Why Governments Impose Trade Barriers

Introduction

The global economy is comprised of a sophisticated combination of trades. Among them, international trade is a significant element, partly due to the efficiency it can grant. When one country has a lower opportunity cost of producing a kind of good, A, than another country, we say that the former has a ‘comparative advantage’ in the production of A. To make full use of comparative advantage, countries trade with each other, exporting goods where they have a comparative advantage and importing those where they do not. Thus, they engage in specialization and increase short-run economic efficiency. An example of this concept is the Iowa Car Crop thought experiment in which David Friedman tries to show that growing wheat is, in an important sense, just another ‘technology’ we can use for manufacturing cars, and in some circumstances a much more efficient one.

However, the truth is that countries do not always follow free trade policies: they set trade barriers on a large scale. These lessen the possibility of exploitation of comparative advantage. Figure 1 illustrates the rates of US trade barriers [1]. In this essay, it will be argued that political leaders overwhelmingly impose trade barriers because they think doing so will increase their popularity, and therefore bolster their political power.

Political/Electoral Incentives

Political incentives are a key motivator for most government policy decisions. Leaders in democracies want to win elections. In a paper published in Electoral Studies, Crist et al. argue that “Legislators benefit by being able to claim credit for having protected their constituents from the competition an unrestricted agreement would entail [2].” Similarly, those in autocracies often want to maintain popularity to avoid being overthrown. Jacob Nyrup described this in his Ph.D. thesis, stating that, “If the ruling coalition unanimously decides to remove the autocrat, he has no other option than to leave. Likewise, if every single member of the civil society rises up against the regime and stands firm, the regime will collapse [3].” There are numerous reasons why leaders may expect that trade barriers will boost their popularity or enhance their position’s security: protection of domestic consumers and suppliers, government capacity, protection of currency value, and international relations, such as sanctions. I will examine these in more detail throughout the rest of the essay.

Benefits to Consumers

From the consumer side, trade barriers may boost leaders' popularity by protecting consumers through both the control of quantity and quality. Some might argue that politicians would not implement this kind of policy to garner votes because protectionism raises prices. These surges would be caused by the leftward shift of the supply curve, and the increased production caused by restrictions on importing cheap foreign raw materials [4]. However, quality restrictions may relate to, among other things: health standards, such as bans on carcinogenic ingredients, false advertising, or other factors that may harm consumers and of which they would not otherwise be aware. The European Union (EU) declared on its official website: “Strict import rules with respect to food and feed hygiene, consumer safety and animal health status aim at assuring that all imports fulfill the same high standards as products from the EU itself [5].” Comparing these positive effects to the inconvenience of higher prices, we see that trade barriers can reduce costumers the risk of being dramatically harmed financially or physically. For a responsible government, it is crucial to offer protections for citizens’ health, proving the importance of this barrier, both morally and electorally. For instance, in a 2021 poll, only 25% of British people said they trusted food from the US [6].

Secondly, by encouraging the development of domestic production, trade barriers can reduce dependency on international supply chains, protecting consumption levels during crises that disrupt trade. Limiting imports will create less competitive and more stable environments for domestic producers to develop. For consumers, there won’t be much difference in where the goods come from in the short run. However, in the long run, the existence of domestic suppliers that possess the capacity for mass production is indeed important. Unpredictable events such as poor international relations, conflict with foreign suppliers, or pandemics that reduce import levels negatively impact domestic consumption. The World Health Organization (WHO) has warned that severe and mounting disruption to the global supply of personal protective equipment (PPE) – caused by rising demand, panic buying, hoarding, and misuse – is putting lives at risk from the new SARS-CoV-2 virus and other infectious diseases [7]. This inequality of resources causes chaos within nations, and thus negatively affects government reputations. Following Donald Trump’s failure to control supply chains during the COVID-19 pandemic, the New York Times criticized him by saying that “hospitals were at risk of buckling under the looming wave of severely ill people, lacking masks and other protective equipment, ventilators and sufficient intensive care beds [8].” Governments can learn from this experience and use trade barriers to develop a more reliable domestic supply of resources in case of emergency, protecting their citizens and thus strengthening their support.

