What is a Trade Barrier

Trade barriers are measures that governments or public authorities introduce to make imported goods or services less competitive than locally produced goods and services. Not everything that prevents or restricts trade can be characterised as a trade barrier. A trade barrier may be linked to the very product or service that is traded, for example technical requirements. A barrier can also be of an administrative nature, for example rules and procedures in connection with the transaction. In a number of areas, special international ground rules have been agreed, which limit the ways in which countries can regulate trade. It means that some barriers are legal while others are illegal. Sometimes it may also be possible to assist companies that face obstacles to trade that do not fall under the definition of actual trade barriers. Trade barriers are measures that governments or public authorities introduce that prevent or restrict overseas trade and investment. These measures need not necessarily take the form of legislation or a specific decision. They may also take the form of current practice. As a result of these measures, domestic companies recieve a competitive advantage relative to their foreign counterparts. It is accepted that in many cases, products are liable to customes duties when imported into a market and that imported products ought to be accompanied by the correct documentation. In some cases, however, customs duties may be unreasonably high or customs clearance may take an unreasonably long time.

OBJECTIVES/NEEDS/ADVANTAGES OF TRADE BARRIERS:

(1)To Protect Home Industries From Foreign Competition: Tread barriers are imposed in order to give protection to home industries b avoiding completion from other countries. Such competition is harmful and may bring home industries in difficulties. Government has to give support and protection to home industries and for such protection, imports must be discouraged or stopped. This is possible through the creation of different trade barriers and restricting imports. (2)To Promote New Industries And R & D Activities: The quality of production is also likely to improve through research and development (R&D) activities. Such R & D activities can be undertaken at the companys level, at the industry level and even at the national level. It is type of industrial research activity conducted in the research laboratories.

R & D is a costly and time consuming activity and also requires the services of scientists/ exports. Quality improvement, cost reduction, introduction of new product, modification in the existing products and making existing products more useful and agreeable to consumers are some benefits of R & D activities.

(3)To Conserve Foreign Exchange Reserves: A country has to pay for imports through its foreign exchange reserves. Large scale imports mean heavy pressure on available reserve of foreign currencies. Such polices will ultimately lead to foreign exchange crisis. On the other hand, foreign exchange will be saved through import substitution and import restriction. (4)To Maintain Favourable Balance Of Trade & Payments Position: Large scale imports lead to deficit in the balance of trade and balance of payments. Such deficit is undesirable and puts heavy strain on the available foreign exchange. For removing such deficit, imports should be restricted and exports should be promoted. Trade barriers are useful for reducing imports. They are advocated for reducing deficit in the balance of trade and payment position. The term Balance Of Trade suggests the difference between exports and imports which may be positive/negative. It is positive when exports made are more than the imports. It is treated as negative when exports are less as compared to imports within a specific period normally one year. Poor and developing countries normally have to face the problems of negative balance of trade. (5)To Protect National Economy From Dumping: Foreign countries may try to capture domestic market by offering their goods at very low prices. The purpose is to sell surplus production. Such techniques of dumping is profitable to reach countries but harms poor countries. to avoid such situation (anti-dumping duties) are imposed. As a result, foreign goods become costly and the adverse effects on home markets is avoided. (6) To Curb Conspicuous Consumption: Domestic consumers may like to purchase costly imported goods for prestige purpose. This tenancy is a socially undesirable and can be checked by restricting the imports of luxury items by making them too costly and there by restricting their sale within the country. (7) To mobilise Additional Revenue through Heavy Duties on Imports: Trade barriers in the form of revenue tariffs are introduced. Such policy restricts imports and in addition gives substantial revenue to the government for various purposes. Here, trade barriers is created for collecting revenue from foreign suppliers. It is used as tool for collecting revenue.

(8)To make the country strong and self sufficient: Trade barriers are useful for making the country strong & the self sufficient. Import restriction lead to production of new commodities within the country through import substitution. Dependence on other countries is reduced considerably. A domestic industry is made competitive in the long run. (9) To counteract trade barriers imposed by other countries: Sometime, trade barriers are introduced against the countries which have already imposed such restrictions. For example, country A may ban imports from country B. country B will adopt similar policy as a protest to the policy adopted by country A. (10) To encourage the use of domestic production: Trade barriers are introduced in order to encourage people to use goods manufactured with in the country. People will have no choice but to purchase domestic goods when imports are stopped or restricted considerably. Thus, trade barriers widen the scope of marketing to home industries and give them an opportunity to grow.

