International Trade Barriers

Economics

Trade barriers are government-induced restrictions on international trade, which generally decrease overall economic efficiency.

Learning Objectives

Explain the different types of trade barriers and their economic effect

Key Takeaways

Key Points

  • Trade barriers cause a limited choice of products and, therefore, would force customers to pay higher prices and accept inferior quality.
  • Trade barriers generally favor rich countries because these countries tend to set international trade policies and standards.
  • Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency, which can be explained by the theory of comparative advantage.

Key Terms

  • quota: a restriction on the import of something to a specific quantity.
  • tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.

Trade barriers are government-induced restrictions on international trade. Man-made trade barriers come in several forms, including:

  • Tariffs
  • Non-tariff barriers to trade
  • Import licenses
  • Export licenses
  • Import quotas
  • Subsidies
  • Voluntary Export Restraints
  • Local content requirements
  • Embargo
  • Currency devaluation
  • Trade restriction

Most trade barriers work on the same principle–the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results.

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A port in Singapore: International trade barriers can take many forms for any number of reasons. Generally, governments impose barriers to protect domestic industry or to “punish” a trading partner.

Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency. This can be explained by the theory of comparative advantage. In theory, free trade involves the removal of all such barriers, except perhaps those considered necessary for health or national security. In practice, however, even those countries promoting free trade heavily subsidize certain industries, such as agriculture and steel. Trade barriers are often criticized for the effect they have on the developing world. Because rich-country players set trade policies, goods, such as agricultural products that developing countries are best at producing, face high barriers. Trade barriers, such as taxes on food imports or subsidies for farmers in developed economies, lead to overproduction and dumping on world markets, thus lowering prices and hurting poor-country farmers. Tariffs also tend to be anti-poor, with low rates for raw commodities and high rates for labor-intensive processed goods. The Commitment to Development Index measures the effect that rich country trade policies actually have on the developing world. Another negative aspect of trade barriers is that it would cause a limited choice of products and, therefore, would force customers to pay higher prices and accept inferior quality.

In general, for a given level of protection, quota-like restrictions carry a greater potential for reducing welfare than do tariffs. Tariffs, quotas, and non-tariff barriers lead too few of the economy’s resources being used to produce tradeable goods. An export subsidy can also be used to give an advantage to a domestic producer over a foreign producer. Export subsidies tend to have a particularly strong negative effect because in addition to distorting resource allocation, they reduce the economy’s terms of trade. In contrast to tariffs, export subsidies lead to an over allocation of the economy’s resources to the production of tradeable goods.

Ethical Barriers

Despite international trading laws and declarations, countries continue to face challenges around ethical trading and business practices.

Learning Objectives

Explain how and why groups place ethical barriers on international trade

Key Takeaways

Key Points

  • Although some argue that the increasing integration of financial markets between countries leads to more consistent and seamless trading practices, others point out that capital flows tend to favor the capital owners more than any other group.
  • With increased international trade and global capital flows, critics argue that income disparities between the rich and poor are exacerbated, and industrialized nations grow in power at the expense of under-capitalized countries.
  • Anti- globalization groups continue to protest what they view as the unethical trading practices of multinational businesses and capitalist nations, often targeting groups such as the WTO and IMF.

Key Terms

  • GDP: Gross Domestic Product (Economics). A measure of the economic production of a particular territory in financial capital terms over a specific time period.
  • neoliberalism: A political movement that espouses economic liberalism as a means of promoting economic development and securing political liberty.

Ethical Barriers

International trade is the exchange of goods and services across national borders. In most countries, it represents a significant part of gross domestic product (GDP). The rise of industrialization, globalization, and technological innovation has increased the importance of international trade, as well as its economic, social, and political effects on the countries involved. Internationally recognized ethical practices such as the UN Global Compact have been instituted to facilitate mutual cooperation and benefit between governments, businesses, and public institutions. Nevertheless, countries continue to face challenges around ethical trading and business practices, especially regarding economic inequalities and human rights violations.

Arguments Against International Trade

Capital markets involve the raising and investing money in various enterprises. Although some argue that the increasing integration of these financial markets between countries leads to more consistent and seamless trading practices, others point out that capital flows tend to favor the capital owners more than any other group. Likewise, owners and workers in specific sectors in capital-exporting countries bear much of the burden of adjusting to increased movement of capital. The economic strains and eventual hardships that result from these conditions lead to political divisions about whether or not to encourage or increase integration of international trade markets. Moreover, critics argue that income disparities between the rich and poor are exacerbated, and industrialized nations grow in power at the expense of under-capitalized countries.

