Since World War II, international trade has played an essential role in driving economic development by enabling nations to specialize in their areas of strength and trade them for other necessities, thereby creating wealth and alleviating poverty for all involved parties.
Still, governments often restrict trade more than is optimal because competing nations have incentives to adopt interventionist policies that may reduce welfare.
Tariffs
Tariffs are used by governments as a method for raising revenue, and have an effect on both costs of doing business and revenue collection. Tariffs have different impacts depending on industry and geographic region – they may increase prices, limit supply or reduce demand of imported goods entering a country, create tension between countries/geographic regions which leads to reciprocal retaliations actions, as well as cause domestic industries less efficient by decreasing competition or generate tensions that lead to reciprocal actions between them that spiral into destructive cycles of retaliation between them both.
Studies suggest that tariffs primarily fall on consumers (who pay higher prices), firms importing foreign goods (who absorb and pass along costs to customers), or some combination thereof. Market power could alter this equation and shift the impact to sellers who control prices more directly rather than buyers, leading to rising domestic consumer costs while decreasing purchasing power of lower income households.
Non-tariff barriers
As any business owner can attest, international trade can be complex enough without countries imposing barriers designed to keep your products out. While tariffs may be the most recognizable form of these trade restrictions, other barriers exist as well that impede companies’ ability to sell their products in foreign markets and may lead to revenue losses for these firms.
Non-tariff barriers typically involve regulatory issues, such as licensing requirements or food safety standards that must be adhered to or quotas placed on products not produced locally. Such restrictions may last only temporarily or be permanent.
GTA utilizes an open data initiative to monitor trade policy measures that include both export restrictions and import liberalisation/facilitation measures, including export restrictions and import liberalisation/facilitation. This high-frequency dataset shows that medical and personal protective equipment (PPE) measures comprise around two thirds of all changes while food-related changes represent far fewer. These changes have the potential to have serious ramifications for trade and welfare.
Trade Agreements
Trade gives nations an advantage in activities where they possess comparative advantage, reducing production costs while simultaneously increasing output volume – all leading to more rapid economic development than would otherwise be possible without it. Furthermore, trading allows nations access inputs not available locally which helps lower production costs further.
Countries with similar histories, demographics and economic goals can enter bilateral or regional trade agreements to eliminate barriers and minimize costs for import/export of raw materials and semi-finished products more cheaply than they otherwise could. Often these trade agreements enable companies to import raw materials more affordably or import finished products more affordably than would otherwise be the case.
NAFTA was instrumental in reducing tariff barriers between Canada, Mexico and the US; other nations have entered preferential trade arrangements with individual trading partners like European Union countries or created preferential arrangements within an individual trading bloc – these may also serve to accelerate global trade liberalization by forcing more-resistant nations to remove trade barriers themselves.
Local Content Requirements
Local content requirements are an effective trade protection mechanism that mandates international companies to produce or rent a certain percentage of goods and services domestically. They can take the form of guidelines, subsidies or tax exemptions for locally assembled products that fulfill certain domestic content levels.
These policies pose significant compliance and fraud risks, creating opportunities for government and parastatal entity officials to direct lucrative contracts to family, friends or affiliates; or for international companies paying bribes or kickbacks in order to acquire required local content.
Globalization has rendered tariffs and quotas ineffective as protectionist measures, leading governments to adopt non-tariff barriers (NTBs) such as local content requirements as alternative mechanisms for protectionism. Such NTBs have an adverse impact on business statistics by restricting competition, increasing costs for both foreign and domestic producers, restricting investment opportunities and restricting competition for producers alike. Therefore, companies must implement and maintain anti-corruption compliance programs tailored to address specific risks.
