Question

Identify four types of trade barriers. Describe the economic impact of each, including both direct and indirect effects

Answer 1

Trade barriers restrict or reduce the imports into an economy. They are imposed by the government using regulations, tariffs, quotas etc. There are basically four types of barriers:

1. Tariff: Tariffs are basically like the taxes on the imports. Tariffs increase the cost of the goods imported which reduce down the amount of imports. They are also a source of revenue or the government as the amount of tariffs which works same as the taxes are being collected by the government. The tariffs imposed indirectly protect the domestic employment and the infant industry by diverting the demand for the goods from foreign products to the domestic products.

2. Quotas: Quotas are the trade restrictions which limit the amount of the goods that can be imported; may be in number of units or in monetary values. The quotas are different from the tariffs as the tariffs generate revenue for the government while the quotas do not. Quotas behave like the first come, first serve basis. As long as the quota is not fulfilled the goods are being imported, and afterward are not. Quotas indirectly help in increasing the domestic employment by increasing the domestic demand which now is not met by the imports.

3. Non- tariffs: Non-tariffs trade barriers are the government rules and regulations which keeps the foreign goods away from the domestic market. These include subsidies to local goods, content requirements, and technical barriers. Subsidies to the local goods increase the cost of the foreign goods for the consumers due to lower domestic prices. Content requirements include those restrictions which are related to the assembly, say a product is mandatory to be assembled in the domestic country or some part is necessary to be produced domestically. This indirectly reduces the amount of imports to the country. Technical barriers include the testification and certification of the goods. A multistage process of certification is time-consuming and expensive which reduces the imports indirectly.

4. VER: It is known as Voluntary Export Restraints, which is a restriction on the exports of a country which the domestic country is exporting to. For eg, US has restricted the exports of Japanese cars to other countries. VERs are the requests made by the importing country to protect the business from competing countries. The producers in the importing country enjoy the well being due to lesser competitive products in the market which is like protecting the infant industries. VER allows these companies or producers to grow and made a substantial part in the market to finally compete with the competitors.