Economics Terms A-Z - The most important terms in economics.

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Economics Terms A-Z

Trade Barriers

Trade barriers refer to the obstacles that are put in place by governments to limit free trade between national economies. Trade barriers are thus essentially interventions in markets that happen to operate internationally. Trade barriers include tariffs (taxes) on imports (and occasionally exports) and non-tariff barriers to trade such as import quotas, subsidies to domestic industry, embargoes on trade with particular countries (usually for geopolitical reasons), and licenses to import goods into the economy.

The theory of comparative advantage states that as long as countries have access to resources in different proportions (i.e. at differing relative cost) then they will all gain from engaging in international trade with one another. To realize these gains from trade, they each need to simply devote resources to the industries where domestic production is most efficient and then trade to receive other goods that satisfy domestic demand. Seen in this light, limiting trade between economies results in a deadweight loss. Economists, ever in search of efficiency, therefore tend to agree that free trade agreements are a good thing and that trade barriers are to be avoided.

Nevertheless, trade barriers are becoming commonplace around the globe as many governments take a protectionist stance to their economies. While countries as a whole do tend to gain from free trade, as more countries participate in the world economy, competition in production intensifies, leading to losses for certain groups within countries. Wages and jobs in particular industries can come under pressure.

In theory, this loss of a less efficient industry at home can be ameliorated by retraining and reallocating people and jobs to more productive areas of the economy. Yet trade barriers can have a more immediate effect because retraining takes time. Trade barriers are hence favored by many citizens and politicians looking for a quick fix. Over time, this results in countries propping up inefficient domestic industries with subsidies and tariffs, creating yet more deadweight loss.

Suggested Opportunities

A prime example of this is the trade dispute that began in June 2018 between the US and China and their governments’ discussions regarding tariffs on imports. The decision by the British electorate to leave the European Union can also be explained in part by an aversion to the free movement of people; exiting the bloc effectively erects a non-tariff barrier to trade on labor as a factor of production.

Within the European Union there are no tariffs on goods and services exchanged. Even so, non-tariff barriers to trade persist through variations in the national rates of tax, differing technical standards of production, as well as the bias of national governments in favor of local firms. The European Union also maintains strict food and drugs safety standards, imposing licenses for the import of non-EU products in these sectors.

The arguments for and against trade barriers typically boil down to a classic discussion about economic efficiency on the one hand and distributive justice on the other. Reducing barriers improves efficiency and thus creates a larger economic “pie”. But, distributive justice may justify keeping some barriers or rules in place to ensure the pie is shared in a fair way.

Further reading

Paul Krugman was awarded the Nobel Prize in Economics in 2008 for his work on New Trade Theory, which explains why trade intervention can make sense when markets are imperfect. For a refreshingly critical view of economists’ unequivocal advocacy of free trade, see his article, “The narrow and broad arguments for free trade” (American Economic Review, 1993).

Good to know

Trade barriers within the discipline of economics itself are few and far between. Students of economics have a comparative advantage over their peers in more traditionally national subjects such as law and medicine, as legal and health systems tend to be specific to each country. Indeed, economic principles can be applied virtually anywhere. This facilitates international student exchange between economics departments during studies. And as a graduate of economics, the international job prospects are good, not least in import and export industries, where a sound knowledge of trade barriers is a must!