Anti-Globalization Movements

The anti-globalization movement is a worldwide activist movement that is critical of the globalization of capitalism. Anti-globalization activists are particularly critical of the undemocratic nature of capitalist globalization and the promotion of neoliberalism by international institutions such as the International Monetary Fund (IMF) and the World Bank. Other common targets of anti- corporate and anti-globalization movements include the Organisation for Economic Co-operation and Development (OECD), the WTO, and free trade treaties like the North American Free Trade Agreement (NAFTA), Free Trade Area of the Americas (FTAA), the Multilateral Agreement on Investment (MAI), and the General Agreement on Trade in Services (GATS). Meetings of such bodies are often met with strong protests, as demonstrators attempt to bring attention to the often devastating effects of global capital on local conditions.

On November 30, 1999, close to fifty thousand people gathered to protest the WTO meetings in Seattle, Washington. Labor, economic, and environmental activists succeeded in disrupting and closing the meetings due to their disapproval of corporate globalization. This event came to symbolize the increased debate and growing conflict around the ethical questions on international trade, globalization and capitalization.

An armed policeman sprays tear gas into a group of protestors.

Criticism of the Global Capitalist Economy: Demonstrations, such as the mass protest at the 1999 WTO meeting in Seattle, highlight ethical questions on the effects of international trade on poor and developing nations.

Cultural Barriers

It is typically more difficult to do business in a foreign country than in one’s home country due to cultural barriers.

Learning Objectives

Explain how cultural differences can pose as barriers to international business

Key Takeaways

Key Points

  • With the process of globalization and increasing global trade, it is unavoidable that different cultures will meet, conflict, and blend together. People from different cultures find it is hard to communicate not only due to language barriers but also cultural differences.
  • It is typically more difficult to do business in a foreign country than in one’s home country, especially in the early stages when a firm is considering either physical investment in or product expansion to another country.
  • Expansion planning requires an in-depth knowledge of existing market channels and suppliers, of consumer preferences and current purchase behavior, and of domestic and foreign rules and regulations.
  • Recognize useful strategic frameworks and tools for assessing variance in cultural predisposition, such as Hofstede’s Cultural Dimensions Theory.

Key Terms

  • red tape: A derisive term for regulations or bureaucratic procedures that are considered excessive or excessively time- and effort-consuming.
  • individualism: The tendency for a person to act without reference to others, particularly in matters of style, fashion or mode of thought.

Culture and Global Business

It is typically more difficult to do business in a foreign country than in one’s home country, especially in the early stages when a firm is considering either physical investment in or product expansion to another country. Expansion planning requires an in-depth knowledge of existing market channels and suppliers, of consumer preferences and current purchase behavior, and of domestic and foreign rules and regulations. Language and cultural barriers present considerable challenges, as well as institutional differences among countries.

With the process of globalization and increasing global trade, it is unavoidable that different cultures will meet, conflict, and blend together. People from different cultures find it hard to communicate not only due to language barriers but also because of cultural differences.

In a survey of Texas agricultural exporting firms, Hollon (1989) found that from a firm management perspective, the initial entry into export markets was significantly more difficult than either the handling of ongoing export activities or the consideration of expansion to new export product lines or markets. From a list of 38 items in three categories (knowledge gaps, marketing aspects, and financial aspects) over three time horizons (start-up, ongoing, and expansion), the three problems rated most difficult were all start-up phase marketing items:

  • Poor knowledge of emerging markets or lack of information on potentially profitable markets
  • Foreign market entry problems and overseas product promotion and distribution
  • Complexity of the export transaction, including documentation and “red tape.”

Two of these items, market entry and transaction complexity, remained problematic in ongoing operations and in new product market expansion. Import restrictions and export competition became more problematic in later phases, while financial problems were pervasive at all phases of the export operation.

Tools for Understanding Cultural Deviations in Business

Recognizing that different geographic regions and/or nationalities represent vastly different business operating characteristics, often due to differences in cultural predisposition, is a critical building block for successful global business leaders. As a result, various researchers in global business have generated business models to illustrate key cultural considerations between different countries. The most recognized and utilized in the field is Geert Hofstede’s Cultural Dimensions Theory, which encompasses six cultural deviations highly relevant to business managers. The figure below provides an example of this model:

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Hofstede’s Cultural Dimensions Theory Example

A three-column chart with the column headings Cultural Dimensions Example, Country A, and Country B.

