Trade Restrictions - Significance and Impact on Supply Chains

Trade restrictions manifest in diverse forms such as tariffs, sanctions, export controls, and trade disputes, thereby affecting both domestic product demand and international supply chains. Examples of these restrictions encompass customs procedures, environmental or quality standards, and limitations on accessing, storing, or transmitting data.

These restrictions significantly impact the global demand and supply of goods and services, impeding the free operation of market forces to determine the optimal quantity, leading to inefficient resource allocation on a global scale.

What is the meaning and significance of trade restrictions?

Trade restrictions are restrictions on the trade of goods and/or services between two countries. The significance of trade restrictions lies in the major impact on the flow of goods and services between countries, affecting both domestic and international supply chains.

They can also weaken demand for domestic products and have negative effects on downstream sectors, decreasing the growth rate of wages, sales, and investment in those industries.

Trade restrictions can take many forms, including tariffs, sanctions, export controls, and trade wars. While trade restrictions were initially intended to protect domestic industries, they can also lead to increased monopoly power, political lobbying, and bureaucratic corruption by domestic companies. However, the increasing role of multinational companies and international institutions, such as the World Trade Organization, has contributed to reducing trade restrictions.

How many types of trade restrictions are there?

Trade restrictions can be broadly categorized as tariff and non-tariff trade restrictions or trade barriers. These can be further bifurcated into various types of trade restrictions and have their respective significance in global trade and supply chains. Let’s discuss them all in detail.

Tariff Trade Restrictions

Tariffs

In the simplest terms, tariff is a tax. Tariff or import tariff increases the expenses incurred by consumers purchasing imported goods and is one of the various trade policies a nation can implement. Tariffs are collected by the customs authority of the imposing country. Tariff can take the form of:

Ad-valorem tariff- Ad-valorem tariff is based on a certain percentage of the original price of the imported goods. The predefined percentage remains the same, however, if the price changes, the tariff will also change accordingly.

Specific tariff- Specific tariff is based on a fixed nominal. For example, $150 per tonne of imported goods.

Why is tariff imposed?

As the price of an imported product increases due to tariffs, domestic buyers may not consider this relatively expensive product and may end-up choosing a similar domestic product instead. Thus, tariffs bring benefits to domestic manufacturers by reducing competitive pressures, enabling them to generate increased sales and revenue. Tariffs serve as a revenue source for the government as higher tariffs result in greater government income. While tariffs have their own significance for domestic producers and government, it may discourage consumers from purchasing imported products, especially if these imported products have some exclusive features or benefits that similar domestic products may not have.

How does tariff impact the global trade?

To put it simple, tariffs make imported products or goods more expensive. This means that local manufacturers don't have to lower their prices due to less competition. This results in people of the importing country end-up buying things at higher prices.

Refer to the below image that depicts how global trade works without tariffs. In the graph, DS represents Domestic Supply, and DD shows Domestic Demand. The price of goods in the country is denoted by P, while the world price is denoted by P*. As the graph shows, when the price is lower, people in the country will buy Qw worth of goods. But since the country can only produce up to Qd, it has to import Qw-Qd worth of goods.

Now consider another scenario when tariff or any policy that increases prices is implemented, it leads to higher prices and restricts the amount of imports. The below image depicts that as the price increase from the non-tariff level P* to P', more domestic businesses are ready to make the product, so Qd shifts to the right. It also causes Qw to move to the left. This results in a decrease in imports, a relative rise in domestic production, and increased prices for end consumers.

The significance of tariffs in international trade has diminished in modern times, largely owing to the introduction of international entities like World Trade Organization (WTO) aimed at fostering free trade.

Such organizations make it complex for a nation to impose tariffs and duties on imported products. As a result, countries have now shifted their focus towards non-tariff trade restrictions, such as quotas and export limitations.

Non-Tariff Trade Restrictions

Import quota

Quotas put a limit on the quantity of a product that can be imported by a country. If local producers can't increase the manufacturing of that product to fill the gap between demand and supply, it leads to shortage in supply. This implies that the price of this domestically manufactured product will increase due to high demand and low supply.

This benefits domestic manufacturers as they have less competition from imported goods. However, domestic people again end-up paying higher prices despite buying from domestic manufacturers.

How does import quota impact supply chain?

Import quotas limit the quantity of goods that can be imported into a country within a specific timeframe. This restriction directly affects the supply available in the market. As a result, it can lead to shortages or reduced availability of certain products within the supply chain.

Quotas restrict market access for foreign suppliers and manufacturers. This limitation can reduce competition within the domestic market, affecting the variety of products available and potentially reducing competitive pressures on domestic producers. They influence relationships between importers and foreign suppliers. They may necessitate changes in supplier strategies, requiring diversification of sourcing or seeking alternative suppliers to fulfill demand within the restricted import limits. Quotas often lead to operational adjustments within supply chains. Companies should reevaluate inventory management, production schedules, and distribution strategies to adapt to limited import availability.