Forms of Trade Barriers

Tariff Barriers
Tariff in international trade refers to the duties or taxes imposed on the import traded goods when they cross the national borders. After Second World War, there has been a reduction in the average level of Tariffs in the advanced countries. Tariff rates are generally high in developing countries. With the recent economic liberalization across the world, many developing countries have reduced the tariff as a part of their trade liberalization. in most economies and organisation like WTO prefers tariff to non-tariff barriers because tariff are transparent and less regressive than non-tariff barriers. The developed countries tariff continues to be very strenuously loaded against the developing ones.

Types of Tariffs and Trade Barriers There are several types of tariffs and barriers that a government can employ: Specific tariffs Ad valorem tariffs Licenses Import quotas

Voluntary export restraints Local content requirements Specific Tariffs A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff can vary according to the type of good imported. For example, a country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported. Ad Valorem Tariffs The phrase ad valorem is Latin for "according to value", and this type of tariff is levied on a good based on a percentage of that good's value. An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles. The 15% is a price increase on the value of the automobile, so a $10,000 vehicle now costs $11,500 to Japanese consumers. This price increase protects domestic producers from being undercut, but also keeps prices artificially high for Japanese car shoppers. Non-tariff barriers to trade include: Licenses A license is granted to a business by the government, and allows the business to import a certain type of good into the country. For example, there could be a restriction on imported cheese, and licenses would be granted to certain companies allowing them to act as importers. This creates a restriction on competition, and increases prices faced by consumers. Import Quotas An import quota is a restriction placed on the amount of a particular good that can be imported. This sort of barrier is often associated with the issuance of licenses. For example, a country may place a quota on the volume of imported citrus fruit that is allowed. Voluntary Export Restraints (VER) This type of trade barrier is "voluntary" in that it is created by the exporting country rather than the importing one. A voluntary export restraint is usually levied at the behest of the importing country, and could be accompanied by a reciprocal VER. For example, Brazil could place a VER on the exportation of sugar to Canada, based on a request by Canada. Canada could then place a VER on the exportation of coal to Brazil. This increases the price of both coal and sugar, but protects the domestic industries.

Trading blocs
A trading bloc is a group of countries that join together in some form of agreement in order to increase trade between themselves and/or to gain economic benefits from cooperation on some level.

Types of Trade Blocs

There are different types of trade blocs depending on the levels of commitments and arrangement between the members.

Preferential Trade Areas Preferential trade areas have the lowest level of commitment to the reduction of trade barriers. Here the members lower the trade barriers but do not eliminate the barriers among themselves. Such an agreement does not address how individual members will deal with the non-members. Free Trade Area The next level of commitment is the free trade area where all the trade barriers among the members are removed. So, all members are free to import and export goods and services among themselves. These members will continue to maintain independent trade policies with non-member countries. An example of a free trade agreement is NAFTA (North American Free Trade Agreement) under which Canada, Mexico and the US have agreed to eliminate the barriers among themselves. However, each member maintains independent policy while dealing with other countries. Customs Union This is the third type of trade bloc, under which the member countries not only eliminate internal trade barriers, but also adopt common policies on how to deal with non-member countries. An example is Customs union of Russia, Belarus and Kazakhstan, which was formed in 2010. These countries are eliminating trade barriers among themselves but have also agreed to some common set of policies for dealing with nonmember countries. The above three types of trade blocs only addressed trade barriers related to goods and services. The following trade blocs, apart from these trade barriers, also address other factors such as flow of resources. Common Market In a common market, the members eliminate internal trade barriers, adopt common external trade barriers and allow free movement of resources, for example labor, among member countries. Examples include Mercosur (Southern Cone Market), East African Common Market, and West African Common market.

Economic Union In an economic union, members eliminate internal barriers, adopt common external barriers, allow free movement of resources, and adopt a uniform set of economic policies. The European Union is an example of an economic union. With one currency, they adopted one monetary policy.

Advantages and disadvantages of trading blocs Advantages are:

1. faster way to remove trade and investment barriers within trade blocs 2. increasing interdependency of neighbouring countries on one another. 3. greater weight and voice on world's political and economic stage when represented as a group. 4.Wider range of goods available.. 5. Makes movement of money and goods easier.

Disadvantages are:
1. Non member countries of the trade bloc will be ostracised since trade blocs are created to help only their member countries reduce trade barriers. 2. Member countries will only look out for each other and ignoring the non-member countries. 3. relaxed borders between member countries mean more illegal immigrants manage to get through.