International Trade Restrictions & Barriers

• Government-induced restrictions on international trade generally decrease overall economic efficiency.

Trade Barriers

• Involve imposing costs on trade, raising prices of traded products.
• Repeated use of trade barriers between nations can lead to trade wars.
• They limit competition and restrict trade, reducing wealth growth.
• Common forms of trade barriers include:
  • Tariffs
  • Quotas

Types of Trade Barriers

• Include tariff barriers and non-tariff barriers.
• Tariff barriers involve export, import, and transit tariffs.
• Non-tariff barriers involve quotas, subsidies, local content requirements, testing, currency controls, embargoes, and administrative delays.

Anti-Dumping Duty

• A protectionist tariff applied by a domestic government on goods from abroad that are priced below fair market value.

Regulatory Barriers

• Imposed by governments to:
  • Control pollution
  • Ensure product standards
  • Maintain safety standards
• Vary by country based on rules restricting unsuitable goods from foreign markets.

Voluntary Export Restraints (VER)

• A self-imposed trade restriction where a government limits the amount of goods exported to another country.
• Imposed by the exporting country at the request of the importing country.

Subsidies

• Government subsidies lower the price of locally produced goods compared to those from other nations.

Tariffs

• Taxes imposed on imports from other countries and charged to end consumers.
• They increase the price of imported goods, discouraging consumers.
• The terms tariff, duty, and customs are often used interchangeably.

Quotas

• Trade restrictions on the number of goods that can enter a country.
• Determined by the governments of both exporting and importing countries.
• Aim to reduce imports of specific goods, increasing domestic production.
• Example: Voluntary export restraint by Japan on car exports to the U.S. to protect American auto manufacturers.

Dumping of Steel by Chinese Companies (2015)

• Large American steel producers complained about Chinese companies dumping steel.
• They claimed unfair competition due to low import prices.

Export Tariff

• A method of protectionism where the government restricts trade to protect its own industries and people
• Most view as a way to raise the price for domestic companies to export their goods
• Most view as harmful domestically

Import Duties

• Represent the most common form of custom duties.
• Levied for either revenue or protection, but can encourage inefficient domestic production.
• Governments prefer import tariffs as methods of economic protection, as they raise the price for foreign companies to import their goods.

Transit Duties

• Levied on commodities that originate in one country, cross another, and are consigned to a third country.
• Levied by the country through which the goods pass.
• Played a role in directing trade and controlling routes during the mercantilist period (16th-19th centuries).
• In countries with floating exchange rates, both export and import tariffs have the same effect.

Specific Tariff

• Tax imposed directly on one imported good, independent of its value.
• Usually based on weight or number of imported goods.
• Can vary based on good type with most agricultural goods fitting in this category
• For example, importing squash in the United States, the general specific tariff imposed is 1.5¢/kg.

Ad Valorem Tariffs

• Based on a percentage of the good's worth ("ad valorem" is Latin for "according to value").
• Ad Valorem tariffs are listed as percentages, while specific tariffs are listed as a price per quantity.

Ad Valorem Tax

• Imposed on a tangible commodity based on its evaluated value, generally at the local level.
• Unaffected by the property's weight, size, or amount
• Levied by local government organisations (municipalities & school districts)

Types of Ad Valorem Tax

• Sales Tax:
  • Fee levied on some services and goods at the time of purchase
  • Could be built into the product's price or applied at the point of sale
• Value Added Tax (VAT):
  • Goods and services tax (GST) in some countries
  • Based on how much value a company adds to the goods and services it buys from the market
• Property tax:
  • Ad Valorem tax levied on the value of the real estate and other business and residential properties
  • Includes property, land, personal goods and improvements

Compound Tariff

• A combination of ad valorem and specific tariffs.
• Includes specific duty on each unit plus a percentage of ad valorem duty.
• For example, U.S. importers of mushrooms must pay 8.8¢/kg plus 20% of their value.

Tariff-Rate Quota

• Combines tariffs and quotas to set tariffs on imported goods.
• Sets a lower tariff on imported goods up to a certain amount (the quota), then increases the tariff.

