International trade leads to an increased number of goods for domestic consumers, decreased cost of goods through competition, and an opportunity for domestic companies to ship products abroad. Free trade isn’t widely accepted by all parties, which is where tariffs and trade barriers enter the equation.

 

Tariffs

A tariff is basically a government tax that adds to the cost of imported goods. There are specific tariffs and ad valorem tariffs.

Specific tariffs are fixed fees on one unit of an imported good. The levy of a specific tariff varies based on the good. For example, there would likely be a higher tariff on a computer than on a pair of shoes.

Ad valorem (or “according to value”) tariffs are based on a percentage of that good’s value. For example, a 5% increase in a good’s price would lead to the price of that good to cost 5% more in a foreign country than in the domestic country. These tariffs protect domestic producers from being undercut by foreign goods.

 

Trade Barriers

Tariffs aren’t the only barriers to trade. These include licenses, import quotas, voluntary export restraints (VERs) and local content requirements.

Even if a domestic country has a restriction on an imported good, a license could be granted to a foreign business that allows imports of a certain type of good. Licensing of only certain companies diminishes competition and increased prices on certain goods. Import quotas, often associated with licenses, are restrictions placed on the amount of one particular good that can be imported.  

A VER is created by the exporting country instead of the importing country. Sometimes, countries will levy reciprocal VERs to increase the price of imported goods while protecting domestic industries. For example, The U.S. could request that Brazil place a VER on the exportation of sugar to the U.S., and the U.S. could then place a VER on the exportation of coal to Brazil, increasing the price of both goods.

A local content requirement means a government can require a certain percentage of a good to be made domestically. It can either be a restriction on the percentage of the good itself or on the value of the good.

 

Purpose

Tariffs and trade barriers are used to protect emerging industries and developed industries alike. One reason is to protect domestic employment from increased competition from imported goods. Barriers to trade can also be used to protect consumers from foreign products that a domestic country feels is unsafe. Governments also tend to levy tariffs and trade barriers on industries they want to grow domestically and industries that are supporting national security. Another purpose of implementing trade barriers and tariffs might be to strategically retaliate against countries who haven’t been trading fairly.

 

Effects

Because of tariffs, governments see increased revenue when goods are imported. Tariffs and trade barriers also benefit domestic industries because they often lead to less competition. As for the effects on individual consumers, tariffs increase the price of imported goods, leaving domestic consumers with a higher price tag. They can also affect stocks.

Tariffs and trade barriers have been reduced by many countries since the 1930’s, leading to the integration of more goods and ideas throughout the globe.

 

Free trade can benefit consumers, but tariffs and trade barriers are imposed by governments to protect the industry from the uncertainty of the global economy. As a means to safeguard from higher unemployment rates, tariffs and trade barriers are part of a delicate balance in the pursuit of efficiencies. Despite this, many economists still promote reciprocated free trade as the best policy. By knowing the facts, you can develop your own opinions on the benefits and drawbacks of tariffs and trade barriers.