TARIFF AND NON-TRIFF

TRADE BARRIERS
Tariffs
A tariff is a tax on imported goods that is designed to make them more expensive for consumers
and thus, make domestically produced goods more competitive.
• A tariff aims to protect local industries from foreign competition, generate revenue for the
government, and influence trade relations between countries.
• Tariffs can be broadly classified into two main types: specific tariffs and ad valorem tariffs.
• Additionally, tariffs can be categorized based on their purpose, such as protective tariffs,
revenue tariffs, or retaliatory tariffs.
Specific vs. Ad Valorem:
• Specific Tariffs:
• A fixed amount of money charged per unit of imported goods, regardless of their value (e.g.,
$2 per kilogram of sugar).
• Ad Valorem Tariffs:
• A percentage of the goods' value is charged as a tariff (e.g., 10% of the value of a car).
• The intention is for citizens to buy local products instead, which, according to supporters, would
stimulate their country's economy.
• Tariffs therefore provide an incentive to develop production and replace imports with domestic
products.
• Tariffs are meant to reduce pressure from foreign competition and, according to supporters, would
help reduce the trade deficit.
• They have historically been justified as a means to protect infant industries and to allow import
substitution industrialisation (industrializing a nation by replacing imported goods with domestic
production).
• Tariffs may also be used to rectify artificially low prices for certain imported goods, due
to dumping, export subsidies or currency manipulation. The effect is to raise the price of the goods
in the destination country.

• Exceptionally, an export tax may be levied on exports of goods or raw materials and is paid by
the exporter.

• A quota limits the quantity of a good that can be imported or exported. The U.S. used to impose a quota on
Japanese cars in the 1980s. To protect its domestic car industry, the U.S. limited how many Japanese vehicles
could be imported each year.
• American economist Milton Friedman said of tariffs: "We call a tariff a protective measure. The
consumer against low prices." Although trade liberalisation can sometimes result in unequally
distributed losses and gains, in the short run, the advantages of free trade are lowering costs of goods
for both producers and consumers.
• The economic burden of tariffs falls on the importer, the exporter, and the consumers.
• While they are intended to protect domestic industries from foreign competition, they can backfire by
increasing costs for domestic companies — especially those that rely on imported parts or raw materials to
produce their goods.
• If a domestic company exports finished products but depends on imported components, tariffs on those
imports raise production costs, making their products less competitive in international markets.
• In 2012, the U.S. imposed anti-dumping and countervailing duties on Chinese solar products to protect domestic
manufacturers. These tariffs significantly increased the cost of importing essential components like solar cells
and modules. As a result, U.S.-based solar companies that relied on these imported parts faced higher
production costs, making their products less competitive in both domestic and international markets.
• Anti-Dumping Duties
Anti-dumping duties are extra tariffs imposed on imports when a foreign company sells a
product below its fair market value (usually lower than in its home country), which can hurt
domestic industries in the importing country.
• Stop unfair low pricing
• In 2009, the U.S. imposed anti-dumping duties on Chinese-made steel pipes (used in oil
and gas pipelines), claiming that Chinese companies were selling them at unfairly low
prices in the U.S. market. The U.S. government imposed anti-dumping duties of 10% to
99% on Chinese steel pipes, depending on the company, to make prices fairer.
These are special tariffs used to cancel out unfair subsidies (financial help) given by other countries to
their exporters.If foreign goods are made cheaper because their government helps them, countervailing
Countervailing Duties duties raise their price again to protect local industries.
Countervailing duties are tariffs imposed to offset subsidies given by foreign governments to
their exporters. These subsidies make foreign products artificially cheap, harming local
industries.
▪ Offset unfair government support
▪ In 2017–2018, the European Union launched an investigation into electric bicycle imports
from China. After confirming the subsidies, the EU imposed countervailing duties (up to
79.3%) on Chinese electric bicycles to offset the unfair advantage.
 Types of Tariffs
1. Specific tariffs.
2. Ad valorem tariffs.
3. Licenses.
4. Import quotas.
5. Voluntary export restraints.
6. Local content requirements.
• Tariffs are paid by domestic consumers and not the exporting country, but they have the effect of raising the
relative prices of imported products.
• Other trade barriers include quotas, licenses, and standardization, all seeking to make foreign goods more
expensive or available in a limited supply.
• The European Union has strict food safety standards.
• India restricts imports of genetically modified (GM) foods, including certain soybeans, corn, and processed foods.
Due to health and environmental concerns, India has not approved many GM varieties and blocks imports unless
explicitly cleared.
• 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 goods 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
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 $40,000 vehicle now
costs $46,000 for 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
• 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 for consumers.
• The European Union requires special licenses for importing pharmaceuticals and medical products.
• 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)
• A VER is a self-imposed limit by an exporting country on the quantity of goods it exports to a
particular country. It’s often the result of pressure or negotiation from the importing country, which
wants to protect its domestic industries — without using formal import quotas or tariffs.
• For example, In 1981, the U.S. asked Japan to limit its car exports to the U.S. because American car
companies were struggling to compete with the rising popularity of fuel-efficient Japanese vehicles.
• Japan agreed voluntarily to limit its car exports to about 1.68 million vehicles per year.
• Japanese carmakers responded by: Quotas: The importing country limits how
• Raising car prices (since supply was limited). much of a product can come in.
• Building factories in the U.S. to bypass the limit (like Honda in Ohio).
VERs: The exporting country agrees to send
less — usually due to pressure from the
Local Content Requirement importing country

