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Section 2 Trade Barriers and Agreements

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Objectives

After studying this section you will be able to:

1. Define various types of trade barriers.
2. Compare the effects of free trade and trade barriers on economic activities.
3. Understand arguments in favor of protectionism.
4. Evaluate the benefits and costs of participation in international trade agreements.
5. Explain the role of multinationals in the global market.

Section Focus

The free exchange of goods can be restricted by barriers to trade, such as tariffs, quotas, and voluntary export restraints. International trade agreements and organizations work to reduce trade barriers.

Key Terms

• trade barrier
• import quota
• voluntary export restraint (VER)
• customs duty
• tariff
• trade war
• protectionism
• infant industry
• international free trade agreement
• World Trade Organization (WTO)
• European Union (EU)
• euro
• free-trade zone
• NAFTA

So far, our discussion of trade has assumed that international trade is not subject to government regulations. Many people, however, argue that governments should regulate trade in order to protect certain industries and jobs from foreign competition.

Trade Barriers

Most countries have some form of trade barriers that hinder free trade. A trade barrier, or trade restriction, is a means of preventing a foreign product or service from freely entering a nation's territory. Trade barriers take three common forms: import quotas, voluntary export restraints, and tariffs.

Import Quotas

An import quota is a limit on the amount of a good that can be imported. For example, the United States limits the annual amount of raw (unprocessed) cotton coming into the country from other nations. Quotas limit India and Pakistan to 908,764 kilograms of cotton, China to 621,780 kilograms, and Egypt and Sudan to 355,532 kilograms. The United States will accept no more than these amounts of cotton from these countries. Other nations that produce cotton must also observe quotas of various amounts.

Voluntary Export Restraints

An import quota is a law. A voluntary export restraint (VER) is a self-imposed limitation on the number of products that are shipped to a particular country. Under a voluntary export restraint, a country voluntarily decreases its exports in an attempt to reduce the chances that the importing country will set up trade barriers.

The cotton used to make much of the clothing Americans wear is subject to import quotas.

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