Trade Barrier

By: EconomyWatch   Date: 29 June 2010

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Trade barriers refer to government-imposed policies to restrict international trade. Most commonly, a country’s government employs tariffs, duties, embargoes and subsidies as trade barriers. However, imposing trade barriers are against the concept of free trade, popularized by developed nations.

 

Understanding Trade Barriers

Almost every trade barrier works as a tool to ensure a protectionism policy. Trade barriers aim to hike the prices of imported products in order to secure the domestic industry against fierce competition from foreign products. Some of the most common trade barriers are:

Tariffs: Taxes levied on products that are traded across borders are called tariffs. However, governments impose tariffs essentially on imports and not on exports. Two most popular types of tariffs are:

  • Ad valorem: This tariff involves a set percentage of the price of the imported goods.
  • Specific: This refers to a specific amount charged by the government on import of goods.

Subsidies: Subsidies work to foster export by providing financial assistance to locally-manufactured goods. Subsidies help to either sustain economic activities that face losses or reduce the net price of production.

Quotas: Import quotas are the trade limits set by the government to restrict the quantity of imports during a specified period of time.

Embargo: This is an extreme form of trade barrier. Embargoes prohibit import from a particular country as a part of the foreign policy. In the modern world, embargoes are imposed during wartimes or due to severe failure of diplomatic relations.

 

Economic Impact of Trade Barriers

In times of flourishing international trade, imposing trade barriers prevents the nation from fully realizing the economic benefits of such globalized trade. A protectionism regime causes over-allocation of resources in the protected sector and exploitation or under-allocation of resources in free trade sectors. This usually leads the country into economic disequilibrium, which hampers growth.

Import restrictions affect international trade relations, which in turn leads to a decline in exports. Thus, the protectionism regime that is employed to protect certain sectors actually tends to retard the growth of the entire economy.

Free trade environments offer greater and better choices in the market, leading to enhanced consumer satisfaction. With trade barriers in place, the government curbs consumer rights to enjoy competition in the market.

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