Despite the advantages to be derivable from free trade, experience has shown that not everyone benefits equally from free trade. Thus, for various reasons ranging from reasonable to spurious ones, countries impose restrictions on free trade. Such restrictions include tariffs, quotas, subsidies and other non-tariff barriers.
A world of free trade would be one with no tariffs, quotas or any other restrictions on importing or exporting. In such a world, a country would import all those commodities that it could buy from abroad at a delivered price lower than the cost of producing them at home.
Now suppose that a country imposes a 20 per cent tariff on all imports. This does not prohibit trade but by making all imported goods more expensive, it affects the profit margin of imports.
Any foreign goods that enjoy a cost advantage of less than 20 per cent are now effectively prohibited; while imported goods that enjoy cost advantage in excess of 20 per cent will still be in demand, but because their domestic price has increased, a smaller quantity will be demanded than if there were no tariff.
Here Are Various Restrictions to Free Flow of Trade Among Nations
1. Tariff
Tariff can be defined as a tax, which the government imposes on imports. Usually, the purpose of a tariff is to cut down on imports in order to protect domestic industries and workers from foreign competition. A secondary purpose however is to generate revenue for the government. Why Tariff is important:
- The most frequent cited non-economic reason for tariff is national Because of the sensitivity of some industries to the economy, tariffs as barrier may protect them against foreign competition.
- Another reason for tariffs is the need to protect infant industries. It is argued that because some industries are new they cannot withstand foreign Foreign firms, the argument goes, are experienced and enjoy economies of scale which enable them to charge lower prices than domestic industries that are still very new. While it may look reasonable, this argument is however widely abused. It has provided a cover for inefficient firms to continue to operate. Many of these firms even after decades of their establishment continue to claim that they are ‘infants’.
- Tariffs are sometimes imposed to protect domestic business, jobs and to reduce unemployment at home. This argument is however criticized on the ground that it can lead to retaliation from other countries. It is maintained that without tariffs, government can still achieve this objective through monetary and fiscal tools.
2. Quotas
On the other hand, quotas refer to the maximum amount of certain commodities that can be imported annually into the country.
A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period. Countries use quotas in international trade to help regulate the volume of trade between them and other countries.
quota, in international trade, government-imposed limit on the quantity, or in exceptional cases the value, of the goods or services that may be exported or imported over a specified period of time.
3. Export subsidies
Export subsidies represent another means by which governments try to give their domestic industries an advantage in international competition. Such subsidies may take the form of outright cash disbursements, tax exemptions, etc.
Export subsidies refer to the granting of support by governments to some beneficiary entity or entities to achieve export objectives. Export subsidiesmay involve direct payments to a firm, industry, producers of a certain agricultural product etc. to achieve some type of export performance.
Export subsidies (direct payments, export loans, tax benefits) are distorting market prices leading to higher-than-market prices and surplus production in exporting countries and lower prices and less production in importing countries. In the short term, consumers in importing countries benefit from low food prices.
4. Licensing
Other non-tariff barriers to free trade include licensing requirements and unreasonable product quality standards. By granting few licenses to import from other countries and by imposing unrealistically stringent product quality standards, government discourages imports.
Licensing is a right or permission granted by a competent authority (as of a government or a business) to engage in some business or occupation, do some act, or engage in some transaction which would be unlawful without such right or permission.