Import quotas can influence pricing within the supply chain. Restrictions on imports might lead to increased prices for imported goods, affecting costs for downstream manufacturers or retailers. This price increase can subsequently impact consumer pricing and purchasing patterns.

Such quotas create market distortions by limiting the free flow of goods. These restrictions can disrupt the natural supply and demand equilibrium, potentially leading to market imbalances, price fluctuations, and inefficiencies within the supply chain. Companies operating within supply chains affected by import quotas need to devise strategic plans to navigate these limitations. This might involve seeking alternative sourcing strategies, adjusting production capacities, or exploring new markets to compensate for restricted imports.

Overall, import quotas significantly influence the availability of goods, competition dynamics, supplier relationships, pricing, market equilibrium, and strategic planning within supply chains. Companies must adapt and optimize their operations to effectively manage these limitations and maintain supply chain efficiency despite the imposed import restrictions.

Embargo

An embargo is a severe form of trade restriction imposed by one country or a group of countries against another country, prohibiting trade and commercial activities altogether. It's a government-imposed ban that restricts or entirely prohibits trade, usually for political reasons, to achieve political goals, such as to condemn certain actions or policies of a government, address human rights violations, or address security concerns.

An emargo typically involves a halt on imports, exports, and other commercial exchanges, including financial transactions and investments. It aims to restrict the flow of goods, services, and sometimes even capital and people between the embargoing country and the targeted nation.

Embargoes significantly disrupt global supply chains by interrupting the flow of goods, services, and materials across borders. They lead to shortages, market access limitations, and financial strains for businesses. Embargoes force companies to find alternative sources, increase costs, and face uncertainty, impacting trade efficiency and increasing operational challenges.

How do embargoes impact the supply chain?

Embargoes disrupt established supply chains, causing shortages and hampering the availability of essential goods, components, and raw materials. This disruption affects industries reliant on these inputs, leading to production delays, decreased output, and even production halts. Moreover, they limit market access for companies based in embargoed countries, curtailing their ability to sell products and services internationally. This restriction results in reduced revenues, hampered growth opportunities, and financial strain on affected businesses.

In response to embargoes, companies are compelled to restructure their sourcing strategies, seeking alternative suppliers, manufacturers, or markets to compensate for disrupted trade routes. Such shifts in supply sources or manufacturing locations incur additional costs, logistical complexities, and operational disruptions.

Financially, embargoes can cause substantial losses for companies due to halted trade activities, contract cancellations, or devaluation of assets. They also pose challenges for investors and financial institutions operating in or dealing with entities from embargoed nations.

The imposition of embargoes amplifies costs across supply chains. Businesses encounter increased expenses related to finding alternative suppliers, rerouting shipments, complying with new trade regulations, and managing delays in transportation and logistics.

License

Some countries use import and export licenses as measures to regulate trade. Importers seeking to bring foreign goods into the country are required to obtain an import license.

Governments have the authority to restrict the issuance of import licenses. They may choose not to grant licenses for specific products originating from particular countries or for particular purposes.

How do licenses impact the supply chain?

Import and export licenses have significant effects on supply chains. They regulate the movement of goods across borders, impacting supply availability, market access, pricing, and operational processes. Import licenses control what comes into a country, affecting the availability of goods and materials, while export licenses influence a company's ability to sell products in international markets. These licensing requirements add complexity to supply chain operations, affecting logistics and operational efficiency. Ultimately, import and export licenses play a pivotal role in shaping how goods flow within global trade networks.

Standardization

Standardization as a trade restriction refers to the implementation of specific standards, regulations, or technical requirements that can limit trade between countries. These standards can be related to product specifications, safety measures, quality certifications, labeling requirements, or manufacturing processes.

While standards are essential for ensuring product quality, safety, and compatibility, they can also act as trade barriers when they are stringent, discriminatory, or divergent from internationally recognized norms. Such divergent standards can create obstacles for exporters as they may have to adjust their products or production processes to comply with different sets of standards in various markets, increasing costs and complexities.

How does standardization impact the supply chain?

Standardization significantly influences supply chains. Adhering to various and often divergent standards across different markets increases compliance costs for businesses. Supply chain participants may need to invest in modifications, additional testing, or alterations in manufacturing processes to meet different standards, rising operational expenses.

Diverse standards create complexities within supply chains. Companies must align to and manage multiple sets of regulations, leading to administrative burdens, logistical challenges, and increased time and effort required for compliance, potentially affecting supply chain efficiency.

Further, stringent standards can disrupt supply chains by causing delays in product development, production, or distribution. Requirements for varying standards may necessitate sourcing materials or components from different suppliers or altering manufacturing processes, leading to delays in delivery or production interruptions.

