Trade barriers have a negative impact on both customers and businesses. At the same time, they reduce economic growth and affect the labor market in developing countries. In the long run, they increase monopoly power and limit competition, leading to a decline in product quality and innovation.
Part of globalization is free trade, where companies can do business across borders without quotas, tariffs or other restrictions. Today, most countries can exchange goods at a minimum cost, which allows governments and enterprises to expand their operations. However, some countries are still practicing trade protectionism. The idea behind trade barriers is to eliminate competition from foreign industries and bring more revenue to the local government.
Barriers Result in Higher Costs
Trade barriers result in higher costs for both customers and companies. As a manufacturer or distributor, you may need to pay more for the goods required to run your business smoothly. For example, if you're selling electronics, importing laptops and cameras will be more expensive unless you stick to domestic brands. Therefore, you will need to raise the prices customers must pay. For instance, the proposed increased tariffs on Chinese imports in 2018 could result in higher prices next time you are in the market to buy your next smartphone, tablet or laptop. Due to increases like these, the National Taxpayers Foundation Union estimates that the annual cost of tariffs in the United States economy is $41.65 billion.
Limited Product Offering
With free trade, customers have access to more products than ever before including high-end goods that were not otherwise available in their region. Imposing trade barriers has the opposite effect. Now, the increase in import costs translates into a limited choice of products. Small businesses, for instance, might not be able to afford to pay these costs so that they will offer fewer goods. Despite this fact, import restrictiveness remains high in developing countries, especially East and South Asia. Many governments put trade restrictions in place to reserve the domestic industry and protect special interests. In the long run, this practice affects economic growth and reduces overall economic efficiency.
Loss of Revenue
Many companies make their money off international trade. Automobile manufacturers, for example, sell cars in foreign markets. Trade barriers can limit their ability to export products, leading to loss of revenue and decreased profit. On a larger scale, trade barriers affect economic growth. For example, in developing countries which are unable to export goods because of high tariffs, trade barriers can limit their ability to prosper and expand their operations. Furthermore, it has a direct impact on wages and international relations.
Fewer Jobs Available
Nowadays, 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.
Higher Monopoly Power
Free trade promotes competition among different countries, which forces local companies to keep product prices at a reasonable level. Trade barriers have the opposite effect. They increase monopoly power and limit competition allowing producers to charge higher prices. Additionally, limiting the competition leads to inflation, causing a decline in customer spending power. It might also stifle innovation, since protectionism provides no incentive for a company to invest in technological advancement. Since there is less incentive to provide superior products, quality will decline over time.
- Globalization 101: Consequences of Trade Restrictions
- Unctad.org: Key Statistics and Trends in Trade Policy 2015
- BBC: US-China Trade War: Deal Agreed to Suspend New Trade Tariffs
- Tax Foundation: The Impact of Trade and Tariffs on the United States
- National Taxpayers Foundation Union: Trump Trade Taxes Will Exceed Obamacare Taxes Next Year