Trade barrier

Trade is the act of buying, exchanging, or selling goods or services. Imports are goods or services purchased by one country from another country. Exports are goods or services sold by one country to another country. An import comes into a country, while an export leaves a country.

Two types of trade exist: domestic and international. Domestic trade is the purchase and sale of goods and services within a nation. This type of trade limits competition because it does not provide a country with a large market of goods. Limited competition leads to high prices and less variety for consumers. International, or foreign, trade is the exchange of goods and services between countries. International trade widens the market with goods or services that otherwise might not be available in a particular country, which leads to increased competition. Increased competition increases variety and lowers prices for consumers. International trade helps to improve a country's economy by increasing its gross domestic product (GDP), or the total value of goods and services produced. The World Trade Organization is the global entity that regulates trade.

Many countries have trade agreements that mutually benefit both parties. However, trade barriers exist to control the flow of goods and services into a country. Trade barriers make imported products more expensive and less competitive than domestically produced goods.

Overview

The main purpose of a trade barrier is to restrict—or even prevent—trade to protect domestic industries from foreign competition. Countries use trade barriers as incentives to entice consumers to buy domestically produced goods. If a domestic industry offers an item for a lower price than an item produced internationally, consumers are more likely to purchase the domestically produced item instead.

Trade barriers are designed to protect the interests of certain industries within a country; however, barriers can unintentionally hurt these industries. Industries that do not have global competition can become less efficient and even complacent. Also, barriers can lead to trade wars between countries as they compete to sell the most goods.

Governments use trade barriers for many reasons. Trade barriers can help protect jobs in a particular country by keeping the prices of domestic products low enough for consumers to choose these goods over internationally produced ones. This keeps domestic industries in business. Barriers can encourage new or developing industry in a particular country. To encourage the growth of an infant industry or to promote a particular industry in a country, the government enacts barriers to ensure goods made by the domestic industry are less expensive than foreign-made versions of that same good in hopes that consumers will favor the domestically made product.

Most countries have trade agreements with other countries in place, but disagreements among trading partners may occur. Such disagreements could result in the country—or countries—choosing not to follow a trade contract. One or both countries could enact trade barriers to punish the other, causing higher prices and fewer purchases. Countries also use trade barriers to protect consumers from purchasing products believed to be harmful.

Types

A tariff, also called a duty, is a tax on imported and exported goods. It is designed to increase the price of imported goods in relation to domestically produced goods. Tariffs are the most common barrier to trade. Many types of tariffs exist.

An ad valorem tariff is a tax that charges a percentage of the value of imported or exported goods or services. An ad valorem of 10 percent is equal to 10 percent of the value of a product. If an item's value is $100 dollars, then the ad valorem is 10 percent of 100, which is $10.

A specific tariff is a fixed fee per unit calculated according to the quantity, volume, or weight of an item. For example, an item such as a television may have a specific tariff of $100, which means this is the set tax paid on all televisions.

A government uses a prohibitive, or exclusionary, tariff when imported goods exceed permitted amounts. This tax reduces or stops imports.

An end-use tariff charges different taxes on the same product based on the product's use. For example, less tax may be charged on a computer used for educational purposes than on a computer used for industrial purposes.

An antidumping tariff is a tax on imports that have been priced lower than their fair market value. A countervailing tariff is charged on subsidized imports. A subsidy is a benefit given by the government to an industry to make that industry's products cheaper to produce and, therefore, less expensive, so the industry can compete with industries from other countries. Antidumping and countervailing tariffs are types of punitive tariffs. Punitive tariffs are high taxes intended to protect domestic products.

Some barriers to trade, called non-tariff measures (NTMs), restrict trade without using tariffs. These may include sanitary and phytosanitary measures, technical barriers, and regulatory barriers, such as levies, licenses, foreign exchange restrictions, quotas, embargoes, sanctions, import deposits, and import bans.

Governments grant licenses to businesses to allow those businesses to import specific goods—usually restricted items—into a country. For example, a wine producer may apply for a license to import a certain type of grapes, so it can make a particular type of wine. Restricted items typically have little competition, which increases the prices of these products. The government can put a quota, or restriction, on the amount of these goods that can be imported into a country. For example, the wine producer who has a license to import grapes may be allowed to import only a fixed amount of grapes.

Sometimes, governments set an embargo, or a blockade, on trade with a specific country. An embargo limits a country's ability to trade. Trade barriers are in place to regulate international trade and protect domestic trade. While not all trade barriers are fair and just, they serve to protect the country enforcing them.

Bibliography

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