Standards that differ significantly from international norms may restrict market access for suppliers and manufacturers. Failure to meet specific standards in certain markets can limit entry or sales, impacting the overall supply chain and market reach.

Inability to comply with diverse standards may result in non-compliance risks, including potential fines, rejections of goods at borders, or reputational damage. These risks could disrupt supply chain operations and relationships with partners or customers.

Addressing standardization-related trade barriers involves harmonizing standards across regions or aligning them with internationally recognized norms. Efforts to streamline standards can reduce compliance costs, simplify operations, facilitate smoother trade flows, and ultimately improve supply chain efficiency by reducing the burden of divergent and overly stringent standards.

Subsidy

Subsidies function differently from import tariffs. Rather than imposing fees on imports, governments offer financial aid to domestic producers, incentivizing them to increase exports.

These subsidies come in various forms, such as reduced production expenses, more affordable access to credit, or financial aid tied to the pricing of exported goods.

By providing subsidies, domestic products become more competitive in global markets. The funds for subsidies originate from tax revenue. Consequently, it is indirectly the taxpayers, be they households or businesses, who bear the cost, even if they don't necessarily utilize the subsidized product.

How does subsidy impact the supply chain?

Subsidies can alter production dynamics within the supply chain. They may encourage increased production or more efficient manufacturing processes by reducing costs for producers. This can affect the quantity and quality of goods produced, potentially influencing inventory levels and operational strategies within the supply chain. Subsidies can modify the cost structure for businesses. They might lead to lower production costs, making it possible for manufacturers to offer goods at more competitive prices. This alteration in cost dynamics can affect pricing strategies and cost calculations along the supply chain.

Subsidies may influence relationships between suppliers and manufacturers. If a subsidy directly impacts input costs, such as raw materials or energy, it can affect negotiations, contracts, and partnerships within the supply chain. Suppliers may adapt to changes in demand or production requirements influenced by subsidies.

They can also change the market competition landscape. When domestic products benefit from subsidies, they may become more competitive in both domestic and international markets. This shift could influence market share, demand patterns, and overall competitiveness within the supply chain.

Subsidies targeting specific industries or technological advancements can stimulate innovation. This innovation can lead to the adoption of new technologies or practices within the supply chain, impacting processes, efficiencies, and product development strategies.

They may affect the resilience of the supply chain. They can impact the distribution of resources, supplier choices, and the structure of the supply chain. These changes may either enhance or challenge the resilience of the chain, particularly in responding to market shifts or disruptions.

Subsidies can bring significant alterations to the cost structure, production dynamics, supplier relationships, competitiveness, innovation, and resilience within supply chains. They can influence decision-making, strategies, and operations across the entire supply chain network, impacting its efficiency, competitiveness, and adaptability.

Why are trade restrictions important?

In the absence of barriers, global trade facilitates the efficient allocation of resources, allowing goods, services, and production factors to move effortlessly between nations. Advocates argue that unrestricted trade promotes societal well-being by offering a broader range of products to meet various needs. It also enables labor mobility to countries with better work opportunities. Additionally, businesses gain from broader market access beyond their domestic boundaries.

However, not all countries share the same objectives of unrestricted trade and free movement of services and production factors. Therefore, some opt to implement trade restrictions. Notably, reasons prompting a nation to enforce these restrictions include: Shielding established domestic industries from foreign competition, which might intensify due to easier access to domestic markets for foreign goods and services.

Protecting emerging industries until they become mature and globally competitive, contributing to national security, employment, technology, or value chains in multiple industries.

Ensuring domestic employment and income, as increased imports benefit foreign producers, redirecting money abroad and potentially boosting production and employment there rather than domestically.

Generating government revenue by imposing import tariffs, creating an income source separate from individual or business taxes.

Responding to similar restrictions imposed by trading partners, aiming to counter unfair trade practices, such as dumping, and maintaining equilibrium in trade relations.

Conclusion

Trade restrictions have a great impact on global supply chains. Measures such as tariffs, import quotas, embargoes, subsidies, and standardization are powerful tools utilized by nations to protect industries, regulate markets, and address various economic objectives. However, their impact on supply chains is multi-faceted, encompassing disruptions to trade flows, alterations in cost structures, market access limitations, and complexities in compliance and operations. Despite their intended goals, trade restrictions pose challenges, often resulting in market distortions, increased costs, and supply chain inefficiencies.

The evolution of international trade dynamics, regulatory frameworks, and collaborative efforts aimed at standardizing norms across regions will continue to shape the landscape, influencing how supply chains navigate and adapt to the ever-changing realm of trade restrictions. The key lies in striking a balance between regulatory objectives and ensuring the smooth functioning of supply chains for a more resilient and efficient global trade ecosystem.