Trade Barriers

International Trade - DefinitionInternational Trade - Definition

� International trade involves the exchange of goods or services between nations.

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

markets. markets. – ImportsImports: the goods or services : the goods or services bought bought from from

foreign producers. foreign producers.

Free Trade vs. Trade BarriersFree Trade vs. Trade Barriers

� Nations can trade freely with each other or there are trade barriers.– Free Trade: Nothing gets in the way from

two nations trading with each other.– Trade Barriers: Trade is difficult because

the barriers get in the way.� There are costs and benefits related to

free trade as well as trade barriers.

Free Trade - BenefitsFree Trade - Benefits

� When nations specialize and trade, When nations specialize and trade, total world output or sales is total world output or sales is increased. increased.

� Companies can produce for foreign Companies can produce for foreign markets as well as domestic markets as well as domestic markets (markets in the home markets (markets in the home country). country).

Free Trade - BenefitsFree Trade - Benefits

� This means there is potential for making This means there is potential for making more money as there are more markets more money as there are more markets to sell goods or services in.to sell goods or services in.

� More variety of goods are available More variety of goods are available from a world market than just a from a world market than just a domestic market.domestic market.

� Prices of goods are decreased through Prices of goods are decreased through increased competition.increased competition.

Free Trade - CostsFree Trade - Costs

� The domestic country can lose money because more people are buying foreign goods– 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.

Trade Barriers – Three TypesTrade Barriers – Three Types

� Trade barriers are things that hinder or get in the way of trading.

� They can be cultural, physical , or economic.– Cultural barriers: language,

currency, belief system.– Physical barriers: mountains, deserts,

canyons,etc.• Example: The Alps Mountains in Europe

– Economic barriers: government rules that restrict, block or discourage international trade between countries. (tariff, quota, embargo)

Trade Barriers - EconomicTrade Barriers - Economic

� The most common trade restrictions are: – tariffs--which are taxes on imports.– quotas--which are limits on the quantity

that can be imported.– embargos--which are a complete trade

block usually for political purposes.

TariffsTariffs

� A A tarifftariff is a tax put on goods imported from is a tax put on goods imported from abroadabroad

� The purpose of a tariff is to raise the price of The purpose of a tariff is to raise the price of the imported product. the imported product. – It makes imported goods more expensive It makes imported goods more expensive

so that people are more likely to purchase so that people are more likely to purchase products from home. products from home.

– EXAMPLE: The European Union removes EXAMPLE: The European Union removes tariffs between member nations, and tariffs between member nations, and imposes tariffs on nonmembersimposes tariffs on nonmembers

QuotasQuotas� A A quota quota is a limit on the amount of goods that can be is a limit on the amount of goods that can be

imported. imported. � Putting a quota on a good creates a shortage, which Putting a quota on a good creates a shortage, which

causes the price of the good to rise and makes the causes the price of the good to rise and makes the imported goods less attractive for buyers. This imported goods less attractive for buyers. This encourages people to buy domestic products, rather encourages people to buy domestic products, rather than foreign goods. than foreign goods. – EXAMPLE: Germany could put a quota on foreign made EXAMPLE: Germany could put a quota on foreign made

shoes to 10,000,000 pairs a year. If Germans buy shoes to 10,000,000 pairs a year. If Germans buy 200,000,000 pairs of shoes each year, this would leave most 200,000,000 pairs of shoes each year, this would leave most of the market to German producers.of the market to German producers.

EmbargosEmbargos

� Embargos are government orders which completely prohibits 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.

EmbargosEmbargos� 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 2: US placed an embargo on Cuba after the Cuban Missile Crisis (still in effect today).

Trade Barriers - BenefitsTrade Barriers - Benefits� Most barriers to trade 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. – Increases the number of goods people can choose

from.– Decreases the costs of these goods through

increased competition

Trade Barriers - CostsTrade Barriers - Costs

� 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.