Tariffs, Import Quotas and Exchange Rate Controls

Free trade offers many benefits, both domestically and internationally. However, most countries have erected trade barriers in some form or another. These restrict the potential gains from trade and add to the stunting of progress. The three most commonly employed trade barriers are tariffs, quotas, and exchange rate controls. There three policies restrict trade more substantially than any other policies.

1. Tariffs. A tariff is a tax levied on goods imported into a country. It is nothing more than a tax on imports from foreign countries. Tariffs result in higher domestic prices and lower domestic consumption. For instance, without a tariff the price of a good in the domestic market is the same as the price of that good in the world market. When a tariff is implemented, however, consumers cannot afford to purchase foreign goods, so the demand for domestic ones goes up. Domestic producers will then expand their output and charge the now higher world price. Therefore, the tariff benefits domestic producers and the government at the expense of the consumer. Also, as a result of the tariff, resources that could have been used to produce other goods will be used in the production of that good at a higher price, and the potential gains from specialization and trade will not be realized.

2. Import quotas. An import quota is a specific limit or maximum quantity or value of a good permitted to be imported into a country during a given period. Much like a tariff, an import quota is designed to restrict foreign goods and protect domestic industries. Import quotas are often imposed on items such as shoes, sugar, dairy products, and peanuts.

3. Exchange rate controls. Sometimes some countries set the exchange rate of their currency above the market rate. In addition, they impose restrictions on exchange rate transactions. At the high exchange rate, exported goods will be too expensive to foreigners so they will purchase elsewhere causing exports to drop. Lower exports will reduce the revenue of the country causing its imports to fall as well. So exchange rate controls greatly restrict trade.

Trade restrictions can be very harmful to the economies involved. They at least retard progress and economic growth in most cases. This is not to say that there is never a need for any of them. Perhaps there sometimes is. However, if not implemented carefully they can cause more harm than good. Therefore, tariffs, quotas, and exchange rate controls should be kept to a minimum.