Economics Online Tutor
| Trade Restrictions |
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Infant industry: Sometimes governments believe that specific industries which are less efficient than
foreign competition would become more efficient if given time to develop without being undermined by
cheaper foreign prices. This is based on the idea that new industries tend to have high startup costs,
but the costs will decrease if the industry has time to develop. Without restrictions, these companies
cannot survive long enough to realize such cost savings.
Retaliation: The argument for this is that "if they impose restrictions on us, we should impose
restrictions on them in order to level the playing field, in order to make trade more fair".
Protecting jobs: If jobs are "shipped overseas", then domestic unemployment increases. Evidence
shows that trade restrictions to protect jobs can increase employment in protected industries, but will
not increase employment in the overall economy. The job gains in the protected industries would be
offset by job losses in perhaps more efficient industries (specialization & trade). This would indicate
that this argument may be more valid in terms of national interest than in terms of jobs.
Low foreign wages: Countries with a lower standard of living tend to pay lower wages. This is often
true when comparing developing nations with established industrialized nations. Some countries have
few laws to protect workers, such as minimum wage, working conditions, and child labor laws. With
lower labor costs, businesses, especially manufacturing businesses, will be able to produce more
efficiently if they produce in a foreign country. One offsetting argument to this is that efficiency may not
be real if the foreign workers are less productive than the domestic workers, who may be more
educated, better trained, etc.
Politics: Politicians may find it desirable to bow to pressure from special interests, and protect specific
industries located in their districts. This protection wouldn't necessarily be based on national security,
infant industry, or other arguments. It would, however, give special treatment to specific industries
over other industries.
Types of trade barriers
I have found that different economics textbooks have different lists of what the various types of trade
barriers are. The only two that seem to be in common to all lists are tariffs and import quotas.
Tariffs
A tariff is a tax on imported goods. This increases the cost of imports in the domestic market, making
domestic production relatively less costly than it would be without the tariff. This will decrease imports
and increase domestic production in a protected industry. The existence of imports in an industry is an
indication that at the current level of domestic demand, foreign production is more efficient than
domestic production. With a tariff restricting imports, the domestic consumer will have to pay a higher
price, and receive a smaller level of output. The domestic producers in the protected industry will gain
from a tariff because it will allow them to increase prices and output.
Those who gain: domestic producers and the government (tax revenue). Those who lose: domestic
consumers and foreign producers.
Import quotas
Import quotas restrict the amount of imports to a specific level. Once that level is reached, additional
domestic demand will have to be met by domestic producers. This will mean that if demand increases,
domestic consumers will not have the benefit of the cheaper world price (the world price would be
cheaper for an import quota to be effective). All of the additional production to meet an increase in
demand will be met by domestic producers.
Winners and losers with import quotas are similar to the situation with tariffs, except that import quotas
do not provide revenue for the government.
Other types of trade restrictions
Some textbooks may list the following as types of trade barriers:
Embargoes
An embargo is similar to an import quota, except that it restricts all imports for a specific product, or for
a specific industry, or from a specific country. In effect, it is an import quota of zero.
Subsidies
A subsidy is a payment that the government makes to domestic producers of products that are produced
for export. A subsidy basically lowers the cost of production for domestic producers, making it more
profitable for them to sell their products relative to foreign competition. Subsidies are sometimes
referred to as negative taxes.
Purchase restrictions
Governments may pass laws limiting themselves to purchase from domestic producers.
Product standards
The government can require goods sold domestically to meet specific safety standards that are above
the standards of the country that exports to the domestic market. This will mean that the exporter will
either have to quit selling to the country that enacts such standards, leaving the domestic producer
with less competition, or raise their standards for the products that they wish to export. This would
increase their costs, and make them relatively less efficient than before such standards.
Voluntary export restrictions
A voluntary export restriction is the same thing as a quota, but without a specific law to mandate
enforcement. It amounts to an agreement by a nation to limit the amount that it exports to a specific
country. The reason countries would do such a thing voluntarily is because of an implied threat of
retaliation. This means that such restrictions are not really voluntary.
Anti-dumping laws
An anti-dumping law is the other side of a subsidy. A country pays a subsidy so its producers can export
to the world at a lower cost. An anti-dumping law would be the retaliation from the importer, to restrict
the imports of goods that it deems are sold on the world market at unfairly low prices because of
subsidies that another country pays its producers.
foreign competition would become more efficient if given time to develop without being undermined by
cheaper foreign prices. This is based on the idea that new industries tend to have high startup costs,
but the costs will decrease if the industry has time to develop. Without restrictions, these companies
cannot survive long enough to realize such cost savings.
Retaliation: The argument for this is that "if they impose restrictions on us, we should impose
restrictions on them in order to level the playing field, in order to make trade more fair".
