trade barrier

Definition
Government imposed restriction on the free internationalexchange of goods or services. Trade barriers are generallyclassified as (1) import policies reflected in tariffs and other import charges, quotas, import licensing, customspractices, (2) standards, testing, labeling, and varioustypes of certification, (3) direct procurement by government, (4) subsidies for local exporters, (5) lack ofcopyright protection, (6) restrictions on franchising, licensing, technology transfer, (7) restrictions on foreign direct investment, etc.
Trade barriers are a general term that describes any government policy or regulation that restricts international trade. The barriers can take many forms, including the following terms that include many restrictions in international trade within multiple countries that import and export any items of trade:

Trades Import licenses Export licenses Import quotas Subsidies Non-tariff barriers to trade Voluntary Export Restraints Local Content Requirements Embargo

Most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results.

Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency, this can be explained by the theory of comparative advantage. In theory, free trade involves the removal of all such barriers, except perhaps those considered necessary for health or national security. In practice, however, even those countries promoting free trade heavily subsidize certain industries, such as agricultureand steel.

Trade barriers are often criticized for the effect they have on the developing world. Because rich-country players call most of the shots and set trade policies, goods such as crops that developing countries are best at producing still face high barriers. Trade barriers such as taxes on food imports or subsidies for farmers in developed economies lead to overproduction and dumping on world markets, thus lowering prices and hurting poor-country farmers. Tariffs aldo tend to be anti-poor, with low rates for raw commodities and high rates for labor-intensive processed goods. The Commitment to Development Index measures the effect that rich country trade policies actually have on the developing world.

[edit]Examples

of free trade areas

North American Free Trade Agreement (NAFTA)

South Asia Free Trade Agreement (SAFTA) European Free Trade Association European Union (EU) Union of South American Nations New West Partnership (An internal free-trade zone in Canada between Alberta, British Columbia, and Saskatchewan)

Other trade barriers include differences in culture, customs, traditions, laws, language and currency.

What are the different types of trade barriers? What are the arguments for trade barriers?
Tariff Barriers Non-tariff Barriers Cost of Trade Barriers Supplementary Readings for Textbooks 54 Despite all the obvious benefits of international trade, governments have a tendency to put up trade barriers to protect the domestic industry. There are two kinds of barriers: tariff and non-tariff. Tariff Barriers Tariff is a tax levied on goods traded internationally. When imposed on goods being brought into the country, it is referred to as an import duty. Import duty is levied to increase the effective cost of imported goods to increase the demand for domestically produced goods. Another type of tariff, less frequently imposed, is the export duty, which is levied on goods being taken out of the country, to discourage their export. This may be done if the country is facing a shortage of that particular commodity or if the government wants to promote the export of that good in some other form, for example, a processed form rather than in raw material form. It may also be done to discourage exporting of natural resources. When imposed on goods passing through the country, the tariff is called transit duty. Tariff can be imposed on three different bases. A specific duty is a flat duty based on the number of units regardless of the value of the goods. For example, there may be a duty of Rs.5,000 per computer imported into India. In this case, a person importing, say, 20 computers would have to pay a duty of (5,000 x 20 =) Rs.1,00,000. An ad valorem duty is expressed as a percentage of the value of the good. So a person importing a walkman worth Rs.2,000 carrying an import duty of 10% would have to pay Rs.200 towards duty charges. A compound duty is a combination of a specific and an ad valorem duty. For example, a book worth Rs.500 carrying a specific duty of Rs.25 and an ad valorem duty of 2% would in effect be carrying a compound duty of Rs.35. Over the last few decades, tariffs have been losing their importance as barriers to trade, their place being taken by non-tariff barriers. Non-tariff Barriers Non-tariff barriers (NTBs) include all the rules, regulations and bureaucratic delays that help in keeping foreign goods out of the domestic markets. The following are the different types of NTBs: Quotas A quota is a limit on the number of units that can be imported or the market share that can be held by foreign producers. For example, the US has imposed a quota on textiles imported from India and other countries. Deliberate slow processing of import permits under a quota system acts as a further barrier to trade. Embargo When imports from a particular country are totally banned, it is called an embargo. It is mostly put in place due to political reasons. For example, the United Nations imposed an embargo on trade with Iraq as a part of economic sanctions in 1990. Voluntary Export Restraint (VER) A country facing a persistent, huge trade deficit against another country may pressurize it to adhere to a self-imposed limit on the exports. This act of limiting exports is referred to as voluntary export restraint. After facing consistent trade deficits over a number of years with Japan, the US persuaded it to impose such limits on itself. Subsidies to Local Goods Governments may directly or indirectly subsidize local production in an effort to make it more competitive in the domestic and foreign markets. For example, tax benefits may be extended to a firm producing in a certain part of the country to reduce regional imbalances, or duty drawbacks may be allowed for exported goods, or, as an extreme case, local firms may be given direct subsidies to enable them to sell their goods at a lower price than foreign firms. Local Content Requirement A foreign company may find it more cost effective or otherwise attractive to assemble its goods in the market in which it expects to sell its product, rather than exporting the assembled product itself. In such a case, the company may be forced to produce a minimum percentage of the value added locally. This benefits the importing country in two ways it reduces its imports and increases the employment opportunities in the local market. Technical Barriers Countries generally specify some quality standards to be met by imported goods for various health, welfare and safety reasons. This facility can be misused for

blocking the import of certain goods from specific countries by setting up of such standards, which deliberately exclude these products. The process is further complicated by the requirement that testing and certification of the products regarding their meeting the set standards be done only in the importing country. These testing procedures being expensive, time consuming and cumbersome to the exporters, act as a trade barrier. Under the new system of international trade, trading partners are required to consult each other before fixing such standards. It also requires that the domestic and imported goods be treated equally as far as testing and certification procedures are concerned and that there should be no disparity between the quality standards required to be fulfilled by these two. The importing country is now expected to accept testing done in the exporting country. Procurement Policies Governments quite often follow the policy of procuring their requirements (including that of government-owned companies) only from local producers, or at least extend some price advantage to them. This closes a big prospective market to the foreign producers. International Price Fixing Some commodities are produced by a limited number of producers scattered around the world. In such cases, these producers may come together to form a cartel and limit the production or price of the commodity so as to protect their profits. OPEC (Organization of Petroleum Exporting Countries) is an example of such cartel formation. This artificial limitation on the production and price of the commodity makes international trade less efficient than it could have been. Exchange Controls Controlling the amount of foreign exchange available to residents for purchasing foreign goods domestically or while travelling abroad is another way of restricting imports. Direct and Indirect Restrictions on Foreign Investments A country may directly restrict foreign investment to some specific sectors or up to a certain percentage of equity. Indirect restrictions may come in the form of limits on profits that can be repatriated or prohibition of payment of royalty to a foreign parent company. These restrictions discourage foreign producers from setting up domestic operations. Foreign companies are generally interested in setting up local operations when they foresee increased sales or reduced costs as a consequence. Thus, restrictions against foreign investments add impediments to international trade by giving rise to inefficiencies. Customs Valuation There is a widely held view that the invoice values of goods traded internationally do not reflect their real cost. This gave rise to a very subjective system of valuation of imports and exports for levy of duty. If the value attributed to a particular product would turn out to be substantially higher than its real cost, it could result in affecting its competitiveness by increasing the total cost to the importer due to the excess duty. This would again act as a barrier to international trade. This problem has now been considerably reduced due to an agreement between various countries regarding the valuation of goods involved in a cross-border trade. For details of this extract see :