Question

In the past two decades, nontariff trade barriers have gained in importance as protectionist devices. What are the major nontariff trade barriers?

Short answer

Non-tariff trade barriers include import quotas, subsidies to domestic industries, customs delays and administrative hurdles, as well as technical barriers such as strict standards and regulations that foreign goods must meet before they're allowed in a country.

Step-by-step solution

Understanding Non-Tariff Trade Barriers

Non-tariff trade barriers are trade restrictions that countries impose, not through taxes on imports or exports, but through regulations or legislations that make it more difficult or expensive for foreign firms to sell their products or make investments in the country. They're typically measures that are kept in place to protect local industries from foreign competition.

Identifying Main Non-Tariff Trade Barriers

Most common non-tariff trade barriers include: 1. Import quotas: These are limits on the quantity of a certain good that can be imported during a specific period. 2. Subsidies: These are government payments to domestic industries which lower their production costs and make them more competitive against foreign competitors. 3. Customs delays and administrative hurdles: These often cause time delays and increase the costs of trading. 4. Technical barriers: Some countries may impose strict standards and regulations that foreign goods must meet before they're allowed in the country.

Explaining the effects of Non-Tariff Trade Barriers

Non-tariff trade barriers tend to raise the cost of imported goods, making them less competitive compared to domestic goods. They also tend to promote domestic industries at the expense of foreign ones. Despite often being against the principles of free trade, countries use them as a political tool to protect domestic industries or retaliate against the trade practices of other countries.

Key concepts

Import Quotas

Import quotas represent a direct restriction on the quantity of a specific good that can be imported into a country over a given period. For instance, a country may only allow 10,000 units of a certain product to be imported every year.

This kind of barrier is particularly impactful in controlling market access for foreign producers, as it caps the maximum amount of goods they can sell within a quota-holding nation. By limiting supply, import quotas can inflate the prices of imported goods, thereby making domestic alternatives more attractive to consumers.

Furthermore, import quotas can lead to unintended consequences such as smuggling if there is a significant price difference between the domestic and international markets, caused by these limitations.

Government Subsidies

Government subsidies are financial contributions provided by the state to domestic industries. These can take many forms, such as direct cash grants, tax breaks, or low-interest loans.

The primary goal of subsidies is to lower production costs for local companies, allowing them to sell goods at lower prices than their international competitors without sacrificing profitability. This makes it exceptionally challenging for foreign businesses to compete in the subsidized product's market.

While subsidies can enhance a country's economic development and protect jobs, they can also distort trade and are often criticized for causing inefficiencies and promoting dependency on government support.

Customs Delays

Customs delays occur when goods are held at the border for an extended period due to regulatory inspections, paperwork reviews or other administrative processes. These delays can significantly increase the cost of trading by causing unpredictability and inefficiency in the supply chain.

Manufacturers and retailers that rely on just-in-time delivery systems may be especially vulnerable to customs delays as their inventory strategies depend on reliable and prompt shipment arrivals. Plus, perishable goods can lose value or become unsellable if holdups at customs are prolonged. This barrier acts as a disincentive for international trade and can be perceived as a method of protectionism, often frustrating foreign businesses and trade partners.

Technical Standards in Trade

Technical standards refer to the specific criteria that products must meet to be cleared for sale within a country. These standards can relate to quality, health and safety, performance, or environmental impact, among other factors.

Countries might enact stringent and sometimes discriminatory technical standards that are difficult for foreign products to meet, which can function as a barrier to trade. These standards may require costly modifications to a product, which can be prohibitive for exporters, effectively shielding the domestic market from outside competition.

Adhering to these standards might necessitate a significant investment in new production processes or technologies, ultimately hindering trade more inconspicuously than overt tariffs.