International Trade Restrictions
Tariffs, quotas, and other trade restrictions discourage imports of foreign products into a country. Tariffs are taxes on imported products. Quotas are limits on the amount of imported products. The ultimate quota is an embargo, which is a complete stop on the import or export of a certain product. Other measures that restrict international trade include standards and licenses. For example, some governments impose health and safety standards for imported products that are higher than for products made domestically. Governments can also require import and export licenses. This makes it more expensive and sometimes impossible for firms to engage in international trade. Some countries manipulate their currency values as a form of protectionism. If a country’s currency decreases in value (relative to foreign countries’ currencies), its exports become cheaper and its imports become more expensive. The Chinese government has been accused of artificially lowering its currency in order to encourage its exports and discourage foreign imports.
Price and Quality Effects
Trade restrictions generally raise the price of imported products and lower the quantity purchased. Consequently, buyers are more attracted to competing domestic products. In the short run, domestic firms benefit from trade restrictions.
However, the decrease in foreign competition provides the domestic producer with less incentive to produce a high-quality and low-cost product. The domestic firm typically raises its price, albeit less than the price increase of the foreign good. In the long run, the lower quality and the higher price of the domestic firm’s products harms the domestic firm. Consumers purchasing the product suffer, as well, because they pay a higher price and face a more-limited variety of competing products.
Tariffs and quotas are alike in that they both lower the quantity sold and raise the price of the foreign good sold in this country. The difference is that in the case of a tariff, the imposing government generates revenue, whereas in the case of a quota, the higher price can benefit the foreign manufacturer (revenue and profit can increase depending on the elasticity of the product). Japanese automakers were not entirely unhappy with the quotas on their car sales to the United States. They sold fewer cars, but they received higher prices for them. Therefore, their revenue decreased very little (depending on the elasticity of cars, revenue might have even increased).
Retaliation
Foreign countries often retaliate against countries imposing trade restrictions. Thus, export industries in all countries suffer. While trade restrictions may benefit domestic industries competing with foreign industries, they hurt export industries affected by retaliation. The economy as a whole suffers, because, on balance, no jobs are gained, and prices are higher due to the lost opportunities to specialize and benefit from absolute and comparative advantages.
In 2010, the United States imposed tariffs on tires manufactured in China and imported into the United States. As retaliation, China imposed tariffs on chickens and auto parts purchased from the United States. In the end, taxes (tariffs) increased and therefore, prices increased. On balance, no country gained employment. Competition, consumers, economic efficiency, and the overall standard of living suffered.
The recent trade war between China and the United States hurts both countries’ productivity and economic growth. One of the Trump administration’s justification for imposing tariffs on China is to punish China for unfair trade practices and illegally copying of products and intellectual information. China also has very restrictive rules for foreign companies doing business (direct investments) inside China. If these punitive tariffs lead to China giving up its illegal trade practices and liberating its trade (implementing unrestricted free trade), the current tariffs may eventually have a positive outcome. However, China doesn’t appear to be changing and if higher tariffs imposed by both countries remain, it will hurt economic growth and consumers in both countries.