By Mudit Dugar

‘If it’s true that God made everything, then he must probably be somewhere in China’, this joke is often used as an economic satire these days. Now from where does this come from? From the fact that 99% of the products we purchase are made in China. If they are made in China, then how come Indians consume it? Simple. International trade. International trade is when two countries engage in a mutually benefitting agreement, where they import one product that they are inefficient or deficient in producing and export another product in which they specialize and probably have a surplus of. Sounds like a win-win situation, doesn’t it? But, like every coin, this situation has a flip side. If trade is practised only across borders, domestic industries fumble, exchange rates are affected, jobs are outsourced and that’s just the tip of the iceberg. In layman terms, countries suffer from absolutely free trade. Now, this is a problem and it needs a solution. To tackle this situation, economists have come up with the phenomena of ‘Trade Barriers’. What are trade barriers? They are measures that government or public authorities introduce to make imported goods and services less competitive and more regulated. They are often introduced to help domestic industries grow, control prices and stabilize the economy. Trade Barriers are of various forms, some of them being ‘Tariff Barriers’, ‘Quotas’ and ‘Non-tariff barriers’. In this assignment, we will focus on two of the many barriers in particular – Tariff Barriers and Quotas.

Tariff Barriers- Tariffs are a tax on imports, which is collected by the government and which raises the price of the good to the consumer. It is also known as duties like import duty. The primary and secondary objective of tariffs is to limit imports and raise revenue respectively. As to why countries have these barriers even after proposing and propagating free trade; the answer is simple. Too much of anything kills, figuratively of course. International trade is good and bad in its own ways. It opens up the consumers’ options, it gives competition to domestic producers that incentivize them to produce more effectively, it prevents a local producer from gaining monopoly and pushing up prices. But it’s not as rosy an image as it seems, international trade is very harmful too – money flows out of the economy, jobs are destroyed, domestic industries are threatened, politics and administration is influenced, economy goes topsy turvy. And this is exactly why tariff barriers are needed even after free trade is promoted. Tariffs come in different forms, mostly depending on the motivation, or rather the stated motivation (the actual motivation is always to limit imports). For instance, a tariff may be levied in order to bring the price of the imported good up to the level of the domestically produced good. This so-called scientific tariff—which to an economist is anything but—has the stated goal of equalizing the price and, therefore, “levelling the playing field,” between foreign and domestic producers. In this game, the consumer loses.

A peril-point tariff is levied in order to save a domestic industry that has deteriorated to the point where its very existence is in peril. An economist would argue that the industry should be allowed to expire. That way, factors of production used by that inefficient industry could move into a new one where they would be better employed.

A retaliatory tariff is one that is levied in response to a tariff levied by a trading partner. In the eyes of an economist, retaliatory tariffs make no sense because they just start tariff wars in which no one—least of all the consumer—wins. For example, the Sino-American trade war over solar panels in 2013. When America started imposing taxes on solar panels, the Chinese imposed taxes on their own produced Polysilicon, which is used for solar panels. This type of counterproductive trade war benefitted no one, but did do a lot of harm to one entity- the customers.

Quotas- A quota is a limit on the amount of a certain type of good that may be imported into the country. A quota can be either voluntary or legally enforced. You may wonder why a nation would ever choose to use a quota when a tariff has the added advantage of raising revenue. The major reason is that quotas allow the nation that uses them to decide the quantity to be imported and let the price go where it will. A tariff adjusts the price, but leaves the post-tariff quantity to market forces. Therefore, it is less predictable and precise than a quota. 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.

Non-tariff barriers include quotas, regulations regarding product content or quality, and other conditions that hinder imports. One of the most commonly used non-tariff barriers is a product standard, which may aim to serve as “barriers to trade.” For instance, when the United States prohibits the importation of unpasteurized cheese from France, is it protecting the health of the American consumer or protecting the revenue of the American cheese producer?

Other non-tariff barriers include packing and shipping regulations, harbour and airport permits, and onerous customs procedures, all of which can have either legitimate or purely anti-import agendas, or both.

These are only a few barriers that we have studied about, and this just proves why countries need barriers, what they are and how they are implemented, along with a few real-life examples.

Posted by The Indian Economist | For the Curious Mind