Common types of trade barriers
- Make imported products more expensive compared to domestic ones
- Protect local industries from foreign competition
- Generate revenue for the government
To understand the full impact of tariffs on trade and the economy, it’s important to examine how they directly influence the prices consumers pay for goods.
This graph illustrates international trade without tariffs. It shows domestic supply (DS) and domestic demand (DD) curves. The equilibrium price in the domestic market is P, while the world price is lower at P*.
At the lower world price P*, domestic consumers increase their demand to Qw. However, domestic producers can only supply Qd at this price. This creates a gap between what consumers want and what local producers can supply.
To meet this excess demand, the country imports the difference (Qw - Qd). This import quantity represents the amount of goods brought in from other countries to satisfy domestic consumption at the lower world price.
The tariff raises the price from the world price P* to a new, higher price P1. This is shown in the upward shift on the price axis. At this higher price, domestic producers find it more profitable to make the good. This is illustrated by Qd moving to the right, indicating increased domestic production.
The higher price leads to a decrease in overall demand. We see this as Qw shifts to the left, showing that consumers buy less at the higher price. The gap between Qw and Qd narrows. This represents a decrease in imports, as more of the demand is met by domestic production.
- Protect domestic industries by directly limiting foreign competition
- Can lead to higher prices for consumers
- Reduced product choices.
While tariffs increase prices through taxes, quotas limit supply directly.
- The government decides which products need licenses
- Only businesses with licenses can import those products
- This limits the number of companies that can import, reducing the total amount of imports.
With licenses in place it means there’s less competition among imports, potentially higher prices for consumers and greater control for the government over what’s imported.
- A government decides to punish or pressure another country for political reasons
- It bans its own citizens and businesses from trading with that country
- This can involve stopping all trade or just specific types of business
Sanctions can harm the economy of the targeted country and are used to try change a country’s behaviour without using military force. Sanctions are different from other trade barriers because they are mainly used for political reasons, not economic ones.
- For example - The United States put sanctions on Russia because of the conflict with Ukraine. This means American companies can’t do business with certain Russian banks (this will explained in more detail in a moment).
Governments do this to support local businesses and jobs and to develop certain industries in their country.
It can increase the costs for companies and higher prices for consumers but it helps grow and sustain local industries.
🚧 Reasons for and against trade barriers
We have just touched on some of the reasons why countries will impose different trade barriers, but lets quickly outline all of them in more detail.
- Domestic Growth Opportunities - Trade barriers can promote domestic industry growth
- Helps protect new industries, as new domestic companies can grow without facing tough global competition right away
- Helps support existing industries as by making foreign goods more expensive, companies can invest more in their production and become more competitive
- Declining industries are given additional government support by the government to help reduce any sudden economic shocks if they did close
- Strategic Industries - Trade barriers can help safeguard industries that are crucial for a country’s security and self-reliance. These industries typically include energy, defence and agriculture. This helps a country stay more self-sufficient and less vulnerable to international pressures or disruptions.
- Current Account Deficit - Trade barriers can help address a trade deficit by making imports more expensive or less available. This encourages people to buy more domestic goods and increase exports.
- Labour / Environmental Regulations - Trade barriers can be used to address unfair advantages some countries gain from weak labour and environmental regulations. By making goods from these countries more expensive, trade barriers aim to encourage better global standards, protect domestic workers, and promote more responsible international trade practices.
- More Jobs - Trade barriers can protect and create domestic jobs.
- Stagnant Technological Advancements - Trade barriers can reduce the incentive for domestic companies to innovate. Without foreign competition, local firms may become complacent, investing less in research and development. This can lead to the country falling behind global standards.
- Limited Consumer Choice - By limiting access to foreign products, it reduces the available options for consumers.
- Increased Prices - By limiting foreign competition, domestic companies face less pressure to keep prices low and so consumers may end up paying more for goods without seeing any improvement in quality.
- Increased Costs - Trade barriers can increase production costs for domestic manufacturers who rely on imported raw materials or components.
- Isolation and Retaliation - When a country imposes protectionist measures, it may face political and economic isolation. Other nations often respond with their own trade restrictions, creating a cycle of retaliation or a ‘trade war’. We will look at some examples of them below.
Trade Protection - ‘America First’ 🇺🇸
- He introduced tariffs on imported solar panels and washing machines
- For washing machines, a 20% tariffs was applied to the first 1.2 million units imported, with a higher 50% tariff on additional imports in the following year (New York Times).
These measures aimed to protect domestic manufacturing jobs but also led to increased prices for American consumers.
But what was his reasoning for this? He largely wanted to address the trade deficit with China. He also consistently accused China of unfair trade practices, arguing these harmed US manufacturing.
Joe Biden has also adopted an aggressive economic approach towards China and has continued to expand many trade restrictions:
- Tariffs - Maintained about $360 billion worth of tariffs on Chinese goods that were imposed by Trump. He also increased tariffs on specific products, tripling those on steel an aluminium, and quadrupling them on Chinese-made electric vehicles.
- Technology Controls - Introduced strict export controls to limit China’s access to advanced technology, particularly in areas like semiconductors and artificial intelligence.
- TikTok - Taken steps that could lead to banning TikTok, the popular Chinese-owned social media app, due to national security concerns about data privacy.
- Targeted Sanctions - Maintained sanctions on Chinese individuals and entities associated with human rights issues in place like Xinjiang and Hong Kong.
To learn about the relationship in more detail, check out these links ⬇️
💨 Trump shows no signs of wanting to slow down
We know that a tariff is essentially an additional tax on the good or service, which will fall on American consumers, a concern after two years of surging inflation. According to the Center for American Progress Action Fund, middle-income U.S. households would pay roughly $1,500 more in taxes per year the tariff is in place.
Additionally, during a campaign event in March 2024 Trump pledged to impose a 100% tariff on all imported cars and warned of a “bloodbath” for the American auto industry if he doesn’t get re-elected.
🥊 Has any country retaliated to America’s tariffs?
Trump’s reasoning being to protect US national security, however this was called “ludicrous” by Canada’s Deputy Prime Minister Chrystia Freeland and criticised for hurting the economic recovery of both countries during the pandemic.
The EU soon responded by placing retaliatory tariffs on Harley-Davidson motorcycles, jeans, and bourbon whiskey. After this spirit exports to Europe declined by 20%.
Since, President Biden has been generally supportive of the tariffs, although he has made some adjustments. In 2022, he allowed “limited volumes” of EU metals into the US without tariffs. He also replaced some tariffs with a quota system, meaning EU steel and aluminium can enter tariff-free up to a certain amount, but anything over that quota still faces tariffs.
In response to these changes, the EU suspended its retaliatory measures until December 31 2023, as a goodwill gesture to continue negotiations.
🛫 Trade dispute - Boeing vs Bombardier
This led to the U.S. Commerce Department recommending a hefty 299.45% tariff on Bombardier’s planes. In a retaliation, Bombardier then accused Boeing of manipulating trade laws to stifle competition.
However, the U.S. International Trade Commission rejected the proposed tariffs in January 2018, effectively ending the dispute and allowing Bombardier’s deal with Delta to proceed without punitive measures.
This case highlights tensions with protectionism in the aerospace industry, a sector often supported by government subsidies globally.
🙏🏻 It’s not all negative… countries do work together for a common goal
- Subsidies to boost domestic production of green technology
- Tax credits for consumers buying eco-friendly products and
- Tariffs on goods produced with high carbon emissions
The goals are to accelerate the transition to renewable energy, reduce dependence on foreign suppliers (especially China) for critical green tech components, and encourage less polluting manufacturing methods globally.