• Instead of placing a quota on the number of goods that can be imported, the government can
require that a certain percentage of a good be made domestically. The restriction can be a
percentage of the good itself or a percentage of the value of the good.
• For example, a restriction on the import of computers might say that 25% of the pieces used to make
the computer are made domestically, or can say that 15% of the value of the good must come from
domestically produced components.
How Do Tariffs Affect Prices?

Tariffs increase the prices of imported goods. Because of this,

domestic producers are not forced to reduce their prices from
increased competition, and domestic consumers are left paying
higher prices as a result.
Tariffs also reduce efficiencies by allowing companies that would
not exist in a more competitive market to remain open.

The figure below illustrates the effects of world trade without the
presence of a tariff.

In the graph, DS means domestic supply and DD means domestic

demand. The price of goods at home is found at price P, while the
world price is found at P*.

At a lower price, domestic consumers will consume Qw worth of

goods, but because the home country can only produce up to Qd,
it must import Qw-Qd worth of goods.
• When a tariff or other price-increasing
policy is put in place, the effect is to
increase prices and limit the volume of
imports.
• In the figure below, price increases from
the non-tariff P* to P’.
• Because the price has increased, more
domestic companies are willing to
produce the good, so Qd moves right.
This also shifts Qw left.
• The overall effect is a reduction in
imports, increased domestic production,
and higher consumer prices.
Do Tariffs Cause Inflation?

• Theoretically, tariffs can cause inflation. Tariffs increase the price of goods and
services in domestic markets by applying a tax on imported goods that is paid by
the domestic importer.
• To cover the increased costs, the domestic importer then charges higher prices
for the goods and services.
• Tariffs are typically applied to specific products or industries, so may not have a
wide-scale effect, which, otherwise, would cause all prices to increase, resulting
in inflation.
 Why Are Tariffs and Trade Barriers Used?
• Tariffs are often created to protect infant industries and
developing economies but are also used by

Arguments more advanced economies with developed industries.

Here are five of the top reasons tariffs are used.

favouring
Protecting Domestic Employment
• The possibility of increased competition from imported

tariffs
goods can threaten domestic industries. These domestic
companies may fire workers or shift production abroad
to cut costs, which means higher unemployment
Protecting Consumers
A government may levy a tariff on products that it feels
could endanger its population. For example, a country
may place a tariff on imported beef if it thinks that the
goods could be tainted with a disease.
 • Infant Industries
The use of tariffs to protect infant industries can be seen by the Import
Substitution Industrialization (ISI) strategy employed by many developing
nations. The government of a developing economy will levy tariffs on
imported goods in industries in which it wants to foster growth. Import
substitution is an economic policy where a country encourages domestic
production to replace imported goods.

Arguments The use of tariffs to protect infant industries can be seen by the Import
Substitution Industrialization (ISI) strategy employed by many developing
nations. The government of a developing economy will levy tariffs on

favouring imported goods in industries in which it wants to foster growth.

