The Definition of Trade Restrictions in Economics

by Nick Robinson; Updated September 26, 2017

In economics, a trade restriction is any government policy that limits the free flow of goods and services across borders. Individual American states can't really impose trade restrictions, because the U.S. Constitution gives the federal government exclusive authority over domestic commerce. Thus, the term "trade restriction" in the U.S. usually refers to barriers to international trade.

Examples of Trade Restrictions

The most straightforward example of a trade restriction is the tariff. A tariff, also called a "duty," is a tax on the value of imported products. Companies or people importing goods from overseas have to pay the tariff to the government. That raises the price of the goods for consumers, thus discouraging importation.

Tariffs aren't the only barriers to trade, however. Quotas are caps on the amount of a product that can be imported. They are often used in combination with tariffs. The U.S. quota on sugar imports allows businesses to import ever-changing amounts of sugar duty free, but once the limit is reached, all sugar imports are subject to a high tax.

Not all trade restricts arise from trade policy, either. Sanitary standards on food, for instance, act as trade restrictions because they prohibit the importation of certain products to a country.

Trade restrictions can also be a tool of foreign policy. The U.S. sometimes imposes sanctions or embargoes on trade with countries it views as hostile. Despite the re-establishment of diplomatic relations with Cuba, the U.S. has embargoed nearly all trade with the Caribbean nation for more than 50 years.

Benefits of Trade Restrictions

The usual goal of trade restrictions is to protect domestic industries from cheap imports from other countries. The idea is that by limiting the quantity of imports or raising the price of imports, domestic producers can hang onto market share they would otherwise lose. That helps protect corporate profits and workers' jobs, at least in the short term.

Other trade restrictions, like sanitary standards or safety regulations, are intended to protect consumers from potentially hazardous products. South Korea, for example, banned the importation of beef from the United States from 2003 to 2008 due to concerns about mad-cow disease.

Problems With Trade Restrictions

The big disadvantages of trade restrictions is that they reduce economic freedom, distort markets and risk retaliation. The Heritage Foundation, a conservative think tank, argues that businesses and consumers should be free to do business with anyone they like. They ask why consumers who like Peruvian chocolate more than American chocolate should have to pay artificially inflated prices or why one brand of car should have a cost advantage over another based solely on where it was made.

Trade restrictions can also lead to some strange behavior due to market distortion. The U.S. isn't really the best place to grow lots of sugar due to its temperate climate, but restrictions on sugar imports make it profitable to keep trying. Sugar producers in the U.S. might be better off doing something else if not for the quota.

Finally, trade restrictions can lead to damaging trade wars between nations. In 2009, the U.S. imposed a tariff on Chinese tires, arguing that China's trading practices were unfairly harming U.S. manufacturers. A few months later, China slapped a tariff on imports of chicken feet from the United States in a move the Washington Post called retaliatory. The spat serves as an example of how a modest trade restriction can quickly escalate and start hurting businesses in other industries.

About the Author

Nick Robinson is a writer, instructor and graduate student. Before deciding to pursue an advanced degree, he worked as a teacher and administrator at three different colleges and universities, and as an education coach for Inside Track. Most of Robinson's writing centers on education and travel.