International trade can help nations thrive both economically and socially. Shipping goods overseas allows countries to enjoy exotic and high-quality goods, something impossible if they can’t be manufactured or naturally sourced on home soil. If it weren’t for global trade, Europe wouldn’t be able to import and taste Dragon Fruit, Plantain, or Saffron. The UK wouldn’t be able to export Scottish Whiskey to the United States, and Asian countries wouldn’t be able to buy European baby formula. And these are only three small examples of how countries benefit and rely on international trade.
Since each country has its own unique resources and expertise, international trade helps connect the world through flavor, knowledge, goods, and services. But there are restrictions in place when it comes to trading around the world. Whether your country is wealthy or not, trade barriers can impact your ability to trade overseas and with certain nations. Some countries are against free trade, as they believe it can affect their country’s economic growth. Yet, restricting imports and exports can actually be bad for business! So, in this article, we’re going to discuss what the different types of trade barriers there are, reveal some examples of trade barriers currently in place across the globe, and how restrictions, tariffs, and taxes can impact businesses and stunt economic growth.1
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Trade barriers are imposed by governments and restrict trade relations with other nations. They can make it more challenging and often more expensive to trade with certain countries and depending on the goods or services you’d like to import or export. These barriers are designed to protect domestic producers from cheaper overseas suppliers, and they can be in the form of a tariff or non-tariff barriers to trade.
According to the World Trade Organization, customs duties on merchandise imports are called tariffs. Tariffs give a price advantage to locally produced goods over similar goods, which are imported from abroad. This helps to raise revenue for governments, which can be used to provide better services such as healthcare and education. The main aim of tariffs is to either increase the price paid for imported goods to the level of current domestic prices, or increase revenue generated by the government.2
What impact can trade barriers have on businesses looking to import or export goods? While trade barriers can limit consumers’ choice of imported and foreign goods, they can also encourage overseas manufacturers to improve the quality of goods provided. And this means that consumers don’t pay a higher price for low-quality imported products. Typically, trade barriers are in favor of wealthier countries, since these nations tend to have higher standards when it comes to international trade policies and manufacturing processes. However, most economists would agree that traded barriers can more often than not negatively affect overall economic efficiency.3
There are three major types of trade barriers that can impact businesses that trade overseas. So let’s take a closer look at each one and what they mean.
The first restriction relates to physical or cultural barriers between trading partners. Suppose you want to ship frozen produce overseas, but the cost of keeping the goods frozen for such a long period of time is too costly. In this case, the distance between the two countries forms a natural barrier to trade.
Another natural trade restriction would be language and cultural barriers. Business owners who are unable to efficiently communicate with foreign buyers might find it too difficult to understand government trade policies. They might also struggle with negotiations and may also face costly mistakes such as shipping the wrong goods or misinterpreting a buyer’s order details. This can be detrimental when trying to forge long-term business partnerships.
Tariff trade barriers are imposed by a nation on imported goods in the form of a tax. Should a business want to export goods to another country, they may be charged a tax per unit. A unit could be a crate, barrel, or box. Whether you export a small number of items or a bulk order, the tax will still make trading with that particular country more expensive for business owners.
These protective tariff trade barriers are designed to financially safeguard domestic businesses and discourage companies from imported overseas goods. For example, the US has tariff trade barriers on imported poultry, steel, and clothing. In fact, in 2018, the Trump administration added tariffs on steel and aluminum for most countries. While these trade policies protect new and infant industries, they can also make it more difficult for manufacturers to become competitive and grow into a global leader.
By preventing free trade agreements, tariffs raise prices and impact consumer purchase power. Going back to the United States example, in 2017, tariffs were enforced against Chinese steel products to give American manufacturers a fair market. But, by doing this, the US risked damaging relations with China and possibly facing tariffs on certain US products and services. When relationships break down between countries, this can also trigger disputes not only relating to products and services and intellectual property.
Non-tariff barriers relate to import quotas. Trade restrictions can limit import quotas, preventing overseas manufacturers from exporting high volumes of goods into another country, pricing domestic industries out of the market. Many countries use quotas to limit and manage imports of specific goods. But governments can also award special privileges to domestic manufacturers and sellers called buy-national regulations to promote economic growth and support local companies.4
Non-tariff barriers are often more restrictive for trade than actual tariffs. In 1949, the US charged an average tariff of 33.9%, but today it’s 3.5%. The European Union tariff is 5.3%, while China’s is 9.5%. With the exception of a few products that are still impacted by high tariffs, it is non-tariff barriers that have the biggest impact on international trade in today’s economic climate. Trade deals such as the Comprehensive Economic and Trade Agreement and the Transatlantic Trade and Investment Partnership increasingly focus on reducing non-tariff barriers, such as regulation and intellectual property requirements, as well as reducing tariffs.
From geographic location and shipping times to import quotas, embargoes, taxes on imported goods, and non-tariff barriers, tariffs are there to help protect domestic companies, industries, and employees.5 But, forging relationships with overseas suppliers can help empower your business, so here’s how to find international buyers for your export business.
Now let’s take a look at some other examples of government policies and how they are currently impacting international trade across the globe.
Payments made by the government to the product supplier or manufacturer are known as subsidies. This is often the case in the agriculture industry, where governments give farmers financial incentives to grow certain crops. This can sometimes create issues such as surplus crops, as domestic farmers choose only to grow high-profit fruit, vegetables, and grains.
Another example of trade barriers is standards. Governments will require domestic and overseas suppliers of goods to meet or exceed a set of standards, which can make trading abroad complicated. If you’re unable to meet the standards to trade as a manufacturer or supplier, you will not be able to export goods to that country. Standards typically relate to food, cosmetics, medicine, and technology.
Regulations are primarily made to discourage the import of foreign goods, which can complicate international trade even further. These regulations can apply to the manufacturing process, health and safety concerns, environmental impact and ethical practice. This is why trading in Europe can be more challenging for overseas manufacturers, as they need to meet certain regulations relating to production, packaging, and marketing.
As we have already mentioned before, limiting the number of foreign goods that can be imported is another way governments can enforce trade barriers. Import quotas can be in place for a period of time or for the foreseeable, depending on what the government is trying to achieve.
When regulations impact certain industries and require them to produce local products and services over exporting and importing goods, this is known as buy-national regulations. Put simply, the government is recommending that locals buy local products and produce. These restrictions are often put in place to boost a country’s economic performance and self-sufficiency.
When international relations break down, sanctions are typically put in place, which involve commercial or financial penalties against certain governments, organizations, nations, or groups of people. Sanctions can significantly impact a country’s ability to trade overseas.
Taking sanctions a step further, embargos are government orders that restrict commercial trade with foreign nations. This is often triggered by a serious dispute, conflict, or concern.
To oversee the process of importing and exporting goods between domestic businesses and certain countries, an import license can be used. This means a company may be micromanaged or required to apply for a license to trade overseas.>6
If you are thinking of shipping goods overseas, read our beginner’s guide on incoterms to understand more about the process of shipping goods across borders.
Now let’s discuss how trade barriers can both positively and negatively impact business.
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