The concept of comparative advantage makes a strong case for free, unrestricted trade among nations. Yet, some people support the use of tariffs or quotas to restrict or stop the international flow of goods and services. These barriers to trade exist in most countries and have differing effects on producers and consumers in the countries involved. Recently the WTO (World Trade Organization) met in Seattle to discuss issues in trade, including trade barriers. Read the article "The Battle In Seattle ."
In this EconomicsMinute, we will examine some of the trade barriers discussed at the WTO meeting and why barriers are imposed.
Examine the clothing you are wearing and other items you own; determine where these items were produced. (Most items have a "Made in _______" tag or label.) Generate a list and answer the following questions:
1. How do you benefit from being able to buy goods made in other countries?
2. Would you favor a policy that would raise the price on T-shirts and reduce the amount available?
Chances are some of the items on your list are imported from other countries. Everyone is affected by international trade.
Even though economists believe free trade will be mutually beneficial (living standards in countries that trade with each other), many barriers to trade exist today. Most barriers raise prices and reduce choices. See if you can identify the following countries:
1. Country A: Restricts the number of cars that may be imported each year from Country X.
2. Country B: Provides subsidies to some companies so they can sell their products at lower prices to other countries.
3. Country C: Imposes taxes on certain imported goods.
Are you surprised by these answers? The answers given are correct, but many other country names would also have been correct. Almost all countries impose some barriers to trade.
Countries establish policies to restrict trade in order to protect homeland industries or new industries, to protect jobs, and to gain income for the government. For example, in the 1970s, unions and U.S. automobile manufacturers supported quotas on less expensive imported cars to help keep their own products competitive.
Read the following definitions of trade barriers. Then in cases 1-4, decide what kind of barrier is being imposed.
Tariff: A tax on imported goods.
Quotas: A limit on the quantity of imports.
Export Subsidy: Government payment to competing firms in its own country. This allows firms to sell their goods at lower prices thus competing well in both their country and other countries.
Product Standard: Safety requirements, product features, and packaging requirements.
1. A tax of 15% makes jewelry from Mexico more expensive than jewelry make in the United States.
2. Korea may export only 15,000 automobiles a year to the United States.
3. The rungs on the ladder of any bulldozer sold in Germany must be 12 inches apart, but US manufacturers generally make the rungs 15 inches apart.
4. A new textile firm asks its government to provide financial assistance to make it possible to sell its products overseas at a lower price that will compete well in other countries.