IV.

Government Restrictions

Because international trade is such an integral part of a nation’s economy, governmental restrictions are sometimes introduced to protect what are regarded as national interests. Government action may occur in response to the trade policies of other countries, or it may be taken in order to protect specific industries. All nations seek to achieve and maintain a favourable balance of trade—that is, to export more than they import, or at least to keep the surplus of imports over exports to a minimum.

In a money economy, goods are not merely bartered for other goods; rather, products are bought and sold in the international market with national currencies. In an effort to improve its balance of payments (that is, to increase reserves of its own currency and reduce the amount held by foreigners), a country may attempt to limit imports by controlling the amount of currency that leaves the country.

A.

Import Quotas

One method of limiting imports is simply to close the ports of entry into a country. More commonly, maximum allowable import quantities may be set for specific products. Such quantity restrictions are known as quotas. These may also be used to limit the amount of foreign or domestic currency that is permitted to cross national borders. Quotas are imposed with the aim of stopping or even reversing a negative trend in a country’s balance of payments. They are also used as a means of protecting domestic industry from foreign competition. Modern economic thought tends to condemn both quotas and the aims they serve as economically damaging protectionism.

B.

Tariffs

The most common way of restricting imports today is by imposing tariffs, or taxes on imported goods. A tariff, paid by the buyer of the imported product, makes the price higher for that item in the country that imported it. The higher price reduces consumer demand and thus effectively restricts the import. The taxes collected on the imported goods also increase revenues for the nation’s government. Furthermore, tariffs serve as a subsidy to domestic producers of the items so taxed; the higher price that results when a tariff is imposed encourages the competing domestic industry to expand production.

C.

Non-Tariff Barriers to Trade

In recent years the use of non-tariff barriers to trade has increased. Although these barriers are not necessarily administered by a government with the intention of regulating trade, they nevertheless have that result. Such non-tariff barriers include government health and safety regulations, business codes of conduct, and domestic tax policies, or even “austerity” campaigns aimed at cutting the consumption of (frequently imported) luxury goods. Direct government support of various domestic industries is also viewed as a non-tariff barrier to free trade, because such support gives the supported industry an additional advantage versus non-assisted industries in local or even international markets.