Government Revenue

Moreover, whilst consumers may benefit from the advantages trade barriers can bring, governments can also directly take advantage; import tax revenue can greatly supplement government revenue. As shown in Figure 2, trade barriers have long been a large proportion of US government income [9]. Figure 3 also lists the distribution of tariffs as a percent of government revenue in 2017 [10]. Now that domestic tax and other forms of income have risen, the proportion it contributes to government revenue is less; nevertheless, in real terms, it still provides vast sums to the revenue. According to the Peterson Institution for International Economy, President Trump has praised tariffs as a “great revenue producer for the US government”. Indeed, in 2018, his tariffs raised $300bn for the Department of the Treasury. Though the tariffs that Trump imposed only raised the share of federal tax revenue derived from tariffs from 1% to 2% [11], $300bn is undeniably a large sum.

It cannot be denied that higher tariffs will reduce imports, which may to some extent reduce revenue. Generally speaking, such an effect would appear more obviously if the supply curve of the goods was more price inelastic.

Support for Domestic Producers

The extra money from higher tariffs can enable governments to fund domestic industries to develop technology and therefore promote long-term economic growth. It can also fund the construction of infrastructure, which would likely deliver utility that would more than justify the tax. With the existence of the multiplier effect, government spending would flow into the market and thus create more value than originally existed.

There is nevertheless concern that the less competitive economic environment would make domestic firms slow their development and become less efficient. This outcome would be highly undesirable. However, this possibility is highly unlikely.

For one, directly exposing domestic firms to the whole world is by no means responsible government policy. Not all competition is beneficial for companies’ growth. For instance, exchange rate manipulation occurs when foreign governments use their nation's banking system to successfully devalue their currency relative to importer nations, resulting in an effect like that of import goods having relatively lower prices than domestic goods. For example, China was recently accused of devaluing its currency relative to the currency value of its Western European and U.S. trading partners [12]. These tricks only harm domestic firms, and government interventions to stop them are necessary. Possible solutions include raising tariffs and increasing exchange rate volatility. As exchange rate volatility increases, there are risks and transaction costs associated with variability in the exchange rate that reduce the incentives to trade, thus reducing international trade [13].

Incumbents may also calculate protectionist policies to be strategically rational in the absence of malicious deliberate external market interference. Infant industry protectionism is one example of this. While foreign competitors may have already matured, domestic ones are often only startups. Inevitably making mistakes frequently and correcting them, they have little experience. Government support, such as imposing quotas on foreign goods of the same kind, attempts to make it easier for infant industries, because their product will be scarce within the nation, affording them surplus profit which they can invest in developing greater efficiency.

A second scenario involves sunset industries, facing the risk of shutdown due to problems such as lack of suitable of workers or outdated products. When these companies fail, sources of tax disappear, while unemployment rises. Under this circumstance, temporarily increasing tariffs or quotas on new alternative products can work to release governing pressure in the short term. In the long term, the government will have more time to prepare to solve problems such as structural unemployment.

Strategically important industries are also to be protected. These industries may include military, energy, and key technologies to support large firms’ production, for example, chips for mobile phones and seeds producing more crops. Their availability determines whether a country can survive crises. If these industries are in trouble, the country becomes weak compared to its challengers. Without strategic industries’ supply, simple sanctions could result in total paralysis. The recent European energy crisis prompted by the war between Russia and Ukraine is a good example. The International Monetary Fund has advised the European Union to “limit the price of gas imports and put a lid on wholesale prices [14].” The government should allow only a small portion of such goods to be influenced by one country, or from countries that do not have promising trade relationships. Therefore, the domestic security of technology will stabilize, acting as proof of a capable government.

Foreign Affairs

Outside the country’s market, trade barriers are also a tool through which to impose sanctions. By imposing huge tariffs on opponent countries’ imports or even totally forbidding the import of certain goods, a government can effectively damage competitor economies. As opponent countries’ exports are reduced, import prices rise, thus expanding national debt. A recent and well-known example of this is the trade war between the US and China. However, the motives at play are disputed. Some believe the trade war was motivated more by political purposes than economic ones. However, statistical analysis proved, “The US–China trade war would have the desired [economic] effect of President Trump, because it would reduce the country's trade deficit, even with Chinese retaliation, by around $50bn. In addition, in both scenarios, there would be an increase in the production of the steel and aluminum sectors in the United States [15].” Another article pointed out: “The new US-China trade agreement will regulate not only the use of classical tools in mutual trade such as tariffs, quotas, and sanitary and phytosanitary certificates, but also other regulations as well as intellectual property protection, technology transfers, and Chinese state subsidies to manufacturers and exporters [16].” The US government has reduced its trade deficit through the trade war. This is a direct example of the benefits of sanctions.

