Firms desiring to enter international business face several obstacles; some are much more severe than others. The most common barriers to effective business are cultural, social, and political barriers, and tariffs and trade restrictions. The first one to effective business is the cultural and social barriers. A nation’s culture and social forces can restrict international business activities. Culture consists of a country’s general concepts and values and tangible items such as food, clothing, and building. Social forces include family, education, religion and customs. Selling products from one country to another is sometimes difficult when the cultures of the two countries differ significantly. For example, when McDonald’s opened its first restaurant in Rome, it was met with protest. The people of Rome objected to the smell of hamburgers frying. McDonald’s overcame this objection by changing the exhaust system of the restaurant. The second barrier is the social forces that can create obstacles to international trade. In some countries, purchasing items as basic as food and clothing can be influenced by religion. In many nations, individuals do not have the same choices in food, clothing, and health care. The third one is political barriers. The political climate of a country can have a major impact on international business. Nations experiencing intense political unrest may change their attitude toward foreign firms at any time; this instability creates an unfavorable atmosphere for international trade. The last one is the tariffs and trade restrictions. Tariffs and trade restrictions are also barriers to international business. A nation can restrict trade through import tariffs, quotas and embargoes, and exchanges controls.
IntroductionA barrier to trade is a government-imposed restraint on the flow of international goods or services. Those restraints are sometimes obvious, but are most often subtle and non-obvious. The most direct barrier to trade is an embargo– a blockade or political agreement that limits a foreign country’s ability to export or import. Embargoes still exist, but they are difficult to enforce and are not common except in situations of war. The most common barrier to trade is a tariff–a tax on imports. Tariffs raise the price of imported goods relative to domestic goods (good produced at home). Another common barrier to trade is a government subsidy to a particular domestic industry. Subsidies make those goods cheaper to produce than in foreign markets. This results in a lower domestic price. Both tariffs and subsidies raise the price of foreign goods relative to domestic goods, which reduces imports. Barriers to trade are often called “protection” because their stated purpose is to shield or advance particular industries or segments of an economy. From an economic perspective, though, the costs to the economy of reducing its opportunities to trade almost always outweigh the benefits enjoyed by those who are protected. See also Exchange and Trade and Comparative Advantage and the Benefits of Trade. Definitions and BasicsProtectionism, from the Concise Encyclopedia of Economics
International Trade Agreements, from the Concise Encyclopedia of Economics
Free Trade, from the Concise Encyclopedia of Economics
Free Trade vs. Protectionism, a LearnLiberty video.
In the News and ExamplesIf economists are so convinced of the benefits of free trade, why are there so many arguments against it in the press?
Popular myth: Trade barriers are good for the economy. Economic reality: Trade barriers benefit some people—usually the producers of the protected good—but only at even greater expense of others—the consumers. See this satire on lobbying: “A Petition”, by Frédéric Bastiat (pronounced bas-tee-AH). Chapter 7 in Economic Sophisms, first published 1845 in France.
Reciprocity. Popular myth: If we remove a trade barrier, shouldn’t we require our trade partners to reduce theirs? Economic reality: Unilateral reduction of trade barriers is better than no reduction at all. See: Reciprocity, by Frédéric Bastiat. Chapter 10 in Economic Sophisms, first published 1845 in France.
Saving and investment: Popular myth: If we keep running a trade deficit, won’t we run down our economy, eating into our savings by continuing to buy more than we sell? Economic reality: Those who buy those foreign goods are not fools—they are searching world markets for the best deals.
Exports, imports, and the trade balance. Political satire illustrating one of many errors of the mercantilist desire to increase exports and decrease imports, that accumulating dollar bills doesn’t increase economic wealth: The Balance of Trade, by Frédéric Bastiat. Chapter 6 in Economic Sophisms, first published 1845 in France.
Jobs. Popular myth: Protectionism saves jobs. See Free Trade, by Alan S. Blinder.
Aren’t there any arguments left in favor of barriers to trade and protectionism? Don’t exports create jobs? What about the painful relocations and retraining when whole industries lose their comparative advantage? What about new businesses—don’t infant industries and startups deserve a chance to compete in world markets? What about agriculture? oil?—don’t we have to have domestic farm and domestic oil industries so we can be self-sufficient in the event of war? What about government revenue—won’t reducing tariffs reduce government revenue and increase the budget deficit? What about market failures—don’t government subsidies sometimes correct for market failures, perhaps making the loss of the benefits from importing worth the cost?
A Little History: Primary Sources and ReferencesA Brief History of International Trade Policy, by Douglas A. Irwin on Econlib
The Myth of Free-Trade Britain, by John V.C. Nye on Econlib
Did the Smoot-Hawley tariff contribute to the Great Depression?
Tariff, by Frank Taussig from the Encyclopedia Britannica
Customs Duties, from Lalor’s Cyclopedia of Political Science
Tariffs of the United States, from Lalor’s Cyclopedia of Political Science
Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home, by Adam Smith. Book IV, Chapter 2 in the Wealth of Nations
A Lecture on Free Trade: In Connexion with the Corn Laws by Thomas Hodgskin, on Econlib. Advanced ResourcesSome Aspects of the Tariff Question, by Frank Taussig on Econlib
Protectionism and the labor market. Protection or Free Trade, by Henry George on Econlib. Particularly see Chapter XXII, The Real Strength of Protection
Free Trade and Other Fundamental Doctrines of the Manchester School. Francis Hirst, editor. Related TopicsComparative Advantage and the Benefits of Trade |