As you can see in the above figure, the six dimensions underline differences in perspective in each category. Two countries (or more) are selected for comparison, at which point can identify differences in business practices based on cultural barriers. For example, Country A demonstrates lower power distance compared to Country B. This means that a resident of Country A operating in Country B must understand that lines of authority are more rigid in Country B and act accordingly.

To briefly explain each dimension:

  • PDI rating represents a stronger acceptance of authority in a given culture
  • IDV (individualism) rating indicates the degree to which individuals are focused upon as opposed to the broader group
  • UAI represents the degree to which risk-taking is commonplace (a higher rating meaning a lower propensity for risk)
  • MAS represents the scale between competitiveness, materialism and aggressiveness (high rating) compared to focusing on relationships and quality of life
  • LTO indicates the tendency to plan for longer-term agenda items as opposed to pursuing short-term goals
  • IVR is simply the frugal (or spendthrift) habits of the average individual in a culture (purchasing beyond necessity)

Technological Barriers

Standards-related trade measures, known in WTO parlance as technical barriers to trade play a critical role in shaping global trade.

Learning Objectives

Explain how technical standards can be barriers to trade

Key Takeaways

Key Points

  • Governments, market participants, and other entities can use standards -related measures as an effective and efficient means of achieving legitimate commercial and policy objectives.
  • Significant foreign trade barriers in the form of product standards, technical regulations and testing, certification, and other procedures are involved in determining whether or not products conform to standards and technical regulations.

Key Terms

  • standard: A level of quality or attainment.
  • enterprise: A company, business, organization, or other purposeful endeavor.

U.S. companies, farmers, ranchers, and manufacturers increasingly encounter non- tariff trade barriers in the form of product standards, testing requirements, and other technical requirements as they seek to sell products and services around the world. As tariff barriers to industrial and agricultural trade have fallen, standards-related measures of this kind have emerged as a key concern. Governments, market participants, and other entities can use standards-related measures as an effective and efficient means of achieving legitimate commercial and policy objectives. But when standards-related measures are outdated, overly burdensome, discriminatory, or otherwise inappropriate, these measures can reduce competition, stifle innovation, and create unnecessary technical barriers to trade. These kinds of measures can pose a particular problem for small- and medium-sized enterprises (SMEs), which often do not have the resources to address these problems on their own. Significant foreign trade barriers in the form of product standards, technical regulations and testing, certification, and other procedures are involved in determining whether or not products conform to standards and technical regulations.

These standards-related trade measures, known in World Trade Organization (WTO) parlance as “technical barriers to trade,” play a critical role in shaping the flow of global trade. Standards-related measures serve an important function in facilitating global trade, including by enabling greater access to international markets by SMEs. Standards-related measures also enable governments to pursue legitimate objectives, such as protecting human health and the environment and preventing deceptive practices. But standards-related measures that are non-transparent, discriminatory, or otherwise unwarranted can act as significant barriers to U.S. trade. These kinds of measures can pose a particular problem for SMEs, which often do not have the resources to address these problems on their own.

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Members of the World Trade Organization: Most countries are now part of the World Trade Organization. Those that are not are concentrated in northeast Africa, Oceania, and the Middle East. The European Union is its own bloc within the W.T.O.

The Argument for Barriers

Some argue that imports from countries with low wages has put downward pressure on the wages of Americans and therefore we should have trade barriers.

Learning Objectives

Argue in support of trade barriers

Key Takeaways

Key Points

  • Economy -wide trade creates jobs in industries that have a comparative advantage and destroys jobs in industries that have a comparative disadvantage.
  • Trade barriers protect domestic industry and jobs.
  • Workers in export industries benefit from trade. Moreover, all workers are consumers and benefit from the expanded market choices and lower prices that trade brings.

Key Terms

  • comparative advantage: The concept that a certain good can be produced more efficiently than others due to a number of factors, including productive skills, climate, natural resource availability, and so forth.
  • inflation: An increase in the general level of prices or in the cost of living.

It is asserted that trade has created jobs for foreign workers at the expense of American workers. It is more accurate to say that trade both creates and destroys jobs in the economy in line with market forces.

