Despite the growth in free trade agreements such as the North American Free Trade Agreement (NAFTA), and organisations such as the World Trade Organization, the majority of nations in the world continue to impose trade restrictions, usually tariffs. Governments typically impose trade restrictions to protect domestic industries. Most economists, however, argue that trade restrictions are detrimental and that the benefits of free trade far outweigh the negative effects it may have on some industries.
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The most common types of trade restrictions include tariffs, quotas, subsidies and embargoes. Governments impose trade restrictions for a variety of reasons, often under pressure from industries that lobby for protection from foreign competition. Governments also cite national security and protecting domestic jobs as other reasons for imposing limits on trade.
Effects of Tariffs and Quotas
A tariff is a tax on an imported good. A quota places a limit on the amount of a specific good, or product, that can be imported. Tariffs raise the price of imported goods, relative to those of domestic goods. Quotas create shortages of the good in question, which also causes prices to increase. Both measures benefit domestic producers, but harm consumers because of the higher prices and reduced supplies. Tariffs can sometimes spark "trade wars," in which nations retaliate against each other by imposing tariffs on the others' goods.
The Smoot-Hawley Tariff Act, signed into law in 1930 by then-President Herbert Hoover, was a factor in exacerbating the Great Depression and contributing to a decline in international trade. These tariffs sparked a round of trade conflicts between the United States and other countries. A famous example was the so-called Egg Wars with Canada. American tariffs on Canadian eggs prompted retaliatory tariffs by Canada on American eggs. These tariffs resulted in lost income for both American and Canadian farmers.
An embargo is a more severe form of trade restriction in which a nation completely bans the importing of products from another country or forbids exporting its own products to that country. The United States has had an embargo against Cuba since 1960 because of the island nation's Communist government. In the early 1970s, some oil-producing Arab nations halted oil exports to the United States because of its support of Israel during the 1973 Yom Kippur War. The embargo caused a huge jump in world oil prices and resulted in gasoline shortages.
Another, less direct form of trade restriction is the subsidy. This involves direct government aid to a particular industry, often an industry in its infancy that the government wishes to support and develop. Subsidies are often defended as only temporary, but they often become permanent as the supported industry becomes dependent on the government aid. Subsidies have the effect of giving a domestic industry an advantage over foreign competitors that are not subsidised.
Most economists contend that trade restrictions, while providing protection to certain industries, harm the economy as a whole by raising prices and limiting the variety of products that are available to consumers. Free trade, in contrast, benefits the economy as a whole through increased competition, which lowers prices and increases product diversity.
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