Trade is a source of earning for governments and businesses. It opens new avenues for local industries. Home made products find buyers in international market and thus profits surge. Additionally, trade barriers gives a country access to new products.
The commodities that aren’t produced in the local market are easily made available. For example, Pakistan is a producer of Rice. The country exports rice on a massive scale. In return it imports tea which isn’t produced locally. So, this creates a balance in supply and demand.
International trade has been a topic of political discussions for long now. Despite its benefits, many countries see trade as a threat. They believe that free trade gives way to cheaper goods. Hence the local industry’s growth diminishes. Economists are foreseeing possible hurdles in the way of import/export. The latest example of trade war between US and China shows that trade barriers will soon pose a problem.
In the subsequent heading we will discuss the four major trade barriers.
What are the 4 Types of Trade Barriers?
Every country or territory has reasons for placing trade barriers. Those can range from ethical to legal barriers. Capitalism is consistently striving for better economic regulations. However, the rising conservatism is leading to closing off of markets. As a result, we see a tug of war between trade enthusiasts and patriots.
Here is the list of 4 most common types of barriers in the way of trade.
Natural trade barriers are hurdles due to some material stuff or culture. It is very difficult to overcome a natural barrier. For example, Distance is a hurdle. Taking stuff like gold to a far off country will incur a huge travel cost. Hence the price quadruples for the buyers.
Language is also a natural barrier. Buying or exchanging stuff without communication is impossible. So, language barrier can became the biggest hurdle.
Culture can also diminish the market for a product. For example, alcohol will not find its niche in countries with shariah law. Likewise, social status, weather (cold/warm) and other factors also contribute as hurdles.
Another barrier we can witness now a days is border closure. This is a physical hurdle that stops entrance of foreign objects in one country. Coronavirus pandemic in 2020 has made almost all countries suspend the supply chain. This has led to distress in trading market. However, no one can do anything about it. Thus such barriers are permanent unless a new technology arrives for navigation through them.
There other types of international trade barriers that lead to limited trade. Here are two of them:
- Governments creates certain regulations that limit the imports in the country. These include quality assurance, pollution control and adherence to labor laws. Foreign product manufactures have to abide by those regulations. Likewise there are some international standards. Big corporations have to uphold them in every country they work in. For example, Disney doesn’t work in country where child labor is in practice.
- There is a legal barrier which bares the selling or trade of products. For example,some countries consider crypto trade as illegitimate. It is driven by the fact that some trades use crypto to hide illegal assets. Therefore, in the states of Washington and New York the operations of a few exchanges has been suspended. Governments believe in scrutiny of trade. However, this poses a trade barrier.
Tariff is a form of text imposed on products of another country. It is also known as custom duty in some places. Tariff raise the price of a product. This makes it more costly then locally manufactured products. As a result, imported goods lose in the competition.
The application of tariffs is on per unit or percentage basis. For example, 10 percent of a $10,000 shipment. Protective tariffs are a measure to protect local industry. Additionally, tariffs are also politically driven sometimes. For instance, US imposes higher taxes on products coming from China whenever China-US relations are on bad terms.
There are economic trade barriers other than tariffs which scrutinize trade, purpose of these are to protect local markets. Below are the most debated non-tarrif hurdles:
- Anti-Dumping Duties: It is a protectionist barrier. When government believes that an export is lower in price then fair market rate then it places this duty. Consequently, local industry still remains in competition.
- Voluntary Export Restraint (VER): Firms abiding by this rule have to limit exports. It helps in increasing the price of product. As a result, revenue also surges.
- Subsidy: This is a special advantage given to local industries and manufacturers. Subsidy is a price that government pays for the product. It lowers the cost of product thus making it more competitive in market.
- Embargo: It completely bans the entrance of products from certain countries. This is a buy-national scheme which forces buyers to purchase local products.
- Quotas: It is a limit placed on number of imports.
Governmental Policies Creating Trade Barriers:
The international trade barriers are a norm in our country. In fact, now a days politicians use anti-trade slogans in their political campaigns. Donald Trump, the president of the United States bagged victory on ‘America-First’ slogan. Same is the case of other populists leaders.As the downside of globalization is becoming evident, people are turning to localization. At this point you might be wondering ‘what are the major government policies that restrict trade. Here is brief overview of them:
Supporting local industries:
This is one of the most common governmental policy for plunging trade rate. Small industries at home are at disadvantage from influx of foreign products. Big international capitalist are far ahead in the competition. This decreases the need for medium quality local products. Governments step in and place barriers on these global organization. It helps local companies grow while preventing trade between countries.
2. Job Creation:
Labor is costly in developed countries. This makes their product price higher. In comparison, developing countries have cheap labor which leads to lower prices. But, government has to protect domestic jobs. Therefore, imports have a high tax on them bringing prices in competition.
3. Improving trade deficit:
When imports of a country are higher then exports then this creates a trade deficit. Governments make policies around improving this trade deficit. High taxes and other barriers make imported products expensive. Subsequently, the demand of imports diminishes. It creates a balance between imports and exports.
4. Creating Competitive Market:
Sometimes the imported products start selling at a lower rate then average price. This gives them edge over all other competitors. Nonetheless, this is a discouraging factor for local manufacturers. The government creates policy to prevent this dumping. An anti dumping duty forces international marketers to increase prices. Thus a healthy competition stays in the market despite imports coming in.
5. Increasing Revenue:
Increasing the income of a country is part of government’s Job description. The biggest source of that income are taxes. Tariffs or custom duties add into it. So, governments opt to place high tariffs on imported stuff. This generates revenue for the country.
In this article we have discussed a list of trade barriers that prevent trade between countries. Essentially, trade is of paramount importance for globalization and flow of economy. It has made the availability of necessities of life possible in every corner of the world. However, as the rich are getting richer trade is being seen as part of problem. In view of governments, foreign trade stifles their own industries. Thus around the world people are demanding the preference of local over global. Additionally, countries are also likely to shut the trade first whenever a political rivalry arises. This has resulted in creation of a big number of hurdles in place of trade, traders are in constant pursuit of navigation through those hurdles. Hopefully, governments will soon realize that a free market is the only way forward.
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