Trade Barriers and Trading Blocks

Recall What are some advantages of international trade? What are some disadvantages of international trade?

Trade Barriers Trade Barrier = a restriction on trade, prevents free trade. A barrier “stops” or “disrupts” something. A trade barrier is used to prevent free trade among countries. What are some examples of Trade Barriers? Tariff = a tax that must be paid on IMPORTS (meaning the country selling you the product charges the tax) Quota = limits the amount of products that can legally be imported into a country (set by the country receiving the product)

More Trade Barriers Embargo = to completely cut off trade with another country (for example Cuba and U.S.) Standards = products must meet safety/environmental standards set by the country’s government that is receiving the import. Higher standards makes it more difficult. Subsides = gov’t reduces costs of production for certain items in their country. Allow the opportunity for more production in your country (reducing imports in hopes of increased exports)

Benefits of Trade Barriers Quotas – ensures that domestic producers will need be used. For example: if there is a quota set on cotton, but manufacturers need more than that, then they can buy cotton from local growers. Tariffs – earns money for the country Lower production costs – if a company can get parts cheaper, they will earn a higher profit Relationships – open door policies build international relations

Downside of Trade Barriers Exact opposites can happen to the flip country when it comes to the benefits Fewer Jobs – if more money can be made off foreign goods, then the company will slow production here leading to layoffs Trade Wars – a country will react negatively to your trade barriers

Why are there Trade Barriers? Protectionism = use of trade barriers to protect a nation’s industries from foreign competition Including protection of 1. Worker jobs – if barriers are too low, then more domestic jobs are threatened (many politicians are using this strategy now) 2. Infant industries – helps newer industries build up time to compete with more mature ones 3. Safeguarding National Security – do not want to completely depend on another nation – what if there was a crisis, we want to keep certain industries going at all times

Trading Blocks Trading Block = When two or more countries enter into free trade agreements International Free Trade Agreement = an agreement to keep barriers low and trade predominantly with each other World Trade Organization (WTO) – organize freer trade and lower tariffs – stem of the UN European Union (EU)- most successful trading block – union members of 12 European nations are free from all trading barriers and they establish uniform barriers for all other countries North American Free Trade Agreement (NAFTA)- free trading zone between Mexico, United States, and Canada Association of Southeast Asian Nations (ASEAN) – not only an economic alliances, but also promoting good relations between the nations