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FINANCIAL WEALTH: Assets, or wealth, that is based on ownership of financial assets, such as stocks, bonds, money, and government securities. Also termed paper wealth. Financial wealth represents ownership of physical or real wealth.

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TRADE BARRIERS:

Policies enacted by the government sector of a domestic economy to discourage imports from the foreign sector. The three most common trade barriers are tariffs, import quotas, and non-tariff barriers. Trade barriers are designed to discourage imports which not only creates or increases a country's balance of trade surplus and thus increase net exports, but also to protect the domestic economy.
Trade barriers are government actions, especially tariffs, import quotas, and assorted non-tariff regulations and restrictions that are intended to increase net exports by restricting imports. By increasing net exports (and creating a more "favorable" balance of trade), the domestic production of a nation increases, which then increases domestic income and employment.

While trade barriers can be beneficial to the aggregate domestic economy they tend to be most beneficial, and thus most commonly promoted by, domestic firms facing competition from foreign imports. Domestic firms benefit with higher sales, greater profits, and more income to resource owners. However, by increasing domestic prices and restricting accessing to imports, trade barriers also tend to be harmful to domestic consumers.

The Why Behind Trade Barriers

Unrestricted trade among nations is theoretically beneficial to both nations engaged in a particular exchange. An exchange generates a net increase in the sum of consumer surplus and producer surplus. These are the same gains from trade that results from any voluntary market exchange.

Why then is it virtually every nation in the global economy imposes trade barriers of one form or another? Before examining specific trade barriers, a quick look at the five reasons commonly used to justify trade barriers is in order.

  • Domestic Employment: One of the most common justifications for trade barriers is to protect domestic employment. Foreign imports provide competition with domestic production. To the extent that domestic consumers purchase imports rather than domestic production, domestic production declines and so too does domestic employment. It follows then that barriers that restrict imports prevent the reduction of domestic production and domestic employment. Key to this justification is that production is provided by citizens of the domestic economy, who pay taxes and vote, rather than foreign workers.

  • Low Foreign Wages: Those who promote barriers to foreign trade often contend that other countries in the foreign sector gain a comparative advantage due to low wages paid to their workers. These low wages then prevent domestic producers and their workers from competing on a "level playing field." These low foreign wages might be the result of a "natural" comparative advantage based on the economic structure of a foreign country or caused by "artificial" subsidies or other policies undertaken by foreign governments. Trade barriers then restrict low wage (read this as "cheap") imports from undercutting domestic production.

  • Infant Industry: Another argument put forth to impose trade barriers and restrict imports is to protect relatively young domestic industries that are not mature enough nor large enough to compete with larger, more mature foreign producers. These "fledgling" industries have not been around long enough to create brand name recognition, benefit from economies of scale, and develop stable input supplies. Trade barriers then protect infant industries from foreign competition while they mature and develop.

  • Unfair Trade: Trade barrier proponents also contend that foreign firms often engage in unfair trade practices that "unlevel" the competitive playing field. A common contention is that foreign imports are sold in the domestic economy at prices below actual production cost. This practice of "dumping" might be undertaken to drive domestic producers out of business, lessen competition, and increase the market share of the foreign producers. In addition, foreign imports might be sold at unfairly low prices because foreign governments subsidize their producers. Trade barriers prevent foreign producers from unfairly gaining a competitive advantage in the domestic economy and help to level the playing field.

  • National Security: A last noted argument is that trade barriers are often needed to protect firms and industries that produce output vital to the security and defense of the nation. Should the nation import a significant amount of goods used for national defense and should the foreign producing nations decide to restrict imports, then the nation would be vulnerable. Trade barriers prevent the country from depending on these imports and allow greater reliance on domestic production.
Each of these arguments provides logical, reasonable, and necessary justification for the imposition of trade barriers. However, each is also commonly misused especially by politically powerful domestic producers that seek little more than to limit foreign competition, charge higher prices, gain greater market share, and increase profits.

For example, the infant industry argument is frequently used to justify the protection of large, dominant, and MATURE domestic firms. The national security argument is also occasionally used to protect industries that have almost nothing to do with the security of the nation.

In fact, the domestic employment and low foreign wages arguments are really and recognition that foreign producers have a comparative advantage, and advantage which the domestic economy can benefit from when engaging in foreign trade. Moreover, the charge of unfair trade practices directed at foreign producers might be little more than lower production costs enabled by comparative advantage.

Tariffs

The first of three trade barriers designed to restrict imports is tariffs on imports. Tariffs are simply taxes placed on imports. They work like any other taxes. A tariff is added to the price of the imported good. The resulting price of the import is thus higher, which tends to decrease the quantity purchased. And if fewer imports are purchased, then more domestic production is sold.

Tariffs are commonly imposed if domestic producers are able to convince government policy makers to compensate for foreign producers who unfairly gain a competitive advantage due to low foreign wages, dumping practices, or low production costs. However, tariffs are also imposed as a general means of limiting imports.

Tariffs are often the trade barrier of choice because tax revenue is paid to the government treasury. Not only do domestic producers benefit from trade protection, but the government sector benefits from extra tax revenue, revenue that in principle could be used to compensate domestic consumers that might be harmed by the trade barriers due to higher prices and restricted access to production.

Import Quotas

The second of three trade barriers designed to restrict imports and promote exports is quotas on imports. In general, a quota is simply a quantity restriction placed on a good, service, or activity. For example, employers often face hiring quotas for different demographic groups and sales representatives often have quotas for sales activities. Import quotas are then merely legal restrictions on the quantities of imports that are imposed by the domestic government.

Import quotas can be established as a simple aggregate, presumably satisfied on a first-come-first-serve basis. Once the total is reached, then no more imports of the particular good are allowed. Alternatively, the total quota can be divided among foreign producers, perhaps pro-rated based on past imports.

Import quotas are imposed based on any of the justifications for trade barriers, but it is particularly important when it comes to national security. If, for example, the military relies on a particular piece of computer equipment for missile guidance systems, then reliance on any foreign imports could be problematic. A "zero" import quota might be the best trade barrier policy.

Non-tariff Barriers

The third of three common trade barriers is assorted non-tariff barriers. These non-tariff barriers primarily include government regulations applied to specific products. The regulations might apply to production techniques, product safety, environmental quality, or ingredients and other inputs. These regulations might reflect the consumer preferences of the domestic economy or unique production techniques available only to domestic producers.

If, for example, domestic consumers value environmental quality or product safety, then government regulations preventing foreign imports that do not meet domestic standards might be imposed. Alternatively, domestic production relies on a unique naturally occurring input, then government regulations preventing foreign imports that do not use this input might be imposed.

While these non-tariff barriers are often justified to protect domestic consumes, they are also just as often imposed to prevent competition for domestic producers.

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Recommended Citation:

TRADE BARRIERS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: July 28, 2014].


Check Out These Related Terms...

     | tariffs | import quotas | export subsidies | foreign trade policies | terms of trade | gains from trade | protectionism |


Or For A Little Background...

     | international trade | comparative advantage | law of comparative advantage | exports | imports | net exports | foreign trade |


And For Further Study...

     | balance of trade | balance of trade surplus | balance of trade deficit | balance of payments | foreign exchange market | international market |


Related Websites (Will Open in New Window)...

     | World Trade Organization | North American Free Trade Agreement | General Agreement on Tariffs and Trade | European Union |


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