, but sometimes they are used to interfere with trade. As the world economy becomes increasingly integrated standards are starting to converge and so different standards is now less of a problem.
- Red tape: red tape is an expression that means excessive bureaucracy. It can be used by some countries to deliberately hold up the distribution of foreign goods.
The cost of tariffs
The graph above illustrates the position before a tariff. Qs is the quantity produced and sold in the country by domestic suppliers at the world price for the good. However, this is not enough to satisfy the domestic market at this price. Therefore, the market is cleared by importing the good at the world price. The total quantity of the good consumed is then Qd. The quantity of import is Qd minus Qs.
Under political pressure from domestic producers the government puts a tariff on all imports of the good. The new domestic market price of the good is now WP + the tariff. This increase in price encourages more domestic production and domestic production increases to Qs1. However, the increase in price means that some domestic consumers either cannot afford the good or are would now prefer to spend their money in another way. Demand falls to Qd1. Because both demand has fallen by Qd minus Qd1, and domestic supply has increased to Qs1 the quantity of imports required to satisfy the market has reduced. The country will now import Qd1 minus Qs1 of the good.
While domestic suppliers may be happy with the increase in sales and profits it comes at a cost to two groups: domestic consumers and foreign suppliers. Fewer domestic consumers can now afford to purchase the product, and if they do they will have to pay more. The foreign suppliers will not be able to sell as much to the country and so this will affect their profitability. The problems of foreign competitors might not on the face of it seem to be a concern for the domestic government, however there may be a international diplomatic consequences to the action.
Keywords: International economics barriers to trade