Question

Q. Discuss the barriers to trade and their impact to the consumer.

Answer 1

Trade barriers are restrictions imposed by governments to decrease international trade. These barriers are generally set up either to protect some particular groups of the society like infant industries, to reduce competition, to provide more employment opportunities to citizens of that country or for governments as a source of revenue. These barriers generally decrease the choices available to consumers and also raise the prices of goods. There are three main types of trade barriers: Tariffs, non tariffs and Quotas.

The various trade barriers and their impact to the consumer are as follows:

1) Tarrifs

Tarrifs are like taxes imposed on the imports of goods. There are two kinds of tariffs:

Specific Tariffs: These are fixed charge for each unit of the good imported. For example: $5 per barrel of oil. So the importer of oil will have to pay $5 per barrel as a tariff over and above the price of oil per barrel imported.

Ad valorem tariffs: These are a fraction of the value of the imported goods, usually expressed as a percentage of the price of the product. For example: 5% Tariff on oil. So the importer of oil will have to pay 5% of the price of the oil as tariff on the total value of the oil imported.

Tariffs are paid by the consumers of the product so it raises the price of the imported good and hence provides a disincentive towards import of that good and hence consumers buy the domestic products. Even if the imported good is used as an intermediate good in the production of some other good, the producers of the good charge that tariff from the consumers and hence consumers have to bear the burden of the tariff.

Tariffs are usually imposed to protect the infant industries in an economy and this tariff is collected by the government of the imposing country, hence raising it's revenue.

Impact of tariff on consumers:

Import tariff raises the price of the imported good making the imported good relatively expensive, hence consumers have to pay high price for that good, hence tariff decreases consumer surplus. Or consumers end up buying domestically produced goods which reduces the choice available to the consumers. So the tariff negatively impacts the consumers.

2) Quotas (Quantitative restrictions)

Quota imposes a direct restriction on the quantity or value of a good that can be imported from some other country or exported to some other country. Usually, individuals or firms are given licenses to import or export a given quantity of good. License holders are able to import the given quantity and sell it at higher rate thus generating profits. These profits that receiver of import license earn are known as quota rents.

Quotas regulate the volume of trade between countries and help to boost domestic production by restricting foreign competition. Quotas are more effective in restricting trade when domestic demand is not sensitive to prices.

Impact of quotas on consumers:

Import Quotas also raise the price of the imported good in the domestic market because the quantity of imported good is limited whereas demand is higher which leads to increase in price. This decreases consumer surplus. Also, choices available to consumers fall.

3) Export subsidy:

An export subsidy is a subsidy given to an individual or firm for exporting goods abroad. This subsidy can be given in the form of direct cash transfers, fiscal incentives i.e. low tax on profits, cheaper inputs like water, electricity etc., cheaper land, cheaper credit etc.

Impact of export subsidy on consumers:

An import subsidy gives an incentive to producers to export more and more goods in order to take advantage of the subsidy. This leads to less availability of the good in the domestic market hence increasing it's price and this leads to a fall in the consumer surplus.

4) Voluntary Export restraints:

A voluntary export restraint (VER) also known as Voluntary Restraint Agreement (VRA) is a quota imposed by the exporting country on the amount of good that it will export to a particular country.

Impact of voluntary export restraint on consumers:

It decreases the quantity available to the consumers, hence increasing the prices, thus decreasing consumer surplus. It also decreases the choices available to consumers hence decreasing welfare.

5) Non-Tariff Barriers (NTB'S) :

Since it is relatively costlier to impose tariff and quota barriers, so countries usually impose non tariff barriers also. These include regulations which give specifications on quality, safety, environment regulations on imported goods which are known as phytosanitary barriers. These barriers make it difficult for countries to export their good to the country imposing these non tariff barriers.

Impact of NTB'S on consumers:

These also decrease the availability of imported goods in the country hence increasing their prices and decreasing the consumer surplus. It also decreases the choices available to consumers.