This increases the prices of imported goods and creates a domestic market

tariffs
for domestically produced goods while protecting those industries from
being forced out by more competitive pricing. It decreases unemployment
and allows developing countries to shift from agricultural products to
finished goods.
Criticisms of this sort of protectionist strategy revolve around the cost
of subsidizing the development of infant industries. If an industry develops
without competition, it could wind up producing lower quality goods, and
the subsidies required to keep the state-backed industry afloat could
sap economic growth.
• Protection against dumping

What is dumping
Dumping is an international trade practice where a country or company exports a product at a price lower than its normal value,
often below the cost of production or lower than the price in the home market, to gain an unfair market advantage in a foreign
country.
• EU vs. Chinese E-Bikes (2019)
The European Union imposed anti-dumping duties on electric bikes from China after finding they were being sold below cost.
Bangladesh Garments Industry (Reverse Effect)
• Some countries argue that Bangladesh sells readymade garments at very low prices, which can sometimes be seen as a form of
dumping—even though it's often due to low labor costs, not deliberate underpricing.
US vs. Vietnamese Catfish (Early 2000s)
The U.S. accused Vietnam of dumping catfish in the American market at prices lower than production costs. This affected American
catfish farmers, leading to tariffs on Vietnamese imports.
• Why dumping is a problem?
• Hurts local industries in the importing country.
• Can lead to monopolies if local businesses shut down.
• May create job losses in the affected industries.
• National Security
 Higher Prices for Consumers:
Tariffs increase the cost of imported goods, which is often passed on to consumers through higher
prices.
• This can disproportionately affect low-income households, reducing their purchasing power and
overall economic welfare.
• The higher prices can also lead to cost-push inflation, where rising input costs (like tariffs) lead to
higher prices for consumers.
Job Losses and Economic Inefficiency:

Arguments • While tariffs may protect jobs in certain import-competing industries, they can lead to job losses in
export-dependent sectors.
• Retaliatory tariffs can reduce demand for exports, leading to economic hardship for workers in

against these sectors. a tax that a government charges on imports to punish another country
for charging tax on its own exports: China responded by saying it would impose
retaliatory tariffs on a broad range of US products.
tariffs Higher production costs for businesses that rely on imported inputs can also lead to job losses and
reduced competitiveness in global markets.
• Tariffs can distort market signals, encouraging investment in less efficient industries and
discouraging investment in potentially more productive sectors.
Disruption of Global Trade:
• Tariffs can trigger a cycle of retaliatory measures, damaging international trade relationships and
hurting all involved.
• This can lead to reduced economic growth and decreased competitiveness for all nations.
• The disruption of global trade can also lead to instability and uncertainty in the global economy.
 A trade deficit means a country imports more than it exports — it buys more from other countries than it sells.

• Tariffs do not determine the size of trade deficits: trade balances are driven by consumption.
• Rather, it is that a strong economy creates rich consumers who in turn create the demand
for imports.
• Industries protected by tariffs expand their domestic market share but an additional effect is
that their need to be efficient and cost-effective is reduced.
• This cost is imposed on (domestic) purchasers of the products of those industries, a cost
that is eventually passed on to the end consumer. Finally, other countries must be expected
to retaliate by imposing countervailing tariffs, a lose-lose situation that would lead to
increased world-wide inflation.
• How Tariffs Affect Global Trade Relations
Another major disadvantage of tariffs is that they can provoke retaliatory measures
from other countries. This can escalate into a trade war, where countries place
increasingly restrictive trade measures on each other.
• Trade wars can cause global supply chain bottlenecks, reduce overall trade volume,
and create an atmosphere of economic uncertainty.
• Moreover, retaliatory tariffs can strain diplomatic relations between countries, as
they are often perceived as hostile or protectionist.
• In the global economy, tariffs can have far-reaching consequences, affecting not
only the countries directly involved but also their trading partners and the broader
international community.
Are Tariffs Beneficial or Harmful?
• The impact of tariffs on an economy is complex and multifaceted, with
both potential benefits and drawbacks.
• While tariffs can provide short-term protection for domestic industries and
help safeguard jobs, they can also result in higher prices for consumers and
reduced international competitiveness.
• In the long run, tariffs can also lead to inefficiencies, slower economic
growth, and strained trade relationships.
• Ultimately, the success of tariffs depends on various factors, including the
broader economic context, the industries targeted, and the international
response.
The Future of Tariffs in a Globalised World
• As the world becomes increasingly interconnected, tariffs are likely to remain a key topic of international
debate. Some countries may continue to use tariffs as a tool to protect domestic industries. However, the
growing complexity of global supply chains and the potential for retaliatory measures may make these trade
barriers less attractive for many countries.
• This could involve diversifying supply chains, adjusting pricing, or exploring free trade agreements.
• Ultimately, the most successful businesses will be those that can adapt to changing trade policies, diversify
their markets, and leverage the guidance of trade experts.