What are Trade Barriers?

Trade barriers are common tools employed by governments of various countries to realize major economic targets such as:

Boosting domestic production Protecting domestic workers and companies Increasing revenues by imposing Exim duty Significant reduction in consumption and reliance on Exports

Why it is important

The barriers can take many forms, including the following: Tariffs Non-tariff barriers to trade Import licenses Export licenses Import quotas Subsidies Voluntary Export Restraints Local content requirements Embargo Currency devaluation Trade restriction Tariffs: A tariff is either (1) a tax imposed on imports or exports (trade tariff) in and out of a country, or (2) a list or schedule of prices for such things as rail service, bus routes, and electrical usage (electrical tariff, etc.). Existing taxes and duties already push up the cost of US imports by 25%, and the new levies make it even more expensive for Chinese consumers to buy American. General Motors faces the greatest impact, almost 22% extra on some sports utility vehicles (SUVs) and other cars with engine capacities above 2.5 litres. Chrysler faces a 15% penalty, while a 2% levy will be imposed on BMW, whose US plants make many of the cars it exports to China. Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are not in the usual form of a tariff. Some common examples of NTB's are anti-dumping measures and countervailing duties, which, although called non-tariff barriers, have the effect of tariffs once they are enacted.

An import license is a document issued by a national government authorizing the importation of certain goods into its territory. Import licenses are considered to be non-tariff barriers to trade when used as a way to discriminate against another country's goods in order to protect a domestic industry from foreign competition. An export license is a document indicating that a government has granted a licensee the right to export specified goods to specified countries. An import quota is a limit on the quantity of a good that can be produced abroad and sold domestically. It is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time.

A subsidy is a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public. The agriculture sector that provides the food we eat daily is another entity that the government can't let fail. Farmers must be kept in business, and consumers must be fed. Food prices, although they fluctuate, must be kept relatively low and affordable. However, in order to keep pace with growing demand for food emanating from population growth, rice production has to be increased at the desired rate. The government is also trying to take initiatives like offering input subsidy almost every year with a view to ensuring proper supply and utilisation of these inputs. During 2005-06 period, the government allocated Tk.1,200crore as subsidy on different inputs (fertiliser, electricity etc.) in order to maintain a conducive production environment.

It is, therefore, imperative that farmers should derive benefits out of the given opportunity. As input subsidy is given to all areas of the country, the costs of fertiliser and irrigation are expected to be more or less similar in all areas, and farmers should be able to harness the benefit from the subsidy program. During the boro season of 2009-10, the government introduced input subsidy card for the farmers in order to provide cash subsidy on diesel, and as much as 10 million farmers were brought under this program. A voluntary export restraint (VER) or voluntary export restriction is a government imposed limit on the quantity of goods that can be exported out of a country during a specified period of time. An oft-cited example for voluntary export restraints is the one that emerged between the

Japanese and the United States in the 1980s. Japanese automakers had been exporting cars and trucks to the United States that were cheaper and more popular than American vehicles. Executives from the U.S. automaking industry lobbied President Ronald Reagan to establish import quotas on Japanese cars. These American automakers were concerned that Japanese automobiles were permanently drawing consumers away from U.S.-made vehicles. The Reagan administration was successful in convincing the Japanese government to temporarily halt auto exports to the U.S. in 1981. An embargo is the partial or complete prohibition of commerce and trade with a particular country. Embargoes are considered strong diplomatic measures imposed in an effort, by the imposing country, to elicit a given national-interest result from the country on which it is imposed. Local content requirements: When a foreign company makes products in a country, the materials, parts etc that have been made in that country rather than imported. A minimum level of local content is sometimes a requirement under trade laws when giving foreign companies the right to manufacture in a particular place. For example, a little-known law in the United States, the Buy America Act ,specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage. The law specifies a product as American if 51 percent of the materials by value are produced domestically . This amounts to a local content requirement . If a foreign company, or an American one for that matter, wishes to win a contract from a U. S. government agency to provide some equipment , it must ensure that at least 51 percent of the product by value is manufactured in the United States. Devaluation in modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.There are two implications for currency devaluation. First, devaluation makes a country's exports relatively less expensive for foreigners and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country's trade deficit. China is keeping its currency, the yuan, artificially low by hoarding foreign reserves, in order to give Chinese exports an advantage over competitors. A trade restriction is an artificial restriction on the trade of goods and/or services between two countries.However, the term is controversial because what one part may see as a trade restriction another may see as a way to protect consumers from inferior, harmful or dangerous products.

Arguments Trade barriers reduce the possible quantity of goods that can be consumed and produced within an economy. Prices will be higher, and there will be fewer choices with regards to consumer goods. Beneficiaries of a tariff include the government, which collects the tariff, and domestic producers within the affected industry (or industries)while the general public (consumers) loses. Arguments in favor of trade restrictions include: Protecting Domestic Employment The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment and a less happy electorate. The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply Infant Industries - Start-up industries in a country may not be able to effectively compete against foreign producers because of their small size. An argument can be made that these industries should be protected until suitable economies of scale can be achieved. The government of
a developing economy will levy tariffs on imported goods in industries in which it wants to foster growth. This increases the prices of imported goods and creates a domestic market for domestically produced goods, while protecting those industries from being forced out by more competitive pricing. It decreases unemployment and allows developing countries to shift from agricultural products to finished goods.

