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Trade Restrictions

Trade Restrictions



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 which 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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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 domestic industries might not 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 might 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 foreign workers are less productive than 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



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 from tariffs: 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.


Embargoes

An embargo is similar to an import quota, except that it forbids all imports for a specific product, or in 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 which are produced for export. A subsidy 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

A government may require goods sold domestically to meet specific safety standards that are above the standards of an exporting country. This will mean that the exporter will either have to quit selling to the country which 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.