Barriers to Fair Trade

Free trade refers to the elimination of barriers to international trade. The most common barriers to trade are tariffs, quotas, and nontariff barriers.

A tariff is a tax on imports, which is collected by the federal government and which raises the price of the good to the consumer. Also known as duties or import duties, tariffs usually aim first to limit imports and second to raise revenue.

A quota is a limit on the amount of a certain type of good that may be imported into the country. A quota can be either voluntary or legally enforced.

You may wonder why a nation would ever choose to use a quota when a tariff has the added advantage of raising revenue. The major reason is that quotas allow the nation that uses them to decide the quantity to be imported and let the price go where it will. A tariff adjusts the price, but leaves the post-tariff quantity to market forces. Therefore, it is less predictable and precise than a quota.

The effect of tariffs and quotas is the same: to limit imports and protect domestic producers from foreign competition. A tariff raises the price of the foreign good beyond the market equilibrium price, which decreases the demand for and, eventually, the supply of the foreign good. A quota limits the supply to a certain quantity, which raises the price beyond the market equilibrium level and thus decreases demand.

Tariffs come in different forms, mostly depending on the motivation, or rather the stated motivation. (The actual motivation is always to limit imports.) For instance, a tariff may be levied in order to bring the price of the imported good up to the level of the domestically produced good. This so-called scientific tariff—which to an economist is anything but—has the stated goal of equalizing the price and, therefore, “leveling the playing field,” between foreign and domestic producers. In this game, the consumer loses.

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