Trade barrier

1. International Trade Barriers

2. The Political Reality Of International
Trade
 Free trade occurs when governments do not
attempt to restrict what citizens can buy from
another country or what they can sell to another
country
 While many nations are nominally committed to
free trade, they tend to intervene in international
trade to
 protect the interests of politically important groups
 Promote the interest of key domestic producers

3. Instrument of Trade policy
 There are seven main instruments of trade policy
 Tariffs
 Non-Tarrifs
 Subsidies
 Import quotas
 Voluntary export restraints
 Local content requirements
 Antidumping policies
 Administrative policies

4. Instrument of Trade policy
1.Tariffs: Taxes levied on imports (also
sometimes on exports)
 To protect domestic producers from foreign
competition by raising the price of imported
goods
 To produce revenue for the government
Specific tariff: fixed charge for each good imported
Ad valorem tariffs: levied as a proportion of the
value of the imported good

5. Instrument of Trade policy
2. Subsidy:
Government payment to domestic producers
It can take many forms: Cash grants, low-interest
loans, tax breaks, equity participation, government
purchases
Subsidies help the domestic producers to
 Compete against cheaper imports
 Gain export markets
3. Import Quota:
 restrict the quantity of some good that may be
imported into a country
 Tariff rate quotas - a hybrid of a quota and
a tariff is applied to imports
 A quota rent - the extra profit that
producers make when supply is artificially
limited by an import quota

6. Instrument of Trade policy
4. Voluntary Export Restraints
 Quotas on trade imposed by the exporting country,
typically at the request of the importing country’s
government
 Import quotas and voluntary export restraints
 benefit domestic producers
 raise the prices of imported goods
 Exporting Country impose
5. Local Content Requirements
 demand that some specific fraction of a good be
produced domestically
 benefit domestic producers
 consumers face higher prices

7. Instrument of Trade policy
6. Administrative Polices –
 bureaucratic rules designed to make it difficult
for imports to enter a country
 polices hurt consumers by limiting choice
7. Antidumping Policies
 Designed to punish foreign firms that engage in
dumping and protect domestic producers from
“unfair” foreign competition
 Dumping - selling goods in a foreign market below
their costs of production, or selling goods in a
foreign market below their “fair” market value
 Production cost/market cost

8. Governments Intervene In Markets
 There are two main arguments for government
intervention in the market
1. Political arguments - concerned with
protecting the interests of certain groups within
a nation (normally producers)
2. Economic arguments - concerned with
boosting the overall wealth of a nation –
benefits both producers and consumers

9. Government Intervention in Markets
(A. Political Arguments)
1.Protecting jobs –
 The most common political reason for trade
restrictions
 Protect jobs and industries from unfair foreign
competition
 Results from political pressures by unions or
industries
2. National security
 Industries like aerospace or electronics are often
protected because they are deemed important for
national security
3. Retaliation
 when governments take, or threaten to take,
specific actions, other countries may remove
trade barriers
 If threatened governments do not back down,

10. Government Intervention in Markets
(A. Political Arguments)
4. Protecting consumers
 Government take regulation to limit or ban
“unsafe” products.
5.Furthering the goals of foreign policy –
 preferential trade terms can be granted to
countries that a government wants to build strong
relationship
 Trade policy has also been used several times to
pressure or punish “rogue states” that do not
abide by international law or norms.
6. Protecting the human rights
 Try to protect or improve human rights through
trade policy actions

11. Government Intervention in Market
(B. Economic Arguments)
1. The infant industry argument
 an industry should be protected until it can
develop and be viable and competitive
internationally
 accepted as a justification for temporary trade
restrictions under the WTO
2. Strategic trade policy
 In cases where there may be important first mover
advantages, governments can help firms from their
domestic firms to attain these advantages rather
than allow foreignenterprises.
 Governments can help firms overcome barriers to
entry into industries where foreign firms have an
initial advantage