Conclusion

Although there are concerns that trade barriers weaken efficiency by preventing the benefits of comparative advantage and competition, I have listed reasons why governments are still willing to impose barriers. Most important among these are: protecting domestic consumers, earning government revenue, protection of domestic producers (especially sunset, infant, and strategic industries), and economic sanctions. Altogether, the key underlying motive that drives the government to pursue the above ends is the bolstering of its political power. Showing the public pretty statistics on government revenue, GDP growth, the dominance of technology development, and low and stable unemployment rates, while successfully restricting the influence of aggressive foreign countries, can be highly effective at convincing the public that the government is performing well. This is especially true where citizens are especially patriotic. This leads to a high support rate, higher electoral shares, and a reduced likelihood of revolt.

References

[1] Fernando Leibovici and Jason Dunn, "US Barriers to International Trade of Goods: Tariffs and Non-Tariff Measures," Economic Synopses, No. 9, 2023. Available: https://doi.org/10.20955/es. 2023.9

[2] B.F. Crisp, N.M. Jensen, G. Rosas, and T. Zeitzoff, “Vote-Seeking Incentives and Investment Environments: The Need for Credit Claiming and the Provision of Protectionism,” Electoral Studies, Vol. 29, Issue 2, 2010, Pages 221-226, ISSN 0261-3794, https://doi.org/10.1016/j.electstud.2010.01. 002.

[3] J. Nyrup, “The Myth of the Benevolent Autocrat? Internal Constraints, External Constraints, and Economic Development in Autocracies,” Electronic Journal, 2019, doi: https://doi.org/10.213 9/ssrn.3360966.

[4] A. Jayachandran, “Trade Barrier,” WallStreetMojo, Dec. 18, 2022. Available: https://www.wallstreet mojo.com/trade-barrier/ (accessed Dec. 12, 2023).  

[5] European Commission, “Imported Products,” European Commission, https://food.ec.europa.eu/ horizontal-topics/official-controls-and-enforcement/imported-products_en/ (accessed Dec. 12, 2023).

[6] N. Desk, “UK Survey Shows Low Level of Trust in U.S. Food,” Food Safety News, Oct. 12, 2021. https://www.foodsafetynews.com/2021/10/uk-survey-shows-low-level-of-trust-in-u-s-food/ (accessed Dec. 12, 2023).

[7] World Health Organization, “Shortage of Personal Protective Equipment Endangering Health Workers Worldwide,” World Health Organization, Mar. 03, 2020. https://www.who.int/news/item/ 03-03-2020-shortage-of-personal-protective-equipment-endangering-health-workers-worldwide

[8] E. Lipton, D.E. Sanger, M. Haberman, M.D. Shear, M. Mazzetti and J.E. Barnes, “He Could Have Seen What Was Coming: Behind Trump’s Failure on the Virus,” New York Times, April 11, 2020. Available: https://www.nytimes.com/2020/04/11/us/politics/coronavirus-trump-response.html

[9] C.P. Bown and D.A. Irwin, “Analysis | Is Trump Right When He Tweets that Tariffs Bring in Government Revenue? Here are 5 Things you Need to Know,” Washington Post, Jul. 17, 2019. Accessed: Dec. 12, 2023. [Online]. Available: https://www.washingtonpost.com/politics/2019 /07/16/tariff-revenue-trump-tweets-things-you-need-know/?utm_term=.3e6112db0aee

[10] The World Bank, “World Development Indicators | DataBank,” The World Bank, 2023. https://databank.worldbank.org/source/world-development-indicators

[11] Economics Online, “Trade protectionism,” Economics Online, Dec. 08, 2022. https://www.economicsonline.co.uk/global_economics/trade_protectionism.html/#:~:text=Sunset industries, also known as

[12] Economics Online, “Trade protectionism,” Economics Online, Dec. 08, 2022. https://www.economicsonline.co.uk/global_economics/trade_protectionism.html/#:~:text=Sunset industries, also known as

[13] A. Nicita, “Exchange Rates, International Trade and Trade Policies,” International Economics, Vol. 135–136, Issue 135-136, 2013, Pages 47-61

[14] J. Zettelmeyer, S. Tagliapietra, G. Zachmann, and C. Heussaff, “Beating the European Energy Crisis,” International Monetary Fund, Dec. 2022. https://www.imf.org/en/Publications/fandd/issues/ 2022/12/beating-the-european-energy-crisis-Zettelmeyer

[15] M. Carvalho, A. Azevedo, and A. Massuquetti, “Emerging Countries and the Effects of the Trade War between US and China,” Economies, vol. 7, no. 2, p. 45, May 2019, doi: https://doi.org/10.3390/economies7020045.

