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 more expensive foreign goods discourages imports and has a similar effect as imposing tariffs.
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 benefits the foreign manufacturer. 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. Thus, their revenue decreased very little.
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.