Protecting jobs: If jobs are "shipped overseas", then domestic unemployment increases. Evidence
shows that trade restrictions to protect jobs can increase employment in protected industries, but will
not increase employment in the overall economy. The job gains in the protected industries would be
offset by job losses in perhaps more efficient industries (specialization & trade). This would indicate
that this argument may be more valid in terms of national interest than in terms of jobs.
Low foreign wages: Countries with a lower standard of living tend to pay lower wages. This is often
true when comparing developing nations with established industrialized nations. Some countries have
few laws to protect workers, such as minimum wage, working conditions, and child labor laws. With
lower labor costs, businesses, especially manufacturing businesses, will be able to produce more
efficiently if they produce in a foreign country. One offsetting argument to this is that efficiency may not
be real if the foreign workers are less productive than the domestic workers, who may be more
educated, better trained, etc.
Politics: Politicians may find it desirable to bow to pressure from special interests, and protect specific
industries located in their districts. This protection wouldn't necessarily be based on national security,
infant industry, or other arguments. It would, however, give special treatment to specific industries
over other industries.
Types of trade barriers
I have found that different economics textbooks have different lists of what the various types of trade
barriers are. The only two that seem to be in common to all lists are tariffs and import quotas.
Tariffs
A tariff is a tax on imported goods. This increases the cost of imports in the domestic market, making
domestic production relatively less costly than it would be without the tariff. This will decrease imports
and increase domestic production in a protected industry. The existence of imports in an industry is an
indication that at the current level of domestic demand, foreign production is more efficient than
domestic production. With a tariff restricting imports, the domestic consumer will have to pay a higher
price, and receive a smaller level of output. The domestic producers in the protected industry will gain
from a tariff because it will allow them to increase prices and output.
Those who gain: domestic producers and the government (tax revenue). Those who lose: domestic
consumers and foreign producers.
Import quotas
Import quotas restrict the amount of imports to a specific level. Once that level is reached, additional
domestic demand will have to be met by domestic producers. This will mean that if demand increases,
domestic consumers will not have the benefit of the cheaper world price (the world price would be
cheaper for an import quota to be effective). All of the additional production to meet an increase in
demand will be met by domestic producers.
Winners and losers with import quotas are similar to the situation with tariffs, except that import quotas
do not provide revenue for the government.
Other types of trade restrictions
Some textbooks may list the following as types of trade barriers:
Embargoes
An embargo is similar to an import quota, except that it restricts all imports for a specific product, or for
a specific industry, or from a specific country. In effect, it is an import quota of zero.
Subsidies
A subsidy is a payment that the government makes to domestic producers of products that are produced
for export. A subsidy basically lowers the cost of production for domestic producers, making it more
profitable for them to sell their products relative to foreign competition. Subsidies are sometimes
referred to as negative taxes.
Purchase restrictions
Governments may pass laws limiting themselves to purchase from domestic producers.
Product standards
The government can require goods sold domestically to meet specific safety standards that are above
the standards of the country that exports to the domestic market. This will mean that the exporter will
either have to quit selling to the country that enacts such standards, leaving the domestic producer
with less competition, or raise their standards for the products that they wish to export. This would
increase their costs, and make them relatively less efficient than before such standards.
Voluntary export restrictions
A voluntary export restriction is the same thing as a quota, but without a specific law to mandate
enforcement. It amounts to an agreement by a nation to limit the amount that it exports to a specific
country. The reason countries would do such a thing voluntarily is because of an implied threat of
retaliation. This means that such restrictions are not really voluntary.
Anti-dumping laws
An anti-dumping law is the other side of a subsidy. A country pays a subsidy so its producers can export
to the world at a lower cost. An anti-dumping law would be the retaliation from the importer, to restrict
the imports of goods that it deems are sold on the world market at unfairly low prices because of
subsidies that another country pays its producers.
Trade restrictions generally refer to the various barriers to free trade
(imports and exports) imposed by governments.
Different reasons have been given for restricting trade. Among them
are:
National security: Governments often determine that restricting the
export or import of specific products is in the national best interest. A
nation that produces weapons systems may want to prohibit those systems
from being sold to potential enemies of the state. Some products may be
deemed to be vital to the well-being of the country. The government
doesn't want to rely on imports for a significant portion of the nation's
supply, even if imports are less expensive than domestic production.
(imports and exports) imposed by governments.
Different reasons have been given for restricting trade. Among them
are:
National security: Governments often determine that restricting the
export or import of specific products is in the national best interest. A
nation that produces weapons systems may want to prohibit those systems
from being sold to potential enemies of the state. Some products may be
deemed to be vital to the well-being of the country. The government
doesn't want to rely on imports for a significant portion of the nation's
supply, even if imports are less expensive than domestic production.
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