CFA Level 1
Global Economic Analysis - Trade Restrictions
Advantages and Disadvantages
Trade barriers reduce the possible quantity of goods that can be consumed and produced within an economy. Prices will be higher, and there will be fewer choices with regards to consumer goods.
Beneficiaries of a tariff include the government, which collects the tariff, and domestic producers within the affected industry (or industries). The general public (consumers) loses.
Arguments in favor of trade restrictions include:
- National Defense - Foreign producers should not be relied upon for production of defense goods, even if the goods can be produced at a lower cost abroad.
- Infant Industries - Start-up industries in a country may not be able to effectively compete against foreign producers because of their small size. An argument can be made that these industries should be protected until suitable economies of scale can be achieved. If the economies of scale are such that the domestic industry achieves a comparative advantage over foreign companies, the temporary protection will help to achieve better economic efficiency
- Anti-Dumping - The claim is often made that foreign producers "dump" their goods on the domestic market. The term dumping is applied when foreign producers are thought to be selling goods at prices below their production costs, or below the prices charged in their home market. Retaliatory measures may include the imposition of tariffs, quotas or fines against foreign producers. The fear is that this "unfair" practice will drive domestic producers out of business and that the foreign producers will then impose monopoly pricing. One argument against this fear is that when prices are raised at a later time, domestic producers can reenter the market. Deliberately driving other producers out by selling at a loss usually does not work. Another argument against "anti-dumping" is that the country as a whole benefits when foreign-made goods are sold at lower prices than domestic ones. The reasons for which the prices are lower should not be a primary concern.
- Short-Sightedness - In the short-run, the imposition of a tariff may help to preserve jobs in the relevant domestic industry. The effort to avoid unemployment in the affected industry also makes for good politics. However, in the long-run, those workers will find other jobs and the economy will be operating at full employment in a more efficient manner.
- Special Interests - Special interests can use their powers to put trade restrictions in place. Although free trade benefits the general public, it does not necessarily benefit all groups within the economy. Management and workers in an industry impacted by foreign goods will not willingly go through dislocation and adjustments (such as retraining) that may be necessitated by foreign competition
- Economic Ignorance - Ignorance also contributes to the creation of trade restrictions. Most members of the general public are not aware of the harm created by trade restrictions.
- Visibility - The benefits of trade restrictions are large and highly visible for small, select groups of people. The benefits of free trade are dispersed across the general population and are, therefore, harder to see. It is easy to note jobs lost to foreign competition; it is not easy to see that those displaced labor resources will be reallocated to more efficient jobs.