Trade Barrier

Last Updated :

-

Blog Author :

Aswathi Jayachandran

Edited by :

Alfina L.

Reviewed by :

Dheeraj Vaidya, CFA, FRM

Table Of Contents

arrow

What Is Trade Barrier?

Trade barriers are the methods used by the government to control international trade. Generally, government design and implement policies or regulations to obstruct the excessive inflow of foreign goods to the country.

International Trade

The decisions regarding trade barriers by nations are important to the world economy. A world of stringent trade barriers can affect the opening up of new markets, trade, and global economic growth. Furthermore, it can also contribute to economic depression. For instance, retaliatory tariffs from Europe intensified the Great Depression.

Table of contents
  • Trade barriers are global restraints on the trade of goods and services between nations.
  • The main objective of trade restrictions or protectionist policies aims to safeguard, promote, and strengthen domestically produced goods and services by employing trade-restrictive measures like import quotas and tariffs.
  • Trade barriers can favor domestically sourced and produced items, reducing the availability of diverse products in the market, decreasing competition, and establishing high prices. 

Trade Barrier Explained

Trade barriers are trade restriction methods used by governments. They apply tariffs and non-tariff barriers to restrict the flow of goods and services from other countries and discourage imports. The main goal of the trade barriers or the protectionist policy is to protect, promote and strengthen the nation's locally produced goods.

For example, trade barriers make imported goods expensive so that people stop buying them and instead promote the domestically produced goods of the country. Furthermore, trade barriers impact the economy's market forces, i.e., demand and supply. Therefore, trade barriers or protectionist policies lead to disequilibrium in the economy's market forces.

Reasons for governments imposing trade barriers: 

  • Government imposes it to protect the domestic market from foreign competition. In other words, to restrict the entry of goods and services from other countries and promote domestic production.
  • The government imposes tariffs, makes revenue by charging taxes on imported goods, and discourages the entry of foreign goods into the domestic market.
  • The trade deficit is another reason the government put trade restrictions. This is because the current account deficit increases as the goods imported are much more than those exported from the country. Hence government tries to reduce imports and promote export.

Types

Different types of trade barriers are as follows: 

1. Anti-Dumping Duties: When a domestic government applies a protectionist tariff on goods from outside that deems priced below fair market value, it is known as an anti-dumping duty.

2. Regulatory Barriers: These barriers are imposed by the government for various reasons, such as to control pollution, ensure product standards, and maintain safety standards. These standards are decided by the governments of different countries depending on their rules and regulations that restrict unsuitable goods from entering the foreign market.

3. Voluntary Export Restraints: Voluntary export restraints (VER) are agreements between exporting and importing nations where the exporting country agrees to restrict the number of particular exports below a predetermined level to avoid the imposition of mandatory restrictions by the importing country.

4. Subsidies: Government subsidies lower the price of goods and services produced locally in the country compared to the price of goods and services from other nations. Therefore, subsidies are another way that acts as a trade barrier. 

5. Tariffs: Tariffs are the tax imposed on imports from other countries. The tax is imposed on the final products and is charged to the end consumers. Thus, it increases the price of the goods imported from other countries more than the actual price and discourages consumers from purchasing goods from other countries.

6. Quotas: A quota is a trade restriction imposed on the number of goods that can enter the country. It is decided by the governments of both exporting and importing countries on the specific goods to reduce the import of specific goods and increase the domestic production.

Examples

Let us look at trade barrier examples to understand the concept better: 

Example #1

Due to increased demand, the Philippines government will impose zero tariffs on electric vehicles. The current range of import duties is 5% to 30%.

The EVs covered for five years under the plan include passengers, cars, buses, vans, trucks, motorcycles, and bicycles, and their parts. The executive order intends to increase market options and motivate consumers to consider owning EVs, improve energy security by lowering dependency on imported fuel, and boost the expansion of the local EV industrial ecosystem.

Example #2

During the pandemic lockdowns in Canada, the demand for butter increased due to Canadians' baking. In a normal market, dairy producers would have smartened up their herds to produce more milk.

However, Canada strictly controls milk, eggs, and poultry production, distribution, and cost. As a result, dairy producers were prohibited from increasing their herds. Moreover, due to tariffs and other trade restrictions, Canada could not acquire more American dairy goods.

So Canadian farmers turned to feeding their cows additional palm oil products to persuade them to produce more milk. But, although milk output increased, butter's texture deteriorated.

Disadvantages

The disadvantages of the trade barrier are as follows: 

  • Trade barriers increase the cost to the company since they have to depend on domestic products for raw materials due to restrictions on importing cheap foreign raw materials. It directly impacts the final price of the goods and services, discouraging customers from buying them in the local market.
  • The diversified variety of goods available in the foreign market is not available in the domestic market. Therefore, it decreases the competition and availability of diverse goods in the country. In other words, an increase in the import price limits the goods' choice in the market.
  • Trade barriers can discourage the country from trading with other countries. The trade restrictions bar the import of goods from other countries and sometimes the export of products to other countries, affecting the foreign revenue, directly impacting the country's overall revenue, and thus decreasing the country's economic growth.
  • Trade barriers limit the overall job opportunities in countries.

Frequently Asked Questions (FAQs)

Why do countries impose trade barriers?

Countries impose trade barriers to decrease foreign competition in the domestic market and encourage the consumption of goods and services produced locally in the nation. There are various ways through which countries put trade barriers, such as quotas, subsidies, anti-dumping duties, etc. 

Who benefits from trade barriers?

The importing countries benefit from the trade barriers because they restrict the entry of goods from other countries and encourage the production of goods in the local market, thus promoting domestic companies and reducing the trade deficit.

How do trade barriers affect international trade?

Imports from other countries become costlier due to tariffs, non-tariff restrictions, and various other countervailing duties by the government. It affects free trade and employment generation capacity, favors rich countries, and disfavors developing and underdeveloped countries.