Question

1. What are the advantages and disadvantages of setting up trade barriers?  Are trade barriers effective?  As part of this question, also answer what might be the advantages and disadvantages of a US company moving the manufacturing of a product, such as sneakers, into the United States?

Answer 1

The term Trade barrier states a policy by government which restricts the international trade. The government does this by the use of tariffs by enacting them on imports.

Importance of Trade barriers:

1) Domestic Employment:Foreign products provide competition but consumers usually purchase imports rather than domestic products, which leads in declining domestic production which eventually leads to decline in domestic employment. So the protectionism will lead to less decline in production and employment.

2) Infant Industry: To protect the new and young industries which are not old enough or large enough to compete with larger and more mature foreign producers. So the trade barriers will help and protect the infant industries from foreign competition until they are mature enough to compete with them.

3) National Security: Domestic firms produce output which is important to the national security and defence of the nation. If the nation is dependent on any other nation for defence equipments rather than producing in it's own nation, the nation would be vulnerable and the nation must be protected from security problems by depending on imports.

Disadvantages of Trade barriers:

1) Higher Costs: Trade barriers causes higher costs for both customers and companies as distributor you have to pay more for the goods required to run your business. Therefore, you will need to raise the prices that customers must pay for the product.

2) Monopoly: Trade barriers increase monopoly power and limit competition allowing producers to charge higher prices. Limiting the competition leads to inflation, causing a decline in customer spending power. Since there is less incentive to provide superior products, quality will decline over time.

3) Less job opportunities: As many organizations have offices and factories in multiple locations across the world, which allows them to employ locals and pay higher wages compared to the national average. Trade barriers limit their expansion and affect the labor market. As a result, fewer jobs will be available for those living in developing countries.