Trade Barriers

Involves the exchange of goods or services between countries

This is described in terms of – ExportsExports: the goods and services : the goods and services soldsold to to

other countriesother countries– ImportsImports: the goods or services : the goods or services bought bought from from

other countriesother countries

International Trade

– Free Trade: Nothing hinders or gets in the way from two nations trading with each other.

– Trade Barriers: Trade is difficult because things get in the way.

There are costs and benefits related to free trade as well as trade barriers.

Free Trade Vs. Trade Barriers

When nations specialize and trade, total world sales are increased

Companies can produce for foreign markets as well as domestic markets This means there is potential for making more

money as there are more markets to sell goods or services in

More variety of goods are available from all over the world (not just from the home country)

Prices of goods are decreased through increased global competition

Benefits of Free Trade

The domestic country can lose money because more people are buying foreign goods (cheaper)

– Example: In the U.S., people might want to buy a foreign automobile like a Honda or Toyota instead of an American made car

Less money will go into the domestic market place and this can cause factories to be closed and jobs to be eliminated

Cons of Free Trade

Trade barriers are things that hinder or get in the way of trading1. Cultural barriers: language, currency, belief system.

2. Physical barriers: mountains, deserts, canyons,etc.

3. Economic barriers: government rules that tax, limit, or block international trade between countries (tariff, quota, embargo)

What are Trade Barriers?

The most common trade restrictions are: 1. tariffs—taxes on imported goods

2. quotas—limits on the quantity of goods that are imported

3. embargos-- a complete ban on trading between countries

3 Economic Trade Barriers

A tariff is a tax put on goods imported from other countries

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 products produced in the home country

EX) The European Union removes tariffs between member nations (cheaper goods), and imposes tariffs on nonmembers (more expensive goods)

What is a Tariff?

A quota is a limit on the amount of goods that can be imported from another country

Putting a quota on a good creates a shortage, which causes the price of the good to rise. Consumers are less likely to buy this good because it’s now more expensive than the good produced in the home country.

Quotas encourage people to buy domestic products, rather than foreign goods (boosts country’s economy)

– EXAMPLE: Germany could put a quota on foreign made shoes to 10,000,000 pairs a year. If Germans buy 200,000,000 pairs of shoes each year, this would leave most of the market to German producers.

Quotas

Government orders that completely ban 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.

Embargos

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 Kingdom has placed an embargo on a Chinese toy-making company because they were using lead-based paint in their toys. UK no longer trades with this company.

– EXAMPLE: US placed an embargo on Cuba after the Cuban Missile Crisis (still in effect today).

Embargos

Most trade barriers are designed to prevent imports from entering a country

Trade barriers provide many benefits:– protect homeland industries from competition– protect jobs– help provide extra income for the

government (boosts economy)– Increases the number of goods people can

choose from.– Decreases the costs of these goods through

increased competition

Benefits 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.

Cons of Using Trade Barriers