Trade Barriers: Impacts on Prices & Demand

Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

All countries desire trade as a way of increasing their wealth, but very often they want it on their own terms. This lesson looks at the trade barriers that many countries establish, as well as the effects of such limitations.

Historical Trade Barriers

As long as communities have had contact with their neighbors, there has been trade. From time to time, rulers saw fit to create trade barriers in order to prevent goods from one country from being sold or bought by those of another. After all, it is generally not wise to sell weapons to a country you are at war with. However, the rise of the global trade routes we think of today really came with the growth of the European trading empires of the 16th and 17th centuries. Because of trade, countries like France, England, Holland, and Spain had emerged from being relative backwaters to being legitimate global powers.

Needless to say, they knew that they owed their success to their ability to carry on trade. As such, they limited other powers' access to their ports and colonies. This was part of a greater practice known as mercantilism, which sought to use such barriers to prevent other countries from growing rich. Mercantilism may have gone away, but it's still an example of a common barrier to trade today known as protectionism. Protectionism seeks to protect businesses at home through trade barriers. While few modern trade barriers are extreme as mercantilism, many do seek to either limit access to markets or artificially adjust prices.

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  • 0:07 Historical Trade Barriers
  • 1:30 Law as a Trade Weapon
  • 2:55 Monetary Trade…
  • 5:07 What Does It All Do?
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Law as a Trade Weapon

Many of those trade barriers are passed as laws. After all, keeping people's jobs and keeping businesses profitable tends to make sure that politicians have an easier time staying in office. One of the most obvious ways that politicians can pass such laws is to limit access to the domestic market. After all, you can't very well sell your goods if you can't get them there.

Governments can limit access to a market by making it mandatory for importers to have a license, or permission from the government to sell goods. While some countries make the paperwork to get a license fairly straightforward, others make it a real ordeal, requiring months of waiting and hefty fees from lawyers. Licenses work both ways, however. Some exporters require a license to sell their goods outside of the country, especially if it is something in high demand, like gems.

Once a company gets a license to import goods to a country, their work still isn't over. They must then be sure to adhere to any quotas. Quotas are a limit on the amount of goods that an importer can bring into a country. Supply graph models tell us that, as supply increases, the price per unit will decrease. This could hurt the producers that the country is trying to protect, so they limit the total amount of shock to the system through quotas.

Monetary Trade Barriers and Embargoes

Sometimes trade barriers have a much more easily measured cost. These come in two different varieties. Let's say that you are importing cars to the United States, a country that definitely works to protect its automobile industry. You would be required to get a license, as well as have quotas. However, you would also have to pay a tariff, or tax per car imported. Needless to say, you'd be forced to pass this cost on to your customers in the United States, such that the price per car rises to a level comparable to those produced domestically. This is part of the reason that so many foreign cars are now produced in the U.S.

However, what about your competition? After all, chances are that they are significant donors to their local politicians' election campaigns. Therefore, countries often also have subsidies, or amounts of money paid directly to domestic producers to make them more competitive with foreign imports. As you can imagine, American car producers receive significant subsidies, but they're not alone. In fact, even wheat producers receive large payments to make their grain more competitive with imported foods. Also, subsidies can be a way for governments to reimburse domestic producers for losses incurred by foreign governments enforcing tariffs.

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