Trade Barriers are restrictions or obstacles imposed by governments to regulate or restrict the flow of goods and services across borders.
These barriers can be tariffs, quotas, import or export restrictions, or other measures designed to protect domestic industries, maintain economic stability, or achieve specific policy goals.
Here are some free trade barriers that countries have used in the past, and some examples of the results:
Tariff
Definition: Import tax.
Taxes on goods from foreign countries, often used as a tool of trade and foreign policy to punish opponents or benefit allies or domestic producers.
Why do countries use them?
Make foreign products more expensive than domestic products. Tariffs should encourage people to buy from domestic producers rather than import.
How to use them?
In 2018, in order to boost the manufacturing industry, the United States announced a 25% steel tariff and a 10% aluminum tariff on Canada, Mexico and the European Union. Mexico responded by imposing tariffs of up to 25% on U.S. dairy products. That resulted in more than $1 billion in lost revenue for U.S. dairy farmers, even with $127 million in aid.
Quota
Definition: A hard limit on the quantity of a product that can be imported into a particular country. Sometimes, rather than stopping all imports above a specified amount, a quota imposes tariffs on every product above a certain limit.
Why do countries use them?
Usually to protect domestic manufacturing. Quotas themselves do not generate government revenue, so they are often combined with tariffs.
How to use them?
After the United States signed the North American Free Trade Agreement, the current 33% tariff on Mexican corn brooms was reduced to 22%. This hurt the industry of 600 broommakers in the United States so much that the U.S. government instituted quotas. All brooms sold over 2.6 million will be subject to the original 33% tariff. That led to escalating tariffs between the U.S. and Mexico for two years until a task force finally convened and ruled that the corn broom quota violated free trade rules previously agreed upon by the U.S. and Mexico. U.S. President Bill Clinton eliminated the quotas later that year.
Subsidy
Definition: A broad term covering a wide range of actions that governments can take to promote economic development in an industry. Typically, subsidies are government programs that provide funds directly to companies in certain industries. They can also come in the form of tax breaks or other financial benefits that promote domestic industries at the expense of foreign competitors.
Why do countries use them?
Support struggling domestic industries or stabilize prices.
How to use them?
In the 1970s, the U.S. dairy industry experienced dangerously low prices. Farmers cannot make enough money selling milk, leading to dairy shortages. In 1977, the U.S. government provided $2 billion in subsidies to promote this major industry. With the influx of cash, dairy farmers began producing as much milk as possible, leaving a massive surplus of milk that they could not sell. The government purchases excess milk and processes it into other products, including cheese, given its short shelf life. Eventually, the U.S. government had a stockpile of half a billion pounds of “government cheese” spread across thirty-five states.
Currency Manipulation
Definition: When a country deliberately prints more money or uses other strategies to change the exchange rate of its currency.
Why do we use it?
Encourage exports by making domestic products cheaper in foreign currencies, especially the United States Dollar (USD), since the US dollar is the most widely accepted currency. Here’s how it works: If $1 is equivalent to 10 yen, then a 400 yen product is worth $40. If the yen depreciates relative to the dollar, so that 1 dollar becomes 100 yen, then the same product is now worth only 4 dollars. Japan, where the product is made, may sell more of it in the United States. But it’s also a barrier to U.S. trade, because U.S. products become more expensive when exported to countries that manipulate their currencies (in this case, Japan).
How to use?
After its defeat in World War II, Japan experienced a period of rapid economic growth, in part due to its increased focus on industrial production and exports. Then, in the early 1990s, Japan’s economy collapsed, leading to a decade of stagnation. A few years later, the yen began to rise rapidly against the U.S. dollar, and Japan’s Finance Ministry worried that a stronger yen would curb the exports Japan needed to stimulate its economy. Therefore, in 2003, Japan’s Ministry of Finance worked hard to keep the price of the yen as low as possible. The results were mixed: While exports increased, the intervention also made it harder for Japanese to buy foreign goods.
Dumping
Definition: When a foreign company sets the price of a product lower than the normal price.
Why do countries use it?
Let more foreign people buy products and increase the company’s market share. If the company can control enough of the market for the product, they can begin to change price and quality, reducing competition.
How to use?
From 2014 to 2017, Chinese electric bicycles flooded into the European market. By the end of 2017, 35% of electric bicycles in Europe came from China. The shift began to squeeze out European companies that couldn’t compete with Chinese prices. Chinese bikes sell for as little as four hundred and fifty dollars in Europe, while European alternatives often cost thousands of dollars. Ultimately, the European Commission determined that Chinese bicycles were priced unfairly and imposed punitive tariffs on every bicycle importing company, some as high as 83.6%.
Export Control
Definition: Government-determined export regulations that are important to national security, economic security, or foreign policy. These exports include physical technology, but also intellectual property such as software and research. Export controls may require a license to export a certain product, or they may prevent exports altogether.
Why do countries use them?
Safeguard the national interests of the motherland. Governments sometimes argue that certain products, such as nuclear materials or secret technologies, should not be freely traded across borders.
How to use them?
Some Chinese companies that work with American companies have been accused of stealing American technology and algorithms and using them for Chinese military purposes. In response, the United States passed a law allowing the government to investigate these Chinese companies. But because of the language of the law, even Netflix, which uses algorithms to recommend movies, may fall under the new definition of advanced technology subject to export controls.
Sanctions
Definition: When a country restricts or completely blocks trade with another country.
A means of governing the country, often involving economic measures such as asset freezes and trade restrictions, used to force another party to adopt a certain behavior or result.
Convince another country to take some political action, such as stopping human rights abuses or developing nuclear weapons.
How to use them?
In 1979, the United States banned imports from Iran after a group of Iranian college students took 52 American diplomats and citizens hostage at the U.S. Embassy in Tehran, the so-called Iran Hostage Crisis. Partly as a result of the ensuing intensification of hostilities, the U.S. Congress passed the Iran-Iraq Arms Nonproliferation Act of 1992, which prohibited the transfer to Iran of goods or technology that could be used to build nuclear weapons. The EU supports the United States in imposing some of these sanctions. The impact of sanctions has varied: While Iran has built an economy that is resistant to these sanctions, it has also experienced severe setbacks. For example, Iran experienced shortages of non-sanctioned products such as cancer drugs in 2012 due to difficulties moving money in and out of the country.
In most cases, countries erect trade barriers to make it easier to sell their goods abroad or domestically, and various economic and political developments can cause countries to prioritize security, politics, or domestic industry over free trade. But these trade barriers almost always have unintended consequences and do not always achieve their goals.
Ultimately, trade will always be messier than the open path the WTO is supposed to protect, but as globalization continues to bring markets closer together, every country will have to deal with the effects of free trade and trade. The obstacles that come with that.
If you want to learn more foreign exchange trading knowledge, please click: Trading Education.
