11.3 Trade Barriers

Notes

Trade barriers limit imports or make them more expensive. Protectionism is the use of trade barriers to shield domestic industries.

• Tariff: a tax on imported goods. A revenue tariff mainly raises money; a protective tariff mainly raises import prices to help domestic producers.
• Quota: a limit on the quantity of a good that may be imported.
• Embargo: a ban on trade with a country, such as the U.S. embargo on Cuba begun in the early 1960s.
• Other barriers: subsidies to domestic producers, strict standards or licensing rules that are hard for foreign firms to meet, and voluntary export restraints.
• Effects: domestic producers in the protected industry gain; consumers pay higher prices and have fewer choices; other countries may retaliate, leading to a trade war.
• The Smoot-Hawley Tariff (1930) raised U.S. tariffs sharply. Other countries retaliated, and world trade fell during the Great Depression.
• Worked example: a $200 imported bike with a $25\%$ tariff costs the importer $200 + 0.25 \times 200 = 250$ dollars before any markup.