Introduction Trade is the exchange or transfer of goods and services from an individual or country to another in exchange for other goods and services or money. When there is a network that is developed in a way that it allows trade, it is referred to as a market (Balassa, 2013). Trade restrictions are artificial restrictions that are placed on the trade of goods and services between two or more countries. Despite the term being defined through restrictive measures, it aids in protecting the consumers from products that are harmful, dangerous and inferior.
Trade barriers are what introduces the trade restrictions. Trade barriers are restrictions that are induced by the government on trade. They include tariffs and non-tariff barriers to trade such as import and export licenses, and trade restrictions. The trade barriers are said to decrease the overall economic efficiency. In the theory of comparative advantage, economic efficiency can be reached when all the barriers have been removed hence there will be free trade.
Comparative advantage and specialization
Comparative involves producing a commodity at the lowest cost than anyone else. An individual or country will possess a comparative advantage in producing a specific product if they can manufacture it at lower costs than anyone else or any other country (Schumacher, 2013). However, comparative advantage does not necessarily imply that an individual is the best at producing something. In fact, they can be unskilled at production yet still have a comparative advantage. The comparative advantage is about gains from trade for nations, firms or individuals that come from differences in technological progress or factor endowments. In economic terms, comparative advantage is possessed when an agent producing a good can manufacture it at a lower relative autarky price or opportunity cost. One can compare the opportunity costs of producing the good rather than the resource or monetary costs of production.
The introduction of the comparative advantage theory was by David Ricardo. To explain the theory through an example, say Donald spends all his time gathering bananas and gathers one hundred bunches per month and no fish. If instead, he decides to catch fish the whole working hours, he catches 200 fish per month and no fish. If he divides his working time evenly, he gathers fifty bananas and one hundred fish. On the other hand, when Bob spends time collecting bananas, he collects fifty bunches, while his whole time on fish, he catches 50 fish. If the two trade and their production are limited to their consumption, Donald can specialize on fish and Bob on bananas.
Consequences of trade restrictions
The combination of quotas, subsidies, and tariffs can be used to serve the economic and in other instances political objectives. Tariffs aids in protecting domestic workers and industries from foreign competition through raising prices of imported goods. With this view, one can argue that import restrictions are taxes imposed on domestic consumers (Borchert, Gootiiz, & Mattoo, 2012). Critics of trade restrictions such as export subsidies and import restrictions argue that they discourage the protected industries and firms from challenging the foreign competition by making the necessary changes. Further consequences of trade restrictions can be attributed to impending development efforts for developing nations that try to sell their products internationally (Moon, 2015).
The trade restrictions are ethical but only when they are meant for economic purposes. Some restrictions are politically motivated that end up doing more harm to the economy than good. However, despite the restrictions that are economically motivated being implemented, they are criticized by economists that advocated for free markets and trade. They include the classical economists that indicate the functioning of a market would be best if there were minimal government interference. Trade restrictions mostly are developed and implemented through governments. Despite this, there is an allowance for government interference in markets hence the need for trade restrictions. They are ethical and necessary to protect the consumer, workers, and industries from exploitation and to make them efficient through specialization.
- Balassa, B. (2013). The Theory of Economic Integration (Routledge Revivals). Routledge
- Borchert, I., Gootiiz, B., & Mattoo, A. (2012). Guide to the services trades restrictions database. World Bank Policy Research Working Paper, (6108).
- Dye, A. V. (1938). Trade Barriers and Their Effects on the Consumer. The Annals of the American Academy of Political and Social Science, 198(1), 22-26.
- Moon, S. (2015). The Losses from Trade Restrictions: Policy Dynamics with Firm Selection and Endogenous Markup. Review of International Economics, 23(1), 86-110
- Schumacher, R. (2013). Deconstructing the theory of comparative advantage. World Economic Review, 2, 83-105.