A Look at Trade Barriers
From time to time, countries will seek to tax, limit, or even ban international trade. Why would governments do this if voluntary trade is mutually beneficial? The answer lies in the fact that even though voluntary trade is mutually beneficial, the benefits are spread out over society, but the costs are sometimes borne directly by a specific group. People might have a strong interest in preserving their industry, raising tax revenue, saving the environment, or even creating social change. At times a country might limit trade in order to punish another country. Tariffs, quotas, and embargoes are a few of the tools that a country will use in order to accomplish these other interests.
A tariff is a tax on trade. Tariffs can be used to raise revenue for the government or in order to benefit a certain segment of the economy. You might pressure Congress to enact a tariff on imports if your industry is subject to foreign competition. For example, for years the United States' steel industry was protected from cheap foreign competition by protective tariffs. In 2007, India proposed a tariff on rice exports in order to prevent food shortages. The Smoot-Hawley Tariff Act of 1930 was intended to protect American industry and raise much needed tax revenue for the government.
The United States Constitution has some things to say about tariffs. In Section 1 Article 8, Congress is given the power to collect a tariff on imports, but in Section 1 Article 9, Congress is forbidden from placing a tariff on exports.
Tariffs are not without their downsides. Protective tariffs often have the effect of preventing competition and encouraging waste and inefficiency. Revenue tariffs often fail to raise tax revenue because people might stop buying the now expensive imports. Export tariffs might give producers an incentive not to produce. The Smoot-Hawley tariff had the effect of not only reducing foreign imports but also of reducing exports as other countries established tariffs in retaliation, preventing the much-needed tax revenue from materializing. Before politicians consider establishing a tariff, it would be wise to look back at history and see if there might be some unintended consequences.
Quotas are limits on trade. Instead of a tax on imports, you might use a quota to limit the number of imported goods coming into your country. In the 1970s and 1980s, U.S. automobile manufacturers and labor unions supported government quotas on foreign car imports to limit competition and preserve American jobs. The result was higher prices and lower quality. Eventually, Japanese and German firms bypassed the quotas by establishing their factories in the United States. In the end, domestic producers faced more competition at home and labor unions suffered as foreign firms established their factories in states where unions had less power.
Quotas create other problems as well. They do not generate tax revenue for the government, but do create more responsibility. They provide an incentive to smuggle goods illegally in order to avoid the quota, thus creating black markets. In addition, quotas may be manipulated by foreign firms to limit competition from other foreign firms. For example, if there is a quota on German cars imported into the United States, then the German firm that first fills the quota has effectively blocked other German firms from competing in the American market.
An embargo is a ban on trade with another country. The purpose of an embargo is usually to punish a country for some offense. The embargo you may be most familiar with is America's embargo against Cuba. In the wake of the communist revolution, and later the Cuban Missile Crisis, the United States enacted an embargo that banned all trade with the island nation. Even though the events are now far in the past, the embargo persists. Once again, you might consider who benefits from the trade embargo in order to understand why it is still in place.