Part of globalization is free trade. Today, most countries can exchange goods at a minimum cost, which allows governments and enterprises to expand their operations. Customers have access to more products than ever before, including high-end goods that were not otherwise available in their region.
However, some countries are still practicing trade protectionism. Harmful trade barriers aim to eliminate competition from foreign industries and bring more revenue to the local government. This practice also reduces customer satisfaction by limiting the availability of goods. Furthermore, it increases production costs because local manufacturers have to pay more to acquire raw materials.
Barriers Result in Higher Costs
Trade barriers result in higher costs for both customers and companies. As a manufacturer or distributor, you may need to pay more for the goods required to run your business smoothly.
For example, if you're selling electronics, importing laptops and cameras will be more expensive unless you stick to domestic brands. Therefore, you will need to raise the prices customers must pay.
Statistics show that trade barriers cost Americans $80 billion each year. That's approximately $1,200 per household. In 2004, U.S. customers paid an extra $1.5 billion for food because of sugar policies.
Limited Product Offering
The increase in import costs translates into a limited choice of products. Small businesses, for instance, might not be able to afford to pay these costs so that they will offer fewer goods.
Despite this fact, import restrictiveness remains high in developing countries, especially East and South Asia. Many governments put trade restrictions in place to reserve the domestic industry and protect special interests. In the long run, this practice affects economic growth and reduces overall economic efficiency.
Loss of Revenue
Many companies make their money off international trade. Automobile manufacturers, for example, sell cars in foreign markets. Trade barriers can limit their ability to export products, leading to loss of revenue and decreased profit.
Reduced Economic Growth
Trade barriers affect economic growth in developing countries, which are unable to export goods because of high tariffs, thus limiting their ability to prosper and expand their operations. Furthermore, it has a direct impact on wages and international relations.
Fewer Jobs Available
Nowadays, many organizations have offices and factories in multiple locations across the world, which allows them to employ locals and pay higher wages compared to the national average.
Trade barriers limit their expansion and affect the labor market. As a result, fewer jobs will be available for those living in developing countries.
Higher Monopoly Power
Free trade promotes competition among different countries, which forces local companies to keep product prices at a reasonable level. Trade barriers have the opposite effect. They increase monopoly power and limit competition allowing producers to charge higher prices. Additionally, limiting the competition leads to inflation, causing a decline in customer spending power.
These are just some of the many trade barrier effects that companies should know about. Also, it's important to note that protectionism limits innovation and technological advancement. Since there is less incentive to provide superior products, quality will decline over time.