International business must face the reality that this is a world of tariffs, quotas, and nontariff barriers designed to protect a country’s markets from intrusion by foreign countries. Although the World Trade Organization has been effective in reducing tariffs, countries still resort to measures of protectionism. Nations utilize legal barriers, exchange barriers, and psychological barriers to restrain entry of unwanted goods
Businesses work together to establish private market barriers while the market structure itself may provide formidable barriers to imported goods. The complex distribution system in Japan is a good example of a market structure creating a barrier to trade. However, as effective as it is keeping some products out of the market, in a legal sense it cannot be viewed as trade barrier.
Countless reasons to maintain government restrictions on trade are given as a reason by protectionists, but essentially all arguments can be classified as follows: 1) protection of an infant industry, 2) protection of the home market, 3) need to keep money at home, 4) encouragement of capital accumulation, 5) maintenance of the standard of living and real wages, 6) conservation of natural resources, 7) industrialization of a low wage nation , 8) maintenance of employment and reduction of unemployment, 9) national defense, 10) increase of business size, and 11) retaliation and bargaining.
A case might be made for temporary protection of markets with excess productive capacity or excess labour when such protection could facilitate an orderly transition. Unfortunately such protection becomes long term and contributes to industrial inefficiency while detracting from a nation’s realistic adjustment to its world situation.
Most protectionists argue the need for tariffs on one of the three premises recognized by economists – whether or not they are relevant to their products. Proponents are likely also to call on the maintenance of employment argument because it has substantial political appeal. When arguing for protection the basic economic advantages of international trade are ignored. The fact that the consumer ultimately bears the costs of tariffs and other protective measures is conveniently overlooked. Sugar and textiles are good examples of protected industries in the US that could not be justified by any of the three arguments, and US government protections of both industries are eroding quickly.
To give you some idea of the cost to the consumer, consider the results of a recent study of 21 protected industries. The research showed that US consumers pay about $70 billion per year in higher prices because of tariffs and other protective restrictions.
Unfortunately, protectionism is politically popular, but it rarely leads to renewed growth in a declining industry. And the jobs that are saved are saved at a very high cost, which constitutes a hidden tax that consumers unknowingly pay.
To encourage development of domestic industry and protect existing industry, governments may establish such barriers to trade as tariffs, quotas, boycotts, monetary barriers, non-tariffs barriers, and market barriers. Barriers are imposed against imports and against foreign businesses. While the inspiration for such barriers may be economic or political, they are encouraged by local industry. Whether or not the barriers are economically logical, the fact is they exist.
A tariff simply defined is a tax imposed by a government on goods entering at its borders. Tariffs may be used as a revenue generating tax or to discourage the importation of goods, or for both reasons. In general, tariffs:
Inflationary pressures, Special interests privileges
Government control and political considerations in economic matters
The number of tariffs (they beget other tariffs via reciprocity).
- Balance of payments positions
- Supply and demand patterns
- International relations (they start trade wars).
- Manufacturers’ supply sources
- Choices available to consumers
In addition tariffs are arbitrary, discriminatory and require constant administration and supervision. They often are used as reprisals against protectionist moves of trading partners.
A quota is a specific unit or dollar limit applied to a particular type of good. Great Britain limits imported television sets, Germany established quotas on Japanese ball bearings, Italy restricted Japanese motorcycles and the US has quotas on sugar textiles and of all things, peanuts. Quotas put an absolute restriction on the quantity of a specific item that can be imported. When the Japanese first let foreign rice into their country it was on a quota basis, but since 2000 the quotas have been replaced by tariffs. Like tariffs, quotas tend to increase prices. US quotas on textiles are estimated to add 50 per cent to the wholesale price of clothing.