Trade Barrier and Their Impacts Essay

Introduction

A Trade barrier is a form of restrictive measure imposed by a government on international trade so as to protect local industries and trade. The practical purpose of a trade barrier is to increase the cost of importation or to put a hurdle on importation so as to discourage importation of goods and services and promote local industry and commerce.

            Trade barriers come in the form of tariffs (additional taxes on importations), non-tariffs (restriction of products/services due to quality or content) and quotas (time barred importations) (Lee & Swagel, 2018). We will discuss and evaluate reasons why countries impose trade barriers and the effects they have on balance of trade, employment and economic growth. Lastly, we will discuss the effect of having trade barrier on China.

Reasons for imposing trade barriers

Here are some of the reasons why a country may decide to impose trade barriers: –

1. A country may impose a tariff in order to increase cost of importation of goods/services hence protect the local industries from competing with similar goods from outside (Parsley & Wei, 2016).
2. In order to protect consumers from low quality goods or harmful (health or safety-wise) goods, it may increase the import duty/tariffs on those particular goods to discourage importation or impose quotas on them (Parsley & Wei, 2016).
3. Some countries view tariffs as a revenue collecting avenue to boost the economy.
4. Countries whose trading partners have already imposed barriers on them may retaliate by imposing barriers of their own (Madsen, 2017).

Effects of Trade Barriers on Balance of Trade, Employment and Economic Growth

Positive effects of trade barriers

1.       On trade balance, tariffs and subsidies lead to more activity in the local industries as they increase production to cover the deficit created by reduced imports. This leads more locally based trade (Yanikkaya, 2017). They also help in promoting industries such mining, farming and other primary industries leading to increased local trade.
2.       On employment, an increase in local production needs extra labor to perform production duties. This leads to direct jobs in factories, farms, mines and in related industries like restaurants, steel factories, supply chain stores, transportation etc (Santos‐Paulino & Thirlwall, 2016).
3. On economic growth, tariffs are a revenue source for country’s economy while an increase in local primary industries leads to more opportunities for the population and more exports which help to boost the country’s economy (Madsen, Suntosh, & Taylor, 2018).

Negative Effects of Trade Barriers

1. On balance of trade, some trade barriers (tariffs and import quotas) lead to increased prices of goods which lead to less imports resulting in less trading output. Also, when a country targeted by tariffs retaliates, exports to that country reduces leading to less trading opportunities (Chandra, 2017).
2. On employment, when imports are reduced, the number people who were trading on the imports will also be reduced due to less products leading to less employment. Less exports due to retaliatory tariffs will lead to redundancies in the sectors dealing in the targeted export products (Madsen, Suntosh, & Taylor, 2018).
3. On economic growth, reduction of imported goods leads to means less revenues for the country’s economic growth (Fontagné, Lionel, Gianluca, & Roberta, 2015). Also, trade wars lead to hostile trading climate for the involved countries, leading to stunted or reduced economic growth (Madsen, Suntosh, & Taylor, 2018). Reduction in exports also means less foreign exchange avenues for the county’s economy.    

Pros and Cons of Erecting Trade Barriers in India

            The Indian government is planning to introduce protectionist barriers in order to bolster local industries and increase exports. Such a measure has its advantages and disadvantages including –

Advantages

• Introduction of tariffs on products such as mobile phones and motor vehicles will bolster the country’s local industries dealing in those products as the lower-middle and the middle-class will be forced to buy them due to costs reasons (Santos‐Paulino & Thirlwall, 2016). Given India’s burgeoning middle (lower, mid and upper) class, this may work greatly in creating a large local market for the local industries.
• Local technology and services industries which make up majority of the country’s economic earning will be bolstered by subsidies hence lead to their growth. Industries such as investment banking, IT solutions and others may greatly benefit from this (Parsley & Wei, 2016).
• Increase in consumption of local products by the country’s huge population will lead to increased local trade and an increase in employment opportunities (Santos‐Paulino & Thirlwall, 2016). Industries such as restaurant, fast food and other food-related industries will benefit a lot from this measure.

Disadvantages

• Raising tariffs on imports will lead to increased prices of imported luxury goods like high-end vehicles which will lead to reduced consumption of those goods leading to less employment in those sectors (Madsen, Suntosh, & Taylor, 2018). Industries such as luxury vehicles, high-end hospitality will suffer from increased tariffs.
• Taxing foreign companies more will mean less competition which will make local alternatives lower the quality of their products. For instance, in the Cab-hailing industry, only two companies dominate the market in India, Uber and Hola (Fontagné, Lionel, Gianluca, & Roberta, 2015). Taxing Uber more may drive the global company which has set high quality standards allover the world out of the Indian market. This would leave Hola with no worth competition, creating an avenue for quality deterioration in the industry (Santos‐Paulino & Thirlwall, 2016).
•  Increasing tariffs on imports will work to disrupt the country’s plans of increasing exports since countries targeted by tariffs may impose retaliatory tariffs of their own (Santos‐Paulino & Thirlwall, 2016). 

Conclusion

            Trade barriers can work to the advantage of a country or work to its detriment depending on the type of barriers imposed, the target country and the rection of the target market on the impositions. A country should carefully weigh the merits and demerits of trade barriers before imposing them to avoid negative impacts which will affect the country’s economy, employment and balance of trade.

References

Chandra, P. (2017). Impact of temporary trade barriers: Evidence from China. China Economic Review, 38(12), 24-48.

Fontagné, S., Lionel, J., Gianluca, O., & Roberta, P. (2015). Product standards and margins of trade: Firm-level evidence. Journal of international economics, 97(1), 29-44.

Lee, J., & Swagel, P. (2018). Trade barriers and trade flows across countries and industries. Review of Economics and Statistics, 79(3), 372-382.

Madsen, J. (2017). Trade barriers and the collapse of world trade during the Great Depression. Southern Economic Journal, 48(12), 848-868.

Madsen, J., Suntosh, J., & Taylor, J. (2018). Trade barriers, openness, and economic growth. Southern Economic Journal, 76(2), 397-418.

Parsley, D., & Wei, S. (2016). Convergence to the law of one price without trade barriers or currency fluctuations. The Quarterly Journal of Economics, 111(4), 1211-1236.

Santos‐Paulino, A., & Thirlwall, A. (2016). The impact of trade liberalisation on exports, imports and the balance of payments of developing countries. The Economic Journal, 114(493), F50-F72.

Yanikkaya, H. (2017). Trade openness and economic growth: a cross-country empirical investigation. ournal of Development economics, 72(1), 57-89.