This post involves a fictional company called Acme Motors. Acme manufactures automotive engines in Mexico and ships them to Detroit for inclusion in their automobiles.
Trade barriers come in many varieties. They are often overt government policies such as tariffs, quotas, and subsidies. More subtle varieties such as transportation costs also exist. Trade barriers of any kind play a major role in directing international trade.
International trade barriers have a direct impact on the price of imported goods. As barriers are applied, prices tend to rise. Rising prices reduces the quantity of goods purchased by consumers. This results in a negative outcome for local consumers and foreign producers. Both of these groups suffer as less goods are imported and purchased. Consequently, local producers benefit from trade barriers as their goods can be sold at a higher price and enjoy increased profit. In the case of tariffs, the government also benefits from increased revenue (Sawyer & Sprinkle, 2006).
Generally speaking, the import of automobile engines into the U.S. by Acme results in higher priced automobiles. The increased cost of auto engines due to tariffs and sanctions will be reflected in the price of the final product. Since the price of Acme’s automobiles will increase, they will not sell as many. Therefore, Acme must constantly monitor the state of trade barriers and determine if importing auto engines is still a feasible solution (Sawyer & Sprinkle, 2006).
Barriers to trade seem to have a negative impact on the world economy. In every case, the group that loses out the most is the consumer. It seems obvious that free trade would allow jobs to be moved over the border creating unemployment in the country with a comparative disadvantage in labor. Evidence from the aftermath of NAFTA strongly disagrees with this. In fact, it shows that unemployment has not significantly changed since the inception of NAFTA. Also, the real wages of workers has risen significantly in that time (Young, 2005). It would seem that trade barriers pose a real problem to local consumers.
Although trade barriers seem to pose a negative impact on a country’s economy, there are valid reasons to employ them. These reasons are mainly concerned with developing countries trying to increase the productivity of burgeoning local industries. When employed correctly, trade barriers can help to lift up undeveloped industries and give them a chance to compete in the global marketplace. Care must be taken to remove these barriers when the industry is ready. If the barriers are left in place to long, the government runs the risk of crippling the new industry and slowing down its development (Sawyer & Sprinkle, 2006).
Sawyer, W. C., & Sprinkle, R. L. (2006). International economics, 2nd ed. Upper Saddle River, New Jersey: Pearson Prentice Hall.
Young, C. (2005). No significant job or wage loss under NAFTA. Wall Street Journal (Eastern Edition), p. A.19. Retrieved September 6, 2008, from ABI/INFORM Global database. (Document ID: 831871721).