Economy-wide trade creates jobs in industries that have comparative advantage and destroys jobs in industries that have a comparative disadvantage. In the process, the economy’s composition of employment changes; but, according to economic theory, there is no net loss of jobs due to trade. Over the course of the last economic expansion, from 1992 to 2000, U.S. imports increased nearly 240%. Over that same period, total employment grew by 22 million jobs,and the unemployment rate fell from 7.5% to 4.0% (the lowest unemployment rate in more than 30 years.). Foreign outsourcing by American firms, which has been the object of much recent attention, is a form of importing and also creates and destroys jobs, leaving the overall level of employment unchanged. There is no denying that with international trade there will be short-run hardship for some, but economists maintain the whole economy’s living standard is raised by such exchange. They view these adverse effects as qualitatively the same as those induced by purely domestic disruptions, such as shifting consumer demand or technological change. In that context, economists argue that easing adjustment of those harmed is economically more fruitful than protection given the net economic benefit of trade to the total economy. Many people believe that imports from countries with low wages has put downward pressure on the wages of Americans.

There is no doubt that international trade can have strong effects, good and bad, on the wages of American workers. The plight of the worker adversely affected by imports comes quickly to mind. But it is also true that workers in export industries benefit from trade. Moreover, all workers are consumers and benefit from the expanded market choices and lower prices that trade brings. Yet, concurrent with the large expansion of trade over the past 25 years, real wages (i.e., inflation adjusted wages) of American workers grew more slowly than in the earlier post-war period, and the inequality of wages between the skilled and less skilled worker rose sharply. Was trade the force behind this deteriorating wage performance? Some industries, or at least components of some industries, are vital to national security and possibly may need to be insulated from the vicissitudes of international market forces. This determination needs to be made on a case-by-case basis since the claim is made by some who do not meet national security criteria. Such criteria may also vary from case to case. It is also true that national security could be compromised by the export of certain dual-use products that, while commercial in nature, could also be used to produce products that might confer a military advantage to U.S. adversaries. Controlling such exports is clearly justified from a national security standpoint; but, it does come at the cost of lost export sales and an economic loss to the nation. Minimizing the economic welfare loss from such export controls hinges on a well- focused identification and regular re-evaluation of the subset of goods with significant national security potential that should be subject to control.

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Korea International Trade Association: KITA attempts to protect South Korean producers while finding international export markets.

The Argument Against Barriers

Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency.

Learning Objectives

Argue against the imposition of trade barriers

Key Takeaways

Key Points

  • Trade barriers are often criticized for the effect they have on the developing world.
  • Even countries promoting free trade heavily subsidize certain industries, such as agriculture and steel.
  • Most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results.

Key Terms

  • trade war: The practice of nations creating mutual tariffs or similar barriers to trade.

Most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results

Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency, this can be explained by the theory of comparative advantage. In theory, free trade involves the removal of all such barriers, except perhaps those considered necessary for health or national security. In practice, however, even those countries promoting free trade heavily subsidize certain industries, such as agriculture and steel.

image

International trade: International trade is the exchange of goods and services across national borders. In most countries, it represents a significant part of GDP.

Trade barriers are often criticized for the effect they have on the developing world. Because rich-country players call most of the shots and set trade policies, goods, such as crops that developing countries are best at producing, still face high barriers. Trade barriers, such as taxes on food imports or subsidies for farmers in developed economies, lead to overproduction and dumping on world markets, thus lowering prices and hurting poor-country farmers. Tariffs also tend to be anti-poor, with low rates for raw commodities and high rates for labor-intensive processed goods.

If international trade is economically enriching, imposing barriers to such exchanges will prevent the nation from fully realizing the economic gains from trade and must reduce welfare. Protection of import-competing industries with tariffs, quotas, and non-tariff barriers can lead to an over-allocation of the nation’s scarce resources in the protected sectors and an under-allocation of resources in the unprotected tradeable goods industries. In the terms of the analogy of trade as a more efficient productive process used above, reducing the flow of imports will also reduce the flow of exports. Less output requires less input. Clearly, the exporting sector must lose as the protected import-competing activities gain. But, more importantly, from this perspective the overall economy that consumed the imported goods must also lose, because the more efficient production process–international trade–cannot be used to the optimal degree, and, thereby, will have generally increased the price and reduced the array of goods available to the consumer. Therefore, the ultimate economic cost of the trade barrier is not a transfer of well-being between sectors, but a permanent net loss to the whole economy arising from the barriers distortion toward the less efficient the use of the economy’s scarce resources.