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Trade Barriers

Free trade, in theory, is the ideal situation in which individuals and companies in different countries can buy and sell goods to and from each other without any interference from governments.

Free trade between countries can increase the variety and reduce the cost of goods, generate job growth, and improve relations between countries.

Here are some of the barriers to free trade that countries have used in the past, and some examples of what happened as a result:

Tariffs

Definition: A tax on an import.

A tax on goods arriving from a foreign country, generally used as a tool of trade and foreign policy to penalize adversaries or favor allies or domestic producers.

Why do countries use them?

To make a foreign product more expensive to buy than a domestically made one. Tariffs are supposed to encourage people to buy from their country’s producers, instead of imports.

How are they used?

In 2018, to bolster its manufacturing industry, the United States announced that Canada, Mexico, and the European Union would face tariffs of 25 percent on steel and 10 percent on aluminum. In response, Mexico placed tariffs of up to 25 percent on U.S. dairy products. This caused U.S. dairy farmers to lose over $1 billion in revenue, even after receiving $127 million in aid.

Quotas

Definition: A hard limit on how much of a product a particular country can import. Sometimes instead of stopping all imports above the specified quantity, a quota will put a tariff on every product above a certain limit.

Why do countries use them?

To protect domestic manufacturing, usually. On their own, quotas do not generate government revenue, so they are often combined with tariffs.

How are they used?

After the United States signed the North American Free Trade Agreement, an existing 33 percent tariff on Mexican brooms made of corn was slashed to 22 percent. This hurt the six hundred–person industry of U.S. broom makers enough that the U.S. government instituted a quota instead. All brooms that exceeded the 2.6 million quota would be subject to the original 33 percent tariff. This resulted in two years of escalating tariffs between the United States and Mexico until, finally, a special panel was convened and decided that the corn broom quota had violated free trade rules previously agreed to by the United States and Mexico. U.S. President Bill Clinton removed the quota later that year.

Subsidies

Definition: A broad term that covers various actions a government could take to financially boost an industry. Usually, subsidies are government programs that give money directly to companies in certain industries. They can also come in the form of tax breaks or other financial benefits, advantaging a domestic industry at the expense of foreign competitors.

Why do countries use them?

To support a struggling domestic industry or stabilize prices.

How are they used?

In the 1970s, the U.S. dairy industry experienced dangerously low prices. Farmers were unable to make enough money selling milk, leading to a shortage of dairy products. In 1977, the U.S. government responded with $2 billion in subsidies to boost this major industry. After the influx of cash, dairy farmers started producing as much milk as possible, resulting in an enormous milk surplus that would not sell. The government bought this excess milk and, mindful of milk’s short shelf life, processed it into other products, including cheese. Ultimately, the U.S. government-owned a five hundred million–pound stockpile of “government cheese” stored across thirty-five states.

Currency Manipulation

Definition: When a country deliberately prints more money or uses other tactics to change the exchange rate of its currency.

Why do we use it?

To encourage exports by making domestic products cheaper in foreign currencies, and particularly in the U.S. dollar (USD), since that is the most widely accepted currency. Here’s how it works: if 1 USD is worth 10 Japanese yen, then a product that costs 400 yen is worth 40 dollars. If the yen is devalued compared to the dollar, and 1 USD becomes worth 100 yen, then that same product is now worth only 4 dollars. Japan, the country that made the product, will probably sell more of it in the United States. But this is also a barrier to U.S. trade since U.S. products then become more expensive to export to the country that manipulated its currency—in this case, Japan.

How is it used?

After its loss in World War II, Japan experienced a rapid period of economic growth, in part because of its increased focus on industrial production and exports. Then, at the beginning of the 1990s, Japan’s economy crashed, leading to a decade of stagnation. A few years later, the yen’s value began rising rapidly against the dollar, and Japan’s Ministry of Finance worried that a strong yen would discourage the exports Japan needed to stimulate its economy. So in 2003, the Japanese Ministry of Finance worked to keep the price of the yen as low as possible. The results were mixed: although exports increased, the intervention also made it harder for people in Japan to buy foreign goods.

Dumping

Related Terms

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  • The European Free Trade Association (EFTA) is the intergovernmental organization of Iceland, Liechtenstein, Norway, and Switzerland. EFTA was created for the promotion of free trade and economic...

  • The European Economic Area, abbreviated as EEA, consists of the Member States of the European Union (EU) and three countries of the European Free Trade Association (EFTA). The Agreement on the EEA...

  • In the Council of the European Union, government ministers from each EU country meet to discuss, amend, and adopt laws, and coordinate policies. It is also is known informally as the EU...

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