A Breakdown of Global Trade Barriers

The topic of trade barriers is gaining eyeballs nowadays and here is why.

The protectionist policies of countries and political conflicts among global powers are increasing dramatically. International trade is intensifying more than ever leading to the availability of cheaper goods and rising competition among producers across the globe. Globalization is promoting generalized and equal benefits for all through free trade.

The coming together of situations explained above is building an ever-ripening situation for trade barriers. Clashing directly with the deepening echoes for free trade, countries are supporting trade barriers greatly.

It is important you understand what are trade barriers, what are their different types, and how they can impact you before you go ahead with picking sides. Let’s delve into breaking them down.

What Are Trade Barriers?

As can be simply understood from the term, trade barriers are different laws, rules, or regulations meant to restrict, control, or manipulate trading activities between two or more countries. These barriers commonly use methods like raising costs, limiting the supply of imports/exports, putting regulatory standards, and more to check trade between two entities.

Trade barriers are usually imposed by governments or equivalent authorities for different reasons. These include protecting the domestic economy, regulating competition in the domestic markets, safeguarding local industries, monitoring imports/exports, etc.

Having a proper understanding of trade barriers is vital for ensuring trade compliance.  make sure that your goods move seamlessly across borders, you must be aware of the tariffs you need to pay or the non-tariff barriers you need to be compliant with. At the same time, keeping track of these global trade barriers manually is no longer a viable option as they continue to increase dramatically. You can rely on advanced trade compliance software to know all about the trade barriers applicable to your goods.

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Why Do Trade Barriers Exist?

Here are some of the main reasons why countries around the globe are for trade barriers.

Safeguarding domestic job

Goods produced in developing countries are a result of cheap labor and are also cheaper. Tariffs on such imports are meant to safeguard higher wages and productivity of domestic labor and promote the demand for local goods among consumers.

Generating more revenue

Tariffs are the taxes that help governments generate revenue from imports along with regulating them. While they make imported goods expensive and decrease their local consumption, the taxes levied on them are collected by the customs authority.

Protecting local industries

Trade barriers help countries with protecting local industries or start-ups. By regulating the flow of imports, governments provide a sustainable and competition-free environment for the infant industries to thrive.

Preventing dumping

Dumping of goods can severely impact a country’s economy which makes a solid case for trade barriers. Although dumping is hard to identify, governments tend to restrict certain imports that they think can harm the demand for locally produced goods.

What Are the Different Types of Trade Barriers?

There are three major types of trade barriers with different purposes.

Now, let's break down these trade barriers one by one.

Natural Barriers

There are plenty of barriers presented to global trade that are not induced by individuals or authorities. These are called Natural barriers which occur due to many reasons. For instance, tough landscapes, tricky transportation routes, trade compatibility of items, cultural differences between countries, language differences, etc. can pose difficulties to trading activities between countries.

Tariff barriers

In simple terms, tariffs include explicit monetary charges like taxes, duties, or fees which are levied by the government on various kinds of imports. Tariffs are the most common trade barriers that can be levied on commodities as well as countries. Essentially, tariffs are taxes levied on imported goods and borne by the customers purchasing those goods. These taxes stay with the customs authority of the ensuing country.

Tariffs are the kind of trade barriers targeted at increasing the cost of imports to bring down their competitive bar in the domestic market. By making foreign goods expensive, tariffs promote consumers to shift towards relatively less costly domestic goods. Therefore, one can mostly associate them with policies related to national interests, revenue generation, or trade protectionism.

Specific tariffs

These are fixed tariffs or fees imposed on a single unit of import. Such specifically applied tariffs are called so as they vary depending upon the type of imports.

Ad valorem

A phrase in Latin, Ad Valorem means according to value. The Ad Valorem tariffs are imposed on goods based on a particular percentage of their value. For instance, a 20% tariff imposed on airbuses imported from Germany will lead to a price hike of 20% for airbus importers in the US. In most cases, Ad Valorem tariffs are meant to safeguard the interest of domestic producers by increasing the prices of imports.

Peril point tariffs

Countries impose peril point tariffs to limit imports from foreign competitors that can threaten local industries. These tariffs are mostly directed at protecting those products or industries that cannot compete with their foreign alternatives.

Retaliatory tariffs

When a country is impacted by tariffs imposed by another country, it can levy retaliatory tariffs on the latter. With retaliatory tariffs, countries attempt to even out their economic disadvantage or punish other countries with similar economic deprivations.

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Non-tariff barriers

All trade barriers that do not require any monetary compensation or are not related to natural barriers are called non-tariff trade barriers. These can be considered indirect measures of producing hurdles in international trade in order to maximize benefits for the local market and industries and also limit foreign imports entering their borders. Non-tariff barriers are of different forms including special conditions, practices, policies, laws, etc.

