What is a Customs Barrier?

A customs barrier is any implementation of fees, rules, or regulations designed with the intention to limit international trade.

Key Takeaways

  • Restrictions can come in the form of tariffs, levies, duties, trade embargoes, and even currency manipulation.
  • Customs barriers may be put in place by governments who are looking to give an advantage to a domestic industry over foreign competitors.

Understanding a Customs Barrier

A customs barrier, or trade barrier, acts to limit trade across borders by creating and enforcing various restrictions. These restrictions can come in the form of tariffs, levies, duties, and trade embargoes and are put in place with the intentions to discourage trade.

Additional types of customs barriers include the use of import and export licenses, quotas, subsidies, and in some cases even changes in a country's currency price can be used as a customs barrier or form trade limitation.

Customs barriers may be put in place by governments who are looking to give an advantage to a domestic industry over that of a foreign competitor. In some instances, these levies are put in place to limit exports of goods and services that may be vital to the local economy. Customs barriers may also be put into place in response to undesirable actions by other nations.

Many economists feel that these customs barriers should only be used as a last resort, as they may create hostile trade environments, but they agree there are valid reasons to put them into place. Whether it’s to protect an emerging domestic industry or a tactical effort in entering a trade war, these barriers have their place in international trading.

Example of Customs Barriers in the United States

The United States, under President Donald Trump, began imposing additional tariffs on goods from other nations. Steel and aluminum imports had tariffs in place, and the U.S. proposed tariffs on many other products from China in response to concerns about national security and intellectual property theft. In response, China placed retaliatory tariffs on goods from the United States, which had a negative impact on farmers within the country as it hurt their ability to sell their commodities.

The tariffs or customs barriers worked out well for some. Some steel manufactures reported increased revenue and earnings thanks to the increase in prices that had come along with the trade sanctions. Reliance Steel & Aluminum (RS) reported record sales after the increase in prices.

However, not all business was booming thanks to the increase. Harley Davidson, General Motors, General Electric, 3M, and many other manufacturers hurried to increase prices and adjust their supply chains to combat the rising prices that had been impacting their profits since the tariffs began. Not all steel companies experienced the rise in earnings from the price bump, either. Many smaller companies didn't see an increase in revenues like their larger counterparts. Also, some companies were locked into fixed pricing agreements and wouldn't see a change in their numbers until those contracts expired and could be re-written.

The proposed and enforced tariffs resulted in both and pros and cons, and some economists warn that such customs barriers are capable of ushering in a recession. Customs barriers can have a negative effect on trade, which in turn hurts certain segments of the economy. This can lead to diminished demand for exportable goods and lack of supply for imported goods, which may strain corporate profits and thus slow economic growth.