[16] L. Kapustina, Ľ. Lipková, Y. Silin, and A. Drevalev, “US-China Trade War: Causes and Outcomes,” SHS Web of Conferences, vol. 73, no. 1, p. 01012, 2020, doi: https://doi.org/10.1051/ shsconf/20207301012.

Bibliography

Bown, Chad P. and Douglas A. Irwin. “Analysis | Is Trump Right When He Tweets that Tariffs Bring in Government Revenue? Here are 5 Things You Need to Know.” Washington Post. Jul. 17, 2019. https://www.washingtonpost.com/politics/2019 /07/16/tariff-revenue-trump-tweets-things-you-need-know/?utm_term=.3e6112db0aee.

Carvalho, Monique, André Azevedo, and Angélica Massuquetti. "Emerging Countries and the Effects of the Trade War between US and China." Economies 7, no. 2 (2019): 45. https://doi.org/10.3390/economies7020045. 

Crisp, Brian F., Nathan M. Jensen, Guillermo Rosas, Thomas Zeitzoff. “Vote-Seeking Incentives and Investment Environments: The Need for Credit Claiming and the Provision of Protectionism.” Electoral Studies 29, no. 2 (2010): 221-226. https://doi.org/10.1016/j.electstud.2010.01. 002.

Desk, News. “UK Survey Shows Low Level of Trust in U.S. Food.” Food Safety News. Oct. 12, 2021. https://www.foodsafetynews.com/2021/10/uk-survey-shows-low-level-of-trust-in-u-s-food/.

Economics Online. “Trade protectionism.” Dec. 08, 2022. https://www.economicsonline.co.uk/global_economics/trade_protectionism.html/#:~:text=Sunset industries, also known as.

European Commission. “Imported Products.” Accessed Dec. 12, 2023. https://food.ec.europa.eu/ horizontal-topics/official-controls-and-enforcement/imported-products_en/.

Jayachandran, Aswathi. “Trade Barrier.” WallStreetMojo. Dec. 18, 2022. https://www.wallstreet mojo.com/trade-barrier/.  

J. Zettelmeyer, S. Tagliapietra, G. Zachmann, and C. Heussaff. “Beating the European Energy Crisis.” International Monetary Fund. Dec. 2022. https://www.imf.org/en/Publications/fandd/issues/ 2022/12/beating-the-european-energy-crisis-Zettelmeyer.

Kapustina, Larisa, Ľudmila Lipková, Yakov Silin, Andrei Drevalev. "US-China Trade War: Causes and Outcomes." SHS Web of Conferences 73, no. 1  (2020): 01012. https://doi.org/10.1051/ shsconf/20207301012.

Leibovici, Fernando and Jason Dunn. "US Barriers to International Trade of Goods: Tariffs and Non-Tariff Measures." Economic Synopses no. 9 (2023). https://doi.org/10.20955/es.2023.9.

Lipton, Eric, David E. Sanger, Maggie Haberman, Michael D. Shear, Mark Mazzetti and Julian E. Barnes. “He Could Have Seen What Was Coming: Behind Trump’s Failure on the Virus.” The New York Times. April 11, 2020. https://www.nytimes.com/2020/04/11/us/politics/coronavirus-trump-response.html.

Nicita, Alessandro. “Exchange Rates, International Trade and Trade Policies.” International Economics135–136, no. 135-136, (2013): 47-61.

Nyrup, Jacob. “The Myth of the Benevolent Autocrat? Internal Constraints, External Constraints, and Economic Development in Autocracies.” SSRN Electronic Journal (March 2019). http://dx.doi.org/10.2139/ssrn.3360966.

The World Bank, “World Development Indicators | DataBank,” 2023. https://databank.worldbank.org/source/world-development-indicators.

World Health Organization. “Shortage of Personal Protective Equipment Endangering Health Workers Worldwide.” Mar. 03, 2020. https://www.who.int/news/item/ 03-03-2020-shortage-of-personal-protective-equipment-endangering-health-workers-worldwide.