Licenses

Governments grant licenses or permits to businesses as an allowance to import goods into the country. Such licenses are usually given to certain companies or individuals for importing otherwise restricted items. For instance, importing processed food may be restricted in a particular country but it may still grant a license to company X for importing it. Licensed imported items are mostly higher in the price for the end customers as they restrict the competition among importers.

Quotas

Quotas are closely associated with licenses as they both become relevant in importing goods. These are meant to restrict the total amount or total value of certain imports that can enter a concerned country over a period of time. Quotas are meant to bring down the circulation of competitive foreign goods in local markets and enhance the demand for cheaper local alternatives.

These licenses are handed by governments or equivalent issuing authorities over to companies or individuals that require to import particular goods or services. Quotas simply set an import quantity restriction that cannot be averted by any foreign exporter in any way.

Voluntary export restraints

These are kind of unique barriers to trade as they are imposed by the exporting country, usually when requested by the importing country. At the same time, the importing country can also impose a reciprocal VER directed towards the exporting country. Essentially, voluntary export restraints are aimed at protecting the domestic countries of countries involved by raising prices and generating more revenue.

Local content requirement

This is another trade barrier aimed at protecting the economic interests of the concerned countries. In this case, governments impose a particular condition on the imported goods that- a specific percentage of the concerned imports OR a specific percentage of the total value of the concerned imports is produced domestically.

Let’s say, country A places local content requirement restrictions on the import of cars. It requires 30% of the parts used in the cars to be made domestically or 20% of the total value to be derived from domestic parts.

Subsidies

Governments provide subsidies to producers of goods where they pay for a specific percentage of the total cost of production in any form. Subsidies are directed toward supporting domestic manufacturers by bringing down production costs, improving profits, and boosting competitiveness.

Embargoes

These are very stringent trade barriers. Embargoes impose extensive or complete bans on all or several trading activities between two countries. Mostly, governments impose embargoes on nations with which they share poor relations or delve into a trade war. Embargoes are meant to cast economic damage to the target countries.

Currency devaluation

This is a more strategic kind of trade barrier based on the concept of foreign exchange rates. With currency devaluation, countries attempt to promote exporting by making it more viable and lower importing by reducing profits. Currency devaluation also helps governments with controlling inflation and regulate payment balances.

Regulatory barriers

These are sort of legal barriers imposed by the government to regulate the imports entering their borders. Commonly, the government tries to do this by setting standards like product safety, pollution, etc., and requiring the imports to meet them.

Technical barriers

These barriers can be considered a kind of regulatory non-tariff barriers. Technical barriers require imports to go through technical regulations, standards, and conformity assessment processes. The aim of these barriers is to ensure that the concerned imports are safe for general health, safety, and protection of the environment and the nation’s citizens. Technical barriers don’t present unnecessary hurdles to global trade but only encourage following international standards.

Anti-dumping duties

Dumping is a serious issue with a great impact on domestic economies around the globe. Businesses sell their goods at lower selling prices in various other countries in order to accumulate profits. This phenomenon is called Dumping. To prevent this process, governments impose anti-dumping duties on such imports that they deem harmful to their domestic markets and manufacturers.

The list of non-tariff barriers is long and tracking them manually leaves plenty of room for error. This can lead your shipment to trouble during the customs check. Trademo Compliance can help you prevent this by knowing all the import/export controls you must know and comply with on time.

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What Is the Impact of Trade Barriers?

The effects trade barriers can have on global trading activities are wide-ranging and different for each stakeholder in the process. While the main aim of trade barriers is to maintain the economic stability of countries, they still impact the concerned countries, goods, customers, and other agencies involved differently.

For consumers, trade barriers usually don’t come with presents. Trade barriers like tariffs make prices competitive, make local goods cheaper, make imported goods expensive, and also increase demand. In this cycle, the end consumer of the concerned goods arrives at a compromised state. They have to either pay higher prices or shift to cheaper local alternatives.

For producers, trade barriers can have different impacts depending on which end they are located at. Domestic producers celebrate tariffs and non-tariff barriers as they enable fair market competition while encouraging expansion. Trade barriers push revenue generation, boost employment, and promote self-sufficiency. At the same time, exporters despise trade barriers as they hurt their business and might also put them in a critical state of operational shutdown.

Conclusion

Some view trade barriers as standing in the way of the policies like globalization and trade liberalization and they are not entirely wrong. However, the modern state of global geopolitics and individual conditions of the countries make a favorable case for these barriers. As trade barriers present differing impacts, it must be left to the stakeholders to decide whether they are desirable or not.

However, proper understanding and awareness of the trade barriers before beginning to trade with another country is no less than crucial. This will help you protect your trade, get competition check, leverage opportunities like FTAs to save cost, and also promote your business depending on which end of the trade relation you are.