Trade Barriers: Economic Bases and Effects on Free Trade

Introduction

International business is a term used for commercial activities that occur among private or public enterprises or governments between two or more nations. International trade has existed for several centuries, originating when nations recognized they could source products in short supply from other countries. After the Industrial Revolution, international business expanded significantly as many companies began to enjoy economies of scale. With increasing levels of output, many companies were unable to find sufficient markets for their products domestically, and so they began exporting to other countries.

It was after the end of the Second World War that trade between nations increased tremendously. Post-war reconstruction led to the rapid development of infrastructure across large parts of Europe and the rest of the world. With rapid improvements in transportation, international trade among nations grew, and the importation and exportation of goods increased substantially. As international business grew, nations began to derive comparative advantages by participating in it, leading to increased world output and greater welfare gains among trading nations.

Despite the benefits derived from international business, there are arguments that it has negative effects on the development of domestic companies. In many countries, especially developing ones, people prefer to buy foreign products at the expense of locally produced goods. To protect domestic industries, many countries began imposing trade barriers. While proponents argue that trade barriers are beneficial because they allow domestic industries to grow, economic theory holds that trade barriers prevent competition among firms and that, without competition, economic efficiency is absent.

The objective of this paper is to explore the concept of trade barriers and the economic bases for trade policies.

Trade Barriers

The concept of trade barriers refers to government actions that impose restrictions on international trade. The major objective of trade barriers is to make imported products less competitive compared to domestic products. Countries employ a variety of strategies to limit free trade, including tariff barriers, non-tariff barriers, and quotas. Holzman categorized trade barriers as tariffs, exchange restrictions, explicit commodity quotas, differential sales taxes on imported products, and hidden quotas (159).

A tariff barrier is a form of trade barrier in which nations increase import duties on foreign products in order to raise their prices. This approach is effective because it discourages consumers from purchasing foreign products and increases the market for domestic goods. The shortcoming of tariff barriers, however, is that they do not encourage the efficient production of goods and services. Local industries may begin to produce inferior or substandard products as a result of government protectionism. Tariff barriers can also provoke retaliation from exporting countries, potentially leading to a trade war.

In addition, a government may use prohibitive tariffs to reduce or stop importation altogether. This type of tariff is designed to protect infant industries, protect consumers from harmful goods, or address a surplus of goods in the economy. Another form of trade barrier is the non-tariff barrier, through which countries legislate on the categories of products permitted to enter the country. One example is the technical barrier to trade (TBT), which refers to standards and technical regulations that define specific requirements for a product. These regulations may cover size, design, shape, packaging, performance, or functionality, and conformity assessments may include inspection, product testing, and certification. TBTs are introduced by governments with specific objectives, such as protecting human health and safety and the environment. However, some argue that TBTs can hurt competition because foreign companies must adjust their product specifications to comply with the regulations, which may increase prices. Several European countries have used such requirements to ban imported beef from cattle raised with hormones.

Another form of trade barrier is the subsidy. Governments may subsidize the production of certain goods and services to make them cheaper than foreign alternatives, thereby increasing exports and reducing imports. Embargo is yet another form of trade barrier, involving a total ban on the importation of certain goods and services.

Several factors may lead a government to formulate trade barrier policies. In developing economies, governments use trade barriers to protect infant industries. In developed economies, tariffs may also be used to protect specific categories of domestic industry.

Arguments in Favor of Trade Barriers

Protection of Infant Industry: An infant industry is composed of companies that are not yet well developed and cannot withstand competition from imported goods. To protect such industries, governments may levy high import duties on foreign goods to raise their prices. This strategy is often employed by developing economies to discourage the importation of foreign goods and encourage consumers to buy locally produced products. One advantage of this type of tariff is that it reduces unemployment while allowing local industries to grow. With minimal competition from foreign products, the economy may also shift from an agricultural base to an industrial one. Many emerging markets, such as India, Taiwan, and Brazil, implemented this type of trade barrier to develop their local industries during the 1980s and 1990s, and many of these economies are now healthy and competitive.

The shortcoming of this form of protectionism is that it does not encourage competition among industries, which can lead to the production of inferior or substandard goods. A major setback to the development of many African economies has been the overprotection of local industries, which face little or no competition and consequently produce goods that cannot compete internationally. Trade barriers implemented to protect infant industries also contradict the theory of comparative advantage, which holds that different countries have different factor endowments and should specialize in the goods and services in which they have an advantage. If countries specialize according to their comparative advantages, total output will increase and economic welfare will improve (Bradford and Lawrence).

Protection of Domestic Employment: Another factor leading countries to implement trade barriers is the desire to protect domestic employment. Allowing competition from foreign companies can threaten domestic industries, potentially causing massive layoffs as firms cut costs. However, allowing local industries to develop without competition leads to stunted economic growth, as industries grow only with state backing. From the perspective of economic theory, free trade both creates and destroys jobs, much like other market forces. It creates jobs in sectors with comparative advantages and destroys them in sectors with comparative disadvantages, with no net job loss overall. Between 1992 and 2000, the United States increased its rate of importation by 240%. During the same period, total employment increased by 22 million and unemployment declined from 7.4% to 4.0% (Elwell 8).

Protecting Consumers: Governments may also levy taxes on products they consider harmful to the population. For example, Europe imposes tariffs on imported beef raised with hormones to protect consumer health.

Retaliation: States may also implement trade barriers as a form of retaliation against trading partners that impose restrictions on their exports.

National Security: Trade barriers can also be employed to protect strategically important industries. In developed economies, trade barriers are used to shield industries that are critical to the national interest. The defense industry, for example, is often regarded as strategically vital to state security, and enjoys high levels of protection. Both the United States and the United Kingdom implement trade policies to protect defense-oriented companies.

Conclusion

Trade barriers are a form of government policy designed to discourage the importation of foreign products. While some sectors within the economy may benefit from the implementation of trade barriers, the economy as a whole may suffer under a protectionist policy. Industries shielded from competition may remain stunted precisely because of that protection. Free trade, by contrast, is beneficial to both domestic and international economies. While many advanced countries have begun to take advantage of free trade, developing countries continue to rely on tariff policies to protect local industries. Developing countries should emulate the free trade policies of advanced economies by exposing local industries to competition, thereby enabling the efficient allocation of scarce resources within the economy.

Works Cited

Anderson, Kym. Subsidies and Trade Barriers. University of Adelaide, The Centre for International Economic Studies, 2004.

Elwell, C. K. Trade, Trade Barriers, and Trade Deficits: Implications for U.S. Economic Welfare. CRS Report for Congress, 2006.

Frankel, Jeffrey, and David Romer. "Does Trade Cause Growth?" NBER Working Paper No. 5476, June 1999.

Holzman, Franklin D. "Comparison of Different Forms of Trade Barriers." The Review of Economics and Statistics, vol. 51, no. 2, 1969.

Bradford, Scott, and Robert Z. Lawrence. Has Globalization Gone Far Enough? The Costs of Fragmented Markets. Institute for International Economics, Washington, 2004.