The basics of trade barriers in international trade

Economic theories suggests that free trade is likely to benefit countries. By allowing each country to specialize, production will take place in locations which enjoy a comparative advantage. World trade expanded in the 19th century but the first half of the 20th century saw a fall in trade. This was partly caused by the economic disruption of two world wars, and the Great Depression of the 1930s which led countries to adopt protectionist policies as governments believed that by keeping foreign goods out, they could save domestic jobs. In practice, all countries adopted the same mix of measures. World trade collapsed, and jobs were lost in export industries.

As such after the Second World War, the protectionist policy had been followed. This had given birth to the concept of Trade Barriers.

The most common barrier to trade is a tariff or tax on imports. There are various types of barriers used in international trade.

Generally, barriers may be classified under the broad heading of Border barriers, Technical barriers, Government influence barriers and Business Environment barriers. There are different forms of trade barriers such as Tariffs, and non-tariff barriers including import licenses, export control licenses, import quotas, subsidies, voluntary export restraints, local content requirements, embargos, and currency devaluation.

International trade provides consumers to choose from domestic as well as foreign goods at a lower price due to competition. International trade allows domestic industries to sell their products in international markets. However, trade barriers take over that facility from the domestic exporters. Although it appears to be profitable to all owing to free trade, it might not be beneficial to all. Tariffs are a type of protectionist policy barrier that generally come under different forms.

While tariffs may benefit domestic industry, economists believe that free trade is more beneficial rather than a protectionism policy. Tariffs are at times called Customs duties. They are the most- used and most – familiar type of trade restriction. Tariffs operate in the same way as a tax does. They make imported goods relatively more expensive than they otherwise would have been, and thereby encourage the consumption of domestically produced goods.

Probably the most infamous tariff had been the “Smoot-Hawley Tariff” imposed on US imports to protect US domestic jobs during the Great Depression of the 1930s. But the action plan was a failure. In retaliation, other countries responded with similar tariffs. As a result of these trade wars, international trade plummeted from $60 billion in 1928 to $25 billion in 1938, unemployment worsened, and the international depression deepened. As a result, it was proved that free trade is preferable to trade restrictions.

The dismal failure of the Smoot-Hawley Tariff was the main reason the General Agreement on Tariffs and Trade (GATT) to reduce trade barriers was established in 1947. However, GATT was replaced by World Trade Organization (WTO) in 1995.

Quotas are quantitative limits placed on imports. They have the same effect on equilibrium price and quantity as the quantity restriction and their effect in limiting trade is similar to the effect of a tariff. Both increase price and reduce the quantity. There is, however, a difference between tariff and quota. In the case of tariff, the government collects tariff revenue, whereas, in the case of quota, the government collects no revenue. The benefit of the increase in price goes to the importer as additional revenue. Therefore, which of the two (tariff or quota) would be more favoured by importing companies? It would be quota as increased profits out of limited supply sold at a higher price and fetch higher revenue to go to the importers.

Once quotas are instituted, firms compete intensely to get them. Tariffs affect trade patterns. Multinational companies to avoid tariff set up their manufacturing subsidies in the tariff-imposing country. As such tariffs affect trade, which has been the case with Japanese light trucks manufactured in the US and sold there. Many similar examples exist, and by following the tariff structure, one can gain a lot of insight into patterns of trade.

Voluntary Restraint Agreements: The imposition of new tariffs and quotas is specifically ruled out by the WTO, but foreign countries know that WTO rules are voluntary and that, if a domestic industry brought sufficient political pressure on its government, the WTO would be forgotten. To avoid the imposition of new tariffs on their goods, countries often voluntarily restrain their exports. For example, Japan has done with their car exports to the US. The effect of such voluntary restraint agreements is similar to the effect of quotas. They directly limit the number of imports, increasing the price of the good and helping domestic producers.

Embargoes: An embargo is a total restriction on the import or export of a good. Embargoes are usually established for international political reasons rather than for primarily economic reasons. An example is the US embargo of trade with Iraq during Saddam Hussein’s regime to severely affect Iraq’s economy.

Regulatory Trade Restrictions: Tariffs, quotas, and embargoes are the primary direct methods to restrict international trade. There are also indirect methods that restrict trade. They are called regulatory trade restrictions. Government-imposed procedural rules that limit imports, regulatory trade restrictions protecting the health and safety of the citizens, and restrictions on imports and the use of certain pesticides are an example of regulatory trade restrictions. A second type of regulatory trade restriction involves making import and customs procedures so intricate, complex and time-consuming that importers simply give up.

Exchange Control: Importers require foreign currencies to buy goods abroad. Firms will require payment in hard currencies like the US dollar or Euro. A country obtains its supply of foreign currencies using exports. Importers requiring foreign currencies must apply to the central bank, which can thus, very effectively control the variety and volume of imports by controlling the issue of foreign currency.

Subsidies: A nation may decide to subsidize certain domestic industries as a means of protecting them from competition from lower-priced foreign goods. The subsidy will reduce the price of domestic products and hence make it difficult for the foreign producer to sell a similar product in the home market. There will be a redistribution of income towards the producers and consumers of the subsidized good because the cost of the subsidy will fall on the taxpayers. In such a situation, a question arises as to why such restrictions on trade are imposed. The reasons advanced for protecting home industries from foreign competition are often classed as economic and non-economic, but this can be misleading because they will all have economic effects.

National Appeals: Finally, nationalistic appeals can help to restrict international trade. The “Buy American” campaign and Japanese xenophobia (a Greek word meaning ‘fear of foreigners’) are examples. Consumers while selecting to buy a similar product foreign-made prefer to go for domestically produced ones having a positive impact on the national appeal. To get around this tendency, foreign and domestic companies often go to great lengths to get made in the domestic country classification on goods they sell in the domestic market. For example, components for many autos are made in Japan but shipped to the US and assembled in the US so that the finished car can be called an American one.

Given the current global economic scenario, it can be safely said that free trade is more beneficial than protection to industry via imposing various trade barriers.

The writer is former Director General of Export Promotion Bureau. He can be contacted at

hassan.youngconsultants@gmail.com