Understanding the Basics: Trade Barriers

What are Trade Barriers?

Trade barriers are tools used by governments around the world to restrict/block the imports of goods from other countries. Economic barriers are often put in place to protect the domestic production of a country. By using trade barriers, domestic industries and workers have more protection from getting outsourced to different countries.

What are the Three Types of Trade Barriers?

There are three main types of trade barriers: tariffs, quotas, and embargos. First, tariffs are a tax on imported goods from a country. So, if a country or company wants to import goods from another country, a 15% tariff would make it 15% more expensive. Why would a country do this? Well, the benefit that comes out of tariffs is if the company or country sees that it's really expensive to import goods, domestic production will begin and grow.

Next, quotas are a limit on how many goods a country or company can import or export. For example, the United States limits the amount of automobiles that it can import from Japan to 2 million per year. Countries use quotas to reduce the amount of dependency on each other in global trade.

Finally, an embargo is a complete ban on imports, exports, and any sort of trade between two countries. An embargo is typically put in place as a form of economic retaliation against a country. For example, the U.S. has had an embargo on Cuba since 1958 because of differing political ideologies.

The Good and the Bad of Trade Barriers

Let's start with the good news! The main benefits that come out of trade barriers are more domestic production and protection of industry. What industries benefit? The three main industries that do well as a result of trade barriers are the manufacturing, agriculture, and technology industries. Manufacturing benefits from more domestic and cheaper steel production. Trade barriers protect the agricultural industry by protecting farmers from getting outsourced by cheaper foreign foods. Most importantly, the tech industry benefits from trade barriers because domestic production of tech is the best and most efficient. Many countries around the world, such as the U.S. and China, want to be the leaders in tech. As a result, both countries have imposed tariffs on each other, trying to weaken the respective country.

Now the bad news! Overall, the worst part about trade barriers is they raise inflation. This happens in one main way. First, if it costs more to do production domestically, companies will still have to buy their imports; however, now they are taxed, limited, or even banned. If it costs more for the country to produce the product, if they want to profit, they have to sell it for more. Also, countries putting trade barriers on each other easily sparks tensions between countries, which isn't good for anything. Most of the time, if one country imposes a trade barrier on another country, that country will impose a trade barrier of their own back onto the first country. Many times in history, this has sparked a "trade war," which can disrupt global trade as a whole.