Barriers to Trade

Introduction

A barrier to trade is a government-imposed restraint on the flow of international goods or

services. Those restraints are sometimes obvious, but are most often subtle and non-obvious.

The most direct barrier to trade is an embargo– a blockade or political agreement that limits a
foreign country’s ability to export or import. Embargoes still exist, but they are difficult to
enforce and are not common except in situations of war.

The most common barrier to trade is a tariff–a tax on imports. Tariffs raise the price of imported
goods relative to domestic goods (good produced at home).

Another common barrier to trade is a government subsidy to a particular domestic industry.

Subsidies make those goods cheaper to produce than in foreign markets. This results in a lower
domestic price. Both tariffs and subsidies raise the price of foreign goods relative to domestic
goods, which reduces imports.

Barriers to trade are often called “protection” because their stated purpose is to shield or
advance particular industries or segments of an economy. From an economic perspective,
though, the costs to the economy of reducing its opportunities to trade almost always outweigh
the benefits enjoyed by those who are protected.

Reasons Governments Are For Trade Barriers

1. To protect domestic jobs from “cheap” labor abroad

Wages in industrialized countries are higher because their output per worker is higher than
developing country. The higher wages reflect higher productivity. Otherwise, there is no
comparative advantage in producing that product, or the owners would have to reduce wages to
match productivity.

For example, the U.S. has import tariffs on sugar, making imported sugar more expensive than
domestically-grown sugar. Thus, people in the US are going to buy US-produced sugar, which
keeps money in the wallets of US sugar producers and farmers.

2. To improve a trade deficit

Trade barriers make imports more expensive, and as a result, they also decrease the demand for
imports. However, in retaliation trade partners can do the same and increase prices for exports.

Thus, this using this rationale, governments won’t necessarily fix the problem, if domestically
produced goods aren’t competitive or are not high-quality. Countries will also spend less on
imports if their exports go down.
To protect “infant industries.”

Countries want to give newly developing industries (known as infant industries) time to grow
and become competitive. natioThis is a reasonable argument for imposing trade barriers.

However, in some cases, government protection never ends. These industries become
competitive only because the government has given the benefit of the trade barrier.

4. Protection from “dumping.”

Dumping is when an importer sells products at below average cost of production.

Dumping is hard to prove, yet nonetheless, sometimes countries impose anti-dumping duties just
because it is competing against a locally manufactured product.

5. To earn more revenue

Governments gain extra revenue from tariffs (which is a tax on imports). The tariff may be in the
form of a specific or ad valorem tax. Tariffs raise the price of the imported good and lower its
consumption.