Retaliatory Tariff

• Results from trade strategy to punish another country for its trade practices.
• In 2018, the United States imposed tariffs on steel and aluminum imports which lead to retaliatory tariffs on many U.S. exports.

Non-Tariff Barriers

• Non-tax measures favoring domestic over foreign suppliers.
• Includes any measure, other than a customs tariff, that acts as a barrier to international trade.
• Can include packaging and labeling requirements.
• Reasons include domestic protection, quality of life, and balance of trade.
• Introduce restrictions to promote national interests while restricting trade.

Types of Non-Tariff Barriers

• License: Used by governments to limit who can import or export.
• Quotas
• Embargo: A total ban on transactions with individual countries, often for political and economic measures.
• Administrative barrier: Imposes complicated procedures to limit imports, increasing costs and impeding flow.
• Standardization: Requires products to meet specific domestic standards on product classification, labeling, and testing.
• Local content requirements: Requires export products to contain a percentage of local raw materials, spurring domestic business activities.
• Sanitary and Phytosanitary Measures (SPS): Regulations on plant and animal health to ensure food safety and prevent the spread of diseases and pests.

Theories of International Trade

• Must answer:
• What determines trade?
• Why do countries gain by trading?
• Encompass theories which explain international trade practices
• Give direction to companies about their vision and objective behind doing international trade
• Countries are linked via:
  • Political
  • Social
  • Cultural
  • Commercial events & activities

International Trade

• Exchange of goods and services between people, organizations, and countries.
• A core tenet of mercantilism is to promote a favorable balance of trade by ensuring that a country's exports exceed its imports.

Mercantilism

• Economic and cultural philosophy of the 16th and 17th centuries, reflecting the emergence of economies based on commerce.
• Great importance to net inflow of precious metals, imports discouraged by duties.
• Marked by aggressive nationalism toward overseas colonies.
• Government should establish economic policies that promoted exports and discouraged imports, so that the trade surplus created should be paid for in gold and silver.
• Objectives to promote a favorable balance of trade
• Exports of manufactured goods are considered beneficial, while exports of raw materials are considered harmful.

Adam Smith

• Father of economics
• Basis of international trade was absolute cost advantage.
• Published in "An Inquiry into the Nature and Causes of the Wealth of Nations" in 1776, supporting international trade
• Argued that economic growth depended upon specialization and the division of labour, promoting productivity
• Division of labour was limited by small markets

Absolute Advantage

• Theory that trade between countries would be beneficial if one country can produce one commodity at absolute advantage
• Achieved through low-cost production

Autarky

• Producing solely on their own for their own needs
• Characteristics include being self-sufficient, able to defend itself, operating a closed economy, and non-involvement in trade.

Comparative Advantage

• Country boosts gains via economic growth by focusing on industry with most substantial comparative advantage
• Argued by David Ricardo
• Most important and most misunderstood principle of international trade theory
• Ability of a country to produce a good or service for a lower opportunity cost than other countries.
• Important to examine all reasonable alternatives before making a decision.
• To find people's comparative advantages, do not compare their absolute advantages instead compare their opportunity costs.

Comparative advantage

• The ability to produce goods and services at a lower opportunity cost
• Absolute advantage refers to ability to produce more or better goods
• Theory of international trade developed by Eli Heckscher and Bertil Ohlin
• Factor proportion theory

The Heckscher-Ohlin Model

• Usually formulated in terms of a two-factor model, with labor and capital as the two factors of production.
• Countries should export goods needing factors of production that the country has in abundance and countries should import goods that the country does not produce as efficiently
• Explains why countries trade goods and services with each other
• HO Model = 2 × 2 × 2 model (2 countries, 2 commodities, 2 factors)
• Capital intensive goods that require more technical equipment and machinery, such as automobile manufacturing
• Labor Intensive goods that require less equipment to produce and rely mostly on the efforts of the workers such as jewelries
• Production of goods and services requires capital and workers
• There is specialization in production and trade between countries generating higher standards of living
• Perfect competition involves responding to profit, there is free entry and free exit of firms in the market and there are no trade restrictions between the two countries

Explore government restrictions on international trade and their impact on economic efficiency. Learn about trade barriers like tariffs and quotas, and their potential to cause trade wars. Understand anti-dumping duties and regulatory barriers.