Anti-Dumping - The claim is often made that foreign producers "dump" their goods on the domestic market. The term dumping is applied when foreign producers are thought to be selling goods at prices below their production costs, or below the prices charged in their home market. Retaliatory measures may include the imposition of tariffs, quotas or fines against foreign producers. The fear is that this "unfair" practice will drive domestic producers out of business and that the foreign producers will then impose monopoly pricing. Level Playing Field - A country may implement trade barriers to create a more equal market for domestic businesses as compared to the international competition. For instance, in a free trade environment where imports are not taxed, a country must rely more heavily on domestic business for tax revenues. In such cases, an import tariff may serve to decrease market distortion as opposed to increasing it. Similarly, a government may choose to have a variety of domestic regulations relating to the environment, child labor, working standards, minimum

wage or collective bargaining. These governments may choose to tax imports from countries that avoid the same standards to equalize cost factors. Tax Revenue- Import tariffs can be useful sources of tax revenue for the governments, especially when applied to non-essential products such as luxury goods. Tariffs on imported luxury goods can act as a form of progressive taxation, as money is diverted from international corporations and high income consumers. The government can then use this money to improve infrastructure or offer services domestically. From an economic standpoint, tariffs for the purpose of tax revenue are best implemented in peripheral areas of the economy that do not affect the majority of consumers. Ensuring National Security - A government may choose to protect industries that are essential to national security. During periods of peace and economic growth, international trade tends to flow unimpeded. As a result the source of products and services, whether domestic or international, may appear to be unimportant. However, during times of conflict or economic crisis, raw materials and key products may become hard to acquire in the international market. Therefore, a country may choose to protect key domestic industries relating to natural resources, agriculture and defense. Retaliation Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. The argument for this is that "if they impose restrictions on us, we should impose restrictions on them in order to level the playing field, in order to make trade more fair". For example ,The beef hormone dispute has affected transatlantic trade relations since 1988 when the EU, concerned for health of its citizens, banned imports of beef treated with certain growth-promoting hormones. In 1996, the US and Canada, which were worst affected by the ban, challenged it under the World Trade Organization (WTO) dispute settlement system and were subsequently authorized to impose trade sanctions on EU products worth respectively US $ 116.8 million and C $ 11.3 million a year. Cons of trade barrier:
Increased Cost to Consumers

Trade barriers can create rising costs to consumers. Perhaps one of the most important disadvantages of trade restrictions is that it drives up the price of goods in a country where trade barriers artificially raise the price of imported products. The apparent effect of trade barriers is to prevent jobs from being lost to foreign competition, which is an argument used by many special interest groups to justify various types of trade barriers. In the long run, however, trade barriers force consumers to pay higher prices, since products that could otherwise be made cheaply overseas take more resources to produce domestically.

Increased Costs to Domestic Suppliers Price hikes due to trade barriers don't just affect consumers. It also puts a strain on firms which supply raw goods and commodities to domestic industries. Without trade barriers in place, such firms can rely on the law of comparative advantage, meaning that it would cost them more to try to find a certain raw material in their own country than it would to buy from a country rich in a particular commodity. Trade barriers artificially raise prices on foreign commodities, making it less profitable to buy from other countries.

Less Competition

Trade barriers lessen foreign competition, leading to fewer product choices for consumers. The fact that trade restrictions make it more costly to purchase goods from abroad results in the domestic industry facing less competition from foreign markets. In the short term, this can save jobs in select domestic industries. However, in the long run, it leads to customers having fewer choices in the products they buy. It also gives producers less incentive to create high-quality products available to the public.

Escalationism Over time, one country's policy of trade restrictions may lead to similar measures taken by foreign governments, who lose out in the international trade game because they can't export products for a profit. This cuts down on economic efficiency and competition on a global scale.

In the long term, businesses may see a decline in efficiency due to a lack of competition, and may also see a reduction in profits due to the emergence of substitutes for their products. For the government, the long-term effect of subsidies is an increase in the demand for public services, since increased prices, especially in foodstuffs, leaves less disposable income.

Why trade should be liberalized?

While there are special reasons for limiting imports or exports of certain kinds of products, economists generally view trade barriers as hurting both importing and exporting nations. Although the trade barriers protect workers and firms in industries competing with foreign firms, the costs of this protection to consumers and other businesses are typically much higher than the benefits to the protected workers and firms. And in the long run it usually becomes prohibitively

expensive to continue this kind of protection. Instead it often makes more sense to end the trade barrier and help workers in industries that are hurt by the increased imports to relocate or retrain for jobs with firms that are competitive. In the United States, trade adjustment assistance payments were provided to steelworkers and autoworkers in the late 1970s, instead of imposing trade barriers on imported cars. Since then, these direct cash payments have been largely phased out in favor of retraining programs.

During recessions, when national unemployment rates are high or rising, workers and firms facing competition from foreign companies usually want the government to adopt trade barriers to protect their industries. But again, historical experience with such policies shows that they do not work. Perhaps the most famous example of these policies occurred during the Great Depression of the 1930s. The United States raised its tariffs and other trade barriers in legislation such as the Smoot-Hawley Act of 1930. Other nations imposed similar kinds of trade barriers, and the overall result was to make the Great Depression even worse by reducing world trade.

Who Benefits from trade barriers? The benefits of tariffs are uneven. Because a tariff is a tax, the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from a reduction in competition, since import prices are artificially inflated. Unfortunately for consumers - both individual consumers and businesses - higher import prices mean higher prices for goods. If the price of steel is inflated due to tariffs, individual consumers pay more for products using steel, and businesses pay more for steel that they use to make goods. In short, tariffs and trade barriers tend to be pro-producer and anti-consumer.

The effect of tariffs and trade barriers on businesses, consumers and the government shifts over time. In the short run, higher prices for goods can reduce consumption by individual consumers and by businesses. During this time period, businesses will profit and the government will see an increase in revenue from duties. In the long term, businesses may see a decline in efficiency due to a lack of competition, and may also see a reduction in profits due to the emergence of substitutes for their products. For the government, the long-term effect of subsidies is an increase in the demand for public services, since increased prices, especially in foodstuffs, leaves less disposable income.