Taking our discussion on international trade forward, today we talk about restrictions on international trading. Restrictions on international trading, also known as barriers to trade, can take the form of trade and capital restrictions. In the following discussion we will review each of them in depth.
International Trading restrictions
Governments impose trade restrictions on international trading for a variety of reasons. Some hold water with economists while others do not. Some of the valid reasons are protecting an infant industry and national security.
A government would want to protect a domestic industry which is in its infancy from foreign competition to help it grow to a competitive level. Again, in the matter of national security a government would want to protect domestic suppliers of goods crucial to a country’s security needs so that those goods are available domestically in times of a national crisis.
Reasons that do not hold with economists are protecting domestic jobs and domestic industries. Economists argue that though some jobs are lost to foreign competition new jobs are created in their lieu. Also, protecting domestic industries from foreign competition causes consumers to lose out on competitive prices.
Other reasons for trade restrictions on international trading include retaliation for trade restrictions imposed by other countries; government wants to earn tax revenue on imported goods, prevention of dumping by other countries. Dumping is exports by foreign producers to your country at prices less than their cost.
Types of trade restrictions and their economic implications
Tariffs are taxes on imports. Tariffs on imports increase the prices of imported goods domestically. This will reduce the demand for imported goods. The domestic supply will increase and will be at higher prices. So the domestic producers will gain at the expense of foreign exporters and the consumers.
Quotas are restrictions on the quantity of goods that can be imported. Again, quotas lead to gains for domestic producers at the expense of consumers.
Voluntary export restraint
Voluntary Export restraint is exercised by the government to restrain the quantity that it exports. It helps the domestic producers in the foreign countries. Sometimes exports are also restricted to increase the domestic supply of a good to control price rise.
Export subsidies are payments made to exporters to subsidize their costs. Subsidies benefit exporters. However in small countries export subsidies cause an increase in the prices by the amount of the subsidy. In large exporting countries though export subsidies reduce prices and benefit the foreign consumers. The domestic producers in the importing countries are however negatively impacted.
Capital restrictions are restrictions on the movement of capital in and out of a country. Restrictions could be imposed in the form of prohibition on foreign investment in a country or certain industries in a country, restrictions on repatriation of funds outside a country, taxes on income earned from foreign investments, etc.
In the short term capital restrictions help a country to avoid shocks to the economy from large inflows and outflows of foreign money into and from the country during times of expansion and contraction, respectively. Large inflow of foreign money during an expansion can accelerate inflation and lead to bubbles in asset prices. Conversely, large outflow of foreign capital during contraction can further precipitate the situation by causing asset prices to drop sharply. Therefore large inflows and outflows of capital cause volatility in the prices of domestic assets.
Capital restrictions also help to keep the foreign exchange rate of the country stable, thus helping the central banks to focus on using the monetary policy and fiscal policy only to pursue the economic goals of the country.
You can read all about monetary and fiscal policy here below;
Restrictions on the outflow of capital from the country, also increases the domestic supply of capital and helps to keep the interest rates low.
Having said that, it is important to note that in the long run excessive use of capital restrictions can serve to alienate a country in the international financial community. Economic welfare is by and large increased in the long run by reducing trade and capital restrictions on international trading. In the short term there could be negative implications like loss of jobs and volatility in capital and bond markets due to reduction in trade and capital restrictions respectively. However in the long run, the workers will learn new skills needed to perform new types of jobs available and the capital and bond markets will be more liquid and deep with less trade and capital restrictions on international trading.
And that brings us to the end of the second installement on international trade…. Thanks for reading….…. in the next post we take the discussion further to cover balance of payment …..seeya until then…and dont forget to share the post if u liked it…
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