Trade Barriers
International Trade - Definition
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International trade involves the
exchange of goods or services between
nations.
This is described in terms of
– Exports: the goods and services sold in foreign
markets.
– Imports: the goods or services bought from
foreign producers.
Free Trade vs. Trade Barriers
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Nations can trade freely with each other
or there are trade barriers.
– Free Trade: Nothing hinders or gets in the
way from two nations trading with each
other.
– Trade Barriers: Trade is difficult because
things get in the way.
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There are costs and benefits related to
free trade as well as trade barriers.
Free Trade - Benefits
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When nations specialize and trade, total world output
or sales is increased.
Companies can produce for foreign markets as well
as domestic markets (markets in the home country).
This means there is potential for making more money
as there are more markets to sell goods or services
in.
More variety of goods are available from a world
market than just a domestic market.
Prices of goods are decreased through increased
competition.
Free Trade - Costs
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The domestic country can lose money
because more people are buying foreign
goods
– Example: In the U.S., people might want to buy a
foreign automobile like a Honda or Toyota instead
of an American made car.
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Less money will go into the domestic market
place and this can cause factories to be
closed and jobs to be eliminated.
Trade Barriers – Three Types
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Trade barriers are things that hinder or get in
the way of trading.
They can be cultural, physical , or economic.
– Cultural barriers: language,
currency, belief system.
– Physical barriers: mountains, deserts,
canyons,etc.
• Example: The Alps Mountains in Europe
– Economic barriers: government rules that
restrict, block or discourage international trade
between countries. (tariff, quota, embargo)
Trade Barriers - Economic
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The most common trade restrictions
are:
– tariffs--which are taxes on imports.
– quotas--which are limits on the quantity
that can be imported.
– embargos--which are a complete trade
block usually for political purposes.
Tariffs
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A tariff is a tax put on goods imported from abroad
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The effect of a tariff is to raise the price of the
imported product.
– It makes imported goods more expensive so that people are
more likely to purchase domestic products.
– EXAMPLE: The European Union removes tariffs between
member nations, and imposes tariffs on nonmembers
Quotas
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A quota is a limit on the amount of goods that can be
imported.
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Putting a quota on a good creates a shortage, which
causes the price of the good to rise and makes the
imported goods less attractive for buyers. This
encourages people to buy domestic products, rather
than foreign goods.
– EXAMPLE: Germany could put a quota on foreign made
shoes to 10,000,000 pairs a year. If Germans buy
200,000,000 pairs of shoes each year, this would leave most
of the market to German producers.
Embargos
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Embargos are government orders which
completely prohibits trade with another
country.
If necessary, the military actually sets
up a blockade to prevent movement of
merchant ships into and out of shipping
ports.
Embargos
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The embargo is the harshest type of trade
barrier and is usually enacted for political
purposes to hurt a country economically and
thus undermine the political leaders in
charge.
– EXAMPLE: the United Kingdom has placed an
embargo on a Chinese toy-making company
because they were using lead-based paint in their
toys. UK no longer trades with this company.
– EXAMPLE 2: US placed an embargo on Cuba
after the Cuban Missile Crisis (still in effect today).
Trade Barriers - Benefits
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Most barriers to trade are designed to prevent
imports from entering a country.
Trade barriers provide many benefits:
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protect homeland industries from competition
protect jobs
help provide extra income for the government.
Increases the number of goods people can
choose from.
– Decreases the costs of these goods through
increased competition
Trade Barriers - Costs
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Tariffs increase the price of imported
goods.
Less competition from world markets
means there is an increase in the price.
The tax on imported goods is passed
along to the consumer so the price of
imported goods is higher.