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The restrictions may be divided into tariff barriers and non-tariff barriers.

By: mun

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According to the law of comparative advantage, world resources can be most effectively used through specialization and trade. Full specialization is only possible when completely free trade is permitted. Unfortunately, every country in the world has trade barriers which are designed to protect its economy against international market forces. These restrictions tend to reduce world trade. They also decrease the consumer's freedom of choice among different products. In addition, they encourage domestic production in areas which are economically inefficient. Such restrictions may be divided into tariff barriers and non-tariff barriers.

Tariff barriers are by far the oldest type of trade restriction, having been in use for five hundred years or more. A tariff may be defined as a tax which is put on a commodity when it crosses a national boundary. The tariff may be collected on an ad valorem basis, where it is a percentage of the value of the import. It can also be collected on a specific basis, where the amount paid depends on the physical quantity of the import. Both specific tariffs and ad valorem tariffs are in common use.

Tariffs may be used simply to obtain revenue. In some developing countries, revenue tariffs provide an important part of the government's income. Often, however, tariffs are protective, and are designed to carry out a particular economic policy. They may help to reduce a balance of payments deficit or to protect an infant industry against strong international competition from older corporations. A revenue tariff will always provide some protection, and a protective tariff will produce some revenue. Therefore, it is difficult to distinguish between revenue and protective tariffs from economic evidence alone.

Many different types of non-tariff barriers have been used, but the best-known of these are quota systems. A quota is an upper limit which is set on imports of a commodity for a fixed period of time. Some quotas apply to the physical quantities of particular goods, whereas others are based on the total value of all imports. In the latter case, the quotas are usually combined with a system of exchange control in an attempt to prevent a balance of payments deficit. Quotas are also used to protect domestic industries. Under most quota systems, importers must obtain government licenses for the goods they wish to import. It should be noted that a quota system is always protectionist and provides no revenue to the country.

When a tariff is imposed on an import, the direct impact on price is to raise it by the amount of the tariff. Market factors, however, can modify this effect. Hence, the final price increase due to a tariff may be less than, equal to, or more than the amount of the tariff. In many cases, though, the final price increase is reasonably close to the amount of the tariff. In contrast, the impact of a quota on price is much harder to predict. The effects are particularly uncertain with goods which are not produced at all domestically. For instance, many countries do not have their own car industry, so that an import quota can cause a considerable shift in automobile prices.

Both a quota and a tariff reduce trade, raise prices, protect domestic industry from foreign competition, and reduce the standard of living of the nation as a whole. But most economists tend to regard quotas with even less enthusiasm than they do tariffs. Under many circumstances, a quota insulates local industry from foreign competition even more effectively than a tariff does. Foreigners, if their costs are low enough, can surmount a tariff barrier; but if a quota exists, there is no way they can exceed the quota.

Article Source: http://depositarticles.com/

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