The Three Types of Trade Barriers

Updated Jun 26, 2020

Trade barriers are restrictions on international trade imposed by the government. They are designed to impose additional costs or limits on imports and/or exports in order to protect local industries. These additional costs or increased scarcity result in a higher price of imported products and thereby make local goods and services more competitive (see also comparative advantage and trade). There are three types of trade barriers: Tariffs, non-tariffs, and quotas. We will look at all of them in more detail below.

Tariffs

Tariffs are taxes that are imposed by the government on imported goods or services. They are sometimes also referred to as duties. Tariffs can be implemented to raise the cost of products to consumers in order to make them as expensive or more expensive than local goods or services (i.e. scientific tariffs). In many cases, tariffs are used to protect local industries that could otherwise not compete with foreign producers (i.e. peril point tariffs). Of course, the countries affected by those tariffs usually don’t like being economically disadvantaged, which often leads them to impose their own tariffs to punish the other country (i.e. retaliatory tariffs). 

For example, let’s assume there are only two countries in the world that produce candy bars. The United States and Japan. In the US, local candy bars currently sell at a price of USD 2.50. Meanwhile, candy bars from Japan only cost USD 2.00. Hence, people in the US buy more Japanese candy, and local producers struggle. In response to this, the US government decides to restrict imports of candy bars to promote local candy production. To do this, they impose a tariff of USD 1.00 on every candy bar imported in the US. Because of this tariff, the price of Japanese candy bars increases to USD 3.00, while US products still sell at USD 2.50. This makes local candy relatively cheaper and more attractive to consumers.

Non-Tariffs

Non-tariffs are barriers that restrict trade through measures other than the direct imposition of tariffs. This may include measures such as quality and content requirements for imported goods or subsidies to local producers. By establishing quality and content requirements the government can restrict imports because only products can be imported that meet certain criteria. More often than not, these criteria are set to benefit local producers. In addition to that, the government can grant subsidies, i.e. direct financial assistance to local producers in order to keep the price of their goods and services competitive.

Let’s revisit our example from above. Apart from imposing a tariff on imported candy, the US government could restrict trade by passing a law that requires all candy bars sold within the US to contain at least 50% locally produced sugar. This prevents many Japanese producers from selling their candy in the US and those who decide to comply with the new regulations will face higher costs of production. As a result, the price of Japanese candy increases and US producers become more competitive. Alternatively, the US government could directly support local companies by paying them USD 0.50 for each candy bar they produce. This allows local producers to sell their candy bars at USD 2.00 instead of USD 2.50 and match the price of Japanese candy.

Quotas

Quotas are restrictions that limit the quantity or monetary value of specific goods or services that can be imported over a certain period of time. The idea behind this is to reduce the quantity of competitive products in local markets which increases the demand for local goods and services. This is usually done by handing out government-issued licenses that allow companies or consumers to import a certain quantity of a good or service. Although technically speaking, quotas are non-tariff measures, they take quite a different approach than the other measures discussed above. Instead of just making it more difficult or costly to import goods, quotas actually limit the number of products that can be traded. There is no way for foreign producers to circumvent such a quota. The most restrictive type of quota is an embargo, i.e. an entire ban of trade and/or commercial activity concerning a specified good or service.

For example, the US government could decide to limit the number of candy bars that can be imported from Japan to 100,000 every year. Once those bars are sold, there are only US products available for the rest of the period, even though they may be more expensive than their Japanese counterparts. A more extreme version of this would be for the US government to ban all imports and exports of candy bars, which eliminates foreign competition altogether.

In a Nutshell

Trade barriers are restrictions on international trade imposed by the government. They either impose additional costs or limits on imports and/or exports in order to protect local industries. There are three types of trade barriers: Tariffs, Non-Tariffs, and Quotas. Tariffs are taxes that are imposed by the government on imported goods or services. Meanwhile, non-tariffs are barriers that restrict trade through measures other than the direct imposition of tariffs. And last but not least, quotas are restrictions that limit the quantity or monetary value of specific goods or services that can be imported over a certain period of time.