2. Trade Barriers
International trade is generally characterized by the existence
of various trade barriers. Trade barriers refer to the
government policies and measures which obstruct the free
flow of goods and services across national borders.
The main objectives of imposing trade barriers are:
•To protect domestic industries from foreign competition.
•To guard against dumping
•To promote indigenous research and development
•To conserve foreign exchange resources of the country
•To make the Balance of Payments position more favourable
•To curb conspicuous consumption and mobilise revenue for the
government
3. Trade Barriers are broadly divided into two groups:
Tariff Barriers
Non-tariff Barriers
Types of Trade Barriers
4. Tariff Barriers
Tariffs refer to the duties or taxes imposed on the export and import
of any commodity as it crosses national border.
Tariff is a very important instrument of trade protection, generally
regarded as less restrictive than other methods of protection like
quantitative restrictions. Therefore organisations like WTO
generally prefer tariff to Non-tariff barriers.
5. On the basis of the origin and destination of the goods
crossing the national boundary, tariffs may be classified
into the following three categories:
•Export duties
•Import duties
•Transit duties
Classification of Tariff Barriers
Export Duties: A tax imposed on a commodity originating from the duty
levying country destined for some other country.
Import duties: A tax imposed on a commodity originating abroad and destined
for the duty levying country.
Transit duties: A tax imposed on a commodity crossing the national frontier
originating from and destined for other countries.
6. On the basis of the quantification, tariffs may be
classified into the following three categories:
•Ad-valorem duties
•Specific duties
•Compound duties
Classification of Tariff Barriers
Ad-valorem Duties: duties are levied as a fixed percentage of the value of the
commodity imported/exported
Specific duties: duties are levied as a flat sum per physical unit of the
commodity imported or exported.
compound duties: mixture of ad-valorem and specific duties.
7. How Tariff works?
Price
B
Quantity
F
F₁
A
N
D
P₂
P₁
P
D₁
S
S₁
C
E
Q₄
Q₃
Q₂ Q₁ Q
DD₁= Domestic Demand curve
SS₁= Domestic Supply curve
In absence of trade: eq. price is P₂ and
domestic DD and SS being Q₄
We assume, Foreign SS curve is perfectly
elastic at price P.
Under free trade: Supply position is
represented by PF
Under free trade, at price P:
Domestic demand: Q
Domestic supply: Q₂
Imports: Q₂Q
Now ,assume that govt. imposes a tariff of
PP₁ per unit of import, therefore price rises
from P to P₁. Now at P₁:
Domestic demand: Q₁
Domestic supply: Q₃
Imports: Q₃Q₁
8. Effects of Tariff
Price
B
Quantity
F
F₁
A
N
D
P₂
P₁
P
D₁
S
S₁
C
E
Q₄
Q₃
Q₂ Q₁ Q
Consumption effect: reduction in domestic
consumption (QQ₁ or CF)
Production effect: expansion in domestic
production (Q₂Q₃ or EB)
Trade effect: the decline in imports (BE+CF)
Revenue effect: revenue collected by govt.
by tariff (ABCF₁)
Consumer surplus (measured by the area
under the dd curve and above the going
price):
Under free trade, CS: DFP
After tariff, CS: DP₁F₁
Loss in CS: PFF₁P₁ (reduction in CS)
Producer Surplus (measured by the area
below the price and above the SS curve):
Under Free Trade, PS: PSE
After tariff, PS: P₁AES
Gain in PS: PP₁AE
Net loss (Deadweight loss) : area ABE + area
CFF₁ (cost of tariff)
O
9. Terms of Trade Effect
A tariff would likely to improve the terms
of trade of a tariff-imposing country.
OH- offer curve of Home country
exporting X-goods and importing Y-goods.
OF: offer curve of foreign country
exporting Y-goods and importing X-goods
At Free trade eq:
TOT: qty of exports/qty of imports or
OX/OY
Now suppose, home country imposes
tariff on its imports → shifts offer curve to
OH₁ → OT₁ (OX₁/OY₁) is new eq. TOT
OT₁ is more favourable than OT for the
home country as now the home country
is getting a large quantity of imports for a
given quantity of its exports as
OX₁/OY₁ < OX/OY.
X Goods
Y
Goods
T₁
X₂
X₁ X
T
E₁
Y₁
Y
H₁
H
F
O
10. Income distribution
effect
Production of
exportable
Production of
importable
Capital
Labor
P
O’
P’
O
Exportable good-labor intensive
Importable good-capital intensive
At free trade: production pt. is at P
After tariff: price of importable rise
→ producers start increasing
production of import goods and
decreasing production of exports →
P shifts to P’.
Production method in both
industries become labor-intensive
because when production of
importable ↑ which is cap-
intensive, more capital is used→
relative price of capital is bid up.
Producers try to substitute labor for
capital → production methods
become more labor intensive.
This phenomenon is known as
Stopler-Samuelson Theorem
11. A tariff will usually have a positive effect on a country’s Balance of
Trade.
Tariff and Balance of Payment
Tariff → imports ↓ initially → balance of trade improve. At the same
time, national income increases → negative effect on BOT
Much now depends on behaviour of trading partners. If repercussions
are small and no retaliation occur→ trade balance improve
But If imports ↑ due to increased national income and if foreign
repercussions are great → temporary improvement in BOT may be
destroyed.
12. Tariff → switch demand from international goods to home goods.
With an export schedule X and Import schedule M, national income is
Y. because of tariff, imports reduce from M to M’ and national income
increases from Y to Y’.
Tariff and National Income
National
Income
Exports/Imports
X
M
M’
Y Y’
13. As national income increases from Y to Y’ due to tariff,
unemployment decreases. The use of tariff for deceasing
unemployment is called Beggar-thy- Neighbour policy. but this is
feasible only if there is no retaliation on the part of the trading
partner.
Tariff and Employment
National
Income
Exports/Imports
X
M
M’
Y Y’
