Government control of global trade

Since global trade can have a significant impact on a country’s economy, a nation may attempt to limit its trade with other countries. This action, referred to as protectionism, is usually used to avoid trade deficits or to protect domestic industries against foreign competition. Protecting homegrown businesses can provide more employment, but it can also reduce competition. It may cause consumers to pay higher prices at home while creating trade problems with other nations.

Governments limit global trade through a variety of trade barriers, or restrictions. The most frequently used trade barriers are tariffs, quotas, subsidies, licenses, and product standards.

Tariffs are taxes on certain imported goods. They are used to provide revenue for governments or to protect industries that might not be able to withstand foreign competition. Most consumers are unaware of these hidden taxes, which are imposed per pound or per unit on foreign goods when they enter the country. The net effect of tariffs is to raise the price of imported goods. Let’s say that the U.S. charges a tariff on foreign-made computers. This allows American-made computers to be sold at lower prices than those of their foreign competitors. The global trend today, however, is to reduce or eliminate tariffs.

Quotas limit the volume of exports or imports that move into or out of a country. Limiting the amount of imports tends to aid domestic industries by limiting foreign competition. In the past, the U.S. set quotas on wood, steel, and textiles. However, the trend in the United States is to eliminate or greatly reduce existing quotas.

Subsidies also protect domestic industries from foreign competition. If the government subsidizes a particular domestic producer, it pays the producer for each good or service that it produces. But, the government expects nothing in return (no product, money, etc.) for providing the subsidy. Because the producer receives a virtual “payment” from the government for each unit of product, it can offer the product to its customers at a lower price. And as a result of the low price, customers are likely to shop domestically rather than buy higher priced imports.

EPA

Licenses are import permits that nations use to keep track of imports and regulate the level of imports by individual businesses. If a country wants to limit the number of imports allowed into the country, it can limit the number of licenses issued to foreign exporters. At the same time, licenses can also be required of domestic exporters in an effort to keep products in the country’s own economy.

Product standards are criteria for determining a product’s ability to meet specified guidelines or requirements. Such requirements prevent the import of goods that do not meet U.S. government standards. They are often used to protect consumers and/or the environment. As an example, the U.S. requires vehicles shipped into the country to meet certain emission and safety standards that comply with regulations of the U.S. Environmental Protection Agency (EPA).