International Trade restrictions
In attempting to sell to another country, a firm may face various trade restrictions. These include”
- Tariff or custom duties
- Import quotas
- Exchange control
- Prohibition (outright prohibition)
- Hidden subsidies for exporters and domestic producers
- Government action to devalue the domestic currency
Now let’s discuss each of them in more details.
Tariffs or custom duties
These are taxes on imported goods. They are taxes levied by the foreign government against certain imported products. The tariff may be designed to raise revenue (revenue tariff) or to protect domestic firms (protective tariff). The effect of a tariff is to raise the price paid for the imported goods by domestic consumer s, while leaving the price paid to foreign producers the same, or even lower. The difference goes to the government. For example, if goods imported to Nigeria are bought for ₦100 per unit and a tariff of ₦20 is imposed; the full cost to the Nigerian buyer will be ₦120, with ₦20 going to the government.
The end result of imposing tariff is that
- Domestic consumers buy fewer units
- Domestic producers supply more to the market
- Foreign suppliers provide less to the market
- The government earns some tax revenue
Import quotas are restrictions on the quantity of a product that is allowed to be imported into the country. Quota sets limits on the amount of goods that the importing country will accept in certain product categories. The purpose of the quota is to conserve on foreign exchange and protect local industry and employment.
The quota has a similar effect on consumer welfare to that of import tariffs, but the overall effects are more complicated:
- Both domestic and foreign suppliers enjoy a higher price.
- Domestic producers supply more
- There are fewer imports (in volume)
- Consumers buy less and pay at a higher price and
- The government collects no revenue
3) Embargoes on imports: An embargo on imports from one particular country is a total ban, i.e. effectively, a zero quota. Embargo is the ultimate form of quota in that imports in prescribed categories are totally banned.
4) Exchange control: This regulates the amount of available foreign exchange and its exchange rate against other currencies.
5) Prohibition: Quite similar to embargoes, here import of some goods may be totally forbidding, and going against this might be punishable by law. Import of goods may be prohibited in a country if they are local alternatives. The Government may also want to use it as an opportunity to encourage local producers and bolster the local market for the goods.
6) Hidden export subsidies and import restrictions
An enormous range of governmental subsidies and assistance for exports and deterrents against imports have been practiced such as:
- For exports: Export credit guarantees (ie government backed insurance against bad debts for overseas sales), financial help (e.g. government grants to the aircraft, ship or building) and state assistance via the foreign office.
- For imports: Complex import regulations and documentation or special safety standards demanded from imported goods etc. These kinds of restrictions are sometimes called non-tariff barriers.
When the government gives grant to domestic producers, these give the domestic producer a cost advantage over foreign producers in export markets as well as domestic markets.
7) Government action to devalue or depreciate the currency: If a government allows its currency to fall in value, imports will become more expensive to buy. This will reduce imports by means of the price mechanism, especially if the demand and supply curves are elastic.