Imports and Exports Trade Barriers

Imports and Exports

Trade barriers are often applied by countries in order to achieve specific results. The impact of trade barriers -- both import and export restraints -- have many other, unintended consequences that also bear consideration.

Import restraints can come in the form of tariffs, quotas and policies that create uncertainty as to how imports will be treated. There are a number of non-tariff barriers that restrict trade. At their core, all of the barriers serve to reduce the availability of specific foreign goods. The expected impact of such barriers is that the price of those goods will increase in the domestic market, thereby increasing the competitiveness of domestically-produced products. Import restraints therefore are typically used as a form of short-term economic stimulus.

This protectionism, however, has long-term consequences. One such consequence is that firms return trade barriers in kind, by setting up barriers on your exports. As a result, exports decrease, bringing the trade balance back towards the equilibrium level. In addition, import restraints remove economic incentives in the domestic market to innovate and to maximize efficiency. In the long run, this will make the domestic industry uncompetitive internationally. As an example, when the U.S.S.R. collapsed, most factories there were unable to compete on global markets, having survived for decades solely on protected markets.

Export restraints are typically enacted by importing countries as a protectionist measure. The exporting nation seldom willingly volunteers for such restraints, but is coerced into doing so under the threat of other trade barriers, which could potentially affect more than just the targeted industry. As such, export restraints on the exporting country typically serve the same basic function as import restraints on the part of the importing country. VER's, however, do have some significant differences from import quotas.

One major difference is that exporters faced with quotas often will act as a cartel, rather than compete with each other. The result of this is that consumers will pay a higher price for those goods, with that higher price often going to the exporting firms. Another outcome is that the exporting country may shift focus to higher-value products as a result of a VER, using higher margins to offset the decrease in volume.

For the importing country, the cost of the VER is higher than an import barrier. The higher prices that result from the cartel-like activity are paid by the importing country's consumers, whereas under an import barrier that cost would typically be paid in the form of a tariff to the importing government. Thus, a VER results in higher prices and lower government revenue for the importing nation. It is typically undertaken, then, to protect industries that are desirable for political or strategic reasons such as automobile or food production.

The main conclusion that can be drawn is that no matter the trade barrier -- even coercing export restraints from your trading partners -- they all serve the same basic function and have the same basic impact. Trade barriers reduce supply and increase costs. This has the impact of rising prices in the domestic market, but this is a sacrifice that governments are sometimes willing to make for a variety of reasons. The key difference between import and export restraints is that with import restraints, the importing country generally keeps some of the economic benefit. With export restraints, the exporting country often responds in such a manner as to earn economic benefit from their position.

2) Most currency today is fiat currency, meaning that it is implicitly backed by the strength of the issuing nation's economy rather than by stores of gold or goods. Currency is used to facilitate financial transactions between parties. The value of the currency is determined by the trade of the nation relative to other nations. Settling that trade requires a system wherein currency values are stabilized.

Gold was once the official reserve asset, but today foreign exchange assets serve as reserves. The United States, for example, holds Euros and yen as its foreign exchange assets while many other countries hold dollars. These reserves are recognized for payment between governments.

Governments hold reserves as a means of ensuring the stability of their own currency. The foreign exchange reserves increase or decrease on the basis of the balance of trade. So for example China has a trade surplus, and this can allowed it to accumulate substantial foreign exchange reserves, particularly dollar assets. These dollar assets are indicative of China's economic strength. Likewise, the U.S. stockpile of Euros and yen indicates America's trade position.

The current account balance reflects a country's standing with respect to foreign exchange reserves. The United States, for example, can build a current account deficit by selling U.S. treasuries to central governments overseas to hold as foreign exchange assets. Nations hold each other's assets as a means of settling trade debt. Canada typically has a trade surplus and uses its foreign assets as a mean to make payments on its foreign debt.

Nations use sovereign debt as a means of moving money between each other. Countries will issue treasury securities and these will be purchased by other governments. As a result, the U.S. issues treasuries and these are purchased by the Chinese to hold. By this means, the U.S. can effectively recognize the obligations that it has accrued to China as a result of the disequilibrium in the trade between the two countries.