Trade Barriers: Governmental

Influence on Trade

International Business - Jatin Vaid 1

Free Trade vs. Trade Barriers

Nations can trade freely with each other or

there are trade barriers.
Free Trade: Nothing hinders or gets in the way
from two nations trading with each other.

Sometimes countries complain about trade.

They say that too much trade causes
workers to lose jobs. Therefore, countries
sometimes try to limit trade by creating trade
barriers.
Reasons for governmental intervention

• Preventing Unemployment
Economic • Protecting Infant Industries
• Promoting Industrialization
Reasons • Improving Comparative Position

• Maintaining Essential industries

Non – Economic • Dealing with unfriendly countries
• Maintaining Control
Reasons • Preserving National Identity

International Business - Jatin Vaid 3

Reasons for Government’s
Intervention
1. ECONOMIC REASONS

International Business - Jatin Vaid 4

 1.1 Preventing Unemployment

• Economic employment of full employment

• Gaining jobs by limiting imports
• Other countries may retaliate
• Impact on other industries

International Business - Jatin Vaid 5

 1.2 Protecting Infant Industries

• Government should shield an emerging industry

from foreign competition by guaranteeing it a
large share of domestic market until it is ready to
compete.
• Efficiency gains take time
• Economies of scale & experience curve translate
into higher productivity
• Benefits include higher employment, lower social
costs and higher tax revenues

International Business - Jatin Vaid 6

 1.3 Promoting Industrialization

• Higher manufacturing base leads to higher per

capita income
• Restricting imports leads to developing an
industrial base
• Increase FDI
• Export – led development for local consumption
• Nation building: Build infrastructure, rural
development, skill building

International Business - Jatin Vaid 7

 1.4 Improving Comparative Position

• Nation’s absolute economic position compared

with other nations
• Balance of trade adjustments
• Controlling prices

International Business - Jatin Vaid 8

Reasons for Government’s
Intervention

2. NON – ECONOMIC REASONS

International Business - Jatin Vaid 9

 2. Non – Economic Reasons
2.1 Maintaining essential industries:
• Protect essential domestic industries
• Rural penetration at affordable prices
• Maintaining competitive advantages in
• essential industries.
Water, electricity, banking, railways, etc.

International Business - Jatin Vaid 10

2.2 Dealing with unfriendly countries

• National defense
• Trade of strategic goods – data encryption
technology, arms & ammunitions, banking,
etc.
• Used as a method to achieve political
objectives

International Business - Jatin Vaid 11

 2.3 Maintaining Control

• Governments give aid to and encourage

imports from countries that join a political
alliance or vote in a preferred way within
international bodies.
• Political motives

International Business - Jatin Vaid 12

 2.4 Preserving national identity

• Unifying sense of identity to be sustained

• National culture to be protected
• Defining boundaries for trade

International Business - Jatin Vaid 13

 Instruments of Trade Control

• Import tariffs
Tariff • Export Tariffs
Barriers • Transit Tariffs

• Subsidies
Non – Tariff •
•
•
Tied Aids
Minimum Sale Price

Barriers •
•
Quotas
Embargoes
• Buy – Local Legislation
Specific Permissions Required
International Business - Jatin Vaid 14
Should countries create trade
barriers that limit trade?
It is true that some workers in certain industries may be hurt
by trade.
For example, some US clothing workers have had to
change jobs during the past 30 years because many
clothes are now imported from other countries.
However, this trade allows people in the US to buy quality
clothing imports at good prices, which results in a higher
standard of living for people in the US and for our trading
partners.
For this reason, most economists agree that it is good to let
countries trade as much as possible.
Economic Trade Barriers

The most common types of trade barriers are

Tariff, quotas and Embargoes.
A tariff is a tax on imports (imports are goods
purchased from other countries and exports are
goods sold to other countries).
A quota is a specific limit placed on the number
of imports that may enter a country.
Tariffs

A tariff is a tax put on goods imported from abroad.

The effect of a tariff is to raise the price of the imported

product.
It makes imported goods more expensive so that people
are more likely to purchase domestic products.

EXAMPLE: The European Union removes tariffs between

member nations and imposes tariffs on nonmembers.
 Tariffs

• Directly affect the prices of goods traded

• Also called Duty or tax levied on goods traded
internationally.
• Most common type of trade control
• Specific duty; Ad – Valorem duty; Compound
duty.

International Business - Jatin Vaid 15

 Tariff Barriers
• Directly affect the prices of goods traded
• Also called Duty or tax levied on goods traded
internationally.
• Most common type of trade control
• Specific duty; Ad – Valorem duty; Compound
duty.

International Business - Jatin Vaid 15

 Types of tariffs
i. Import tariffs: Collected by importing
country
ii. Export tariffs: Collected by exporting country
iii. Transit tariffs: Collected by the country
through which the goods have passed.

International Business - Jatin Vaid 16

 Non Tariff Barriers
• May directly affect either price or quantity of
goods traded internationally.

International Business - Jatin Vaid 17

 Types of Non – Tariff Barriers
i. Quotas: Limiting the quantity of goods
imported or exported at a given time
ii. frame.
Embargoes: Prohibits all forms of trade
from a country or a category of goods.
iii. Minimum sale price: Goods sold at a price
set by authorities after clearances.

International Business - Jatin Vaid 18

Quotas
A quota is a limit on the amount of goods that can be
imported.

Putting a quota on a good creates a shortage, which causes

the price of the good to rise and makes the imported goods
less attractive for buyers. This encourages people to buy
domestic products, rather than foreign goods.

EXAMPLE: Brazil could put a quota on foreign made

shoes to 10,000,000 pairs a year. If Brazilians buy
200,000,000 pairs of shoes each year, this would leave
most of the market to Brazilian producers.
Embargos

Embargos are government orders which

completely prohibit trade with another
country.
If necessary, the military actually sets up a
blockade to prevent movement of merchant
ships into and out of shipping ports.
US-Cuban Trade Embargo
The embargo is the harshest type of trade barrier
and is usually enacted for political purposes to hurt
a country economically and thus undermine the
political leaders in charge.
EXAMPLE: The United States placed an embargo on
Cuba after the Cuban Missile Crisis. We do not trade with
Cuba—this is still in effect today.
iv. Subsidies: Direct assistance to companies,
making them more competitive.
v. Tied Aids: Loans to other countries, a part
which is spend in donor country. E.g.
Infrastructure, telecommunication.
vi. Buy – Local: Favoring domestic producers or
goods of local origin.
vii. Specific Permissions: import or export
license.

International Business - Jatin Vaid 19

Benefits of Trade Barriers
Most barriers to trade are designed to prevent
imports from entering a country.

Trade barriers provide many benefits

because they
protect homeland industries from competition.
protect jobs.
help provide extra income for the government.
increase the number of goods people can choose from.
decrease the costs of these goods through increased
competition.
Costs of Trade Barriers

Tariffs increase the price of imported goods.

Less competition from world markets means
there is an increase in the price.
The tax on imported goods is passed along
to the consumer so the price of imported
goods is higher.
jatinvaid@gmail.com
THANK YOU!

International Business - Jatin Vaid 20