RESEARCH PROJECT

On

A STUDY ON THE INTERNATIONAL TRADE BARRIERS

Submitted to

MAHARASHTRA NATIONAL LAW UNIVERSITY,

AURANGABAD

Submitted by

AARYA DUBEY

B.A.LL.B. (Hons.), Semester- V

Roll no.- 2022/BALLB/44

GENERAL PRINCIPLES OF ECONOMICS

Under the guidance of

Mr. Akash Shahpure

Assistant Professor of Economics

Maharashtra National Law University, Aurangabad

DECLARATION

This declaration is made at Aurangabad that this project is prepared and drafted by me, Aarya
Dubey. It contains the project work that was assigned to me during my 5 th Semester period,
and successfully accomplished from my side.

This project is a sincere attempt at compilation of the aforementioned work. This has not been
submitted, either in whole or in part, to any other Law University or affiliated Institute under
which any University is recognized by the Bar Council of India, for the award of any other law
degree or diploma, within the territory of India.

Aarya Dubey

22/BALLB/44
INDEX

S. NO. NAME OF THE CHAPTER PAGE NO.

1. INTRODUCTION 3
2. TYPES OF INTERNATIONAL TRADE 4-8
BARRIERS
3. NEED FOR TRADE BARRIERS 9-10
4. HOW DO THESE BARRIERS WORK 11-12
5. IMPLICATIONS OF TRADE BARRIERS 13-14
6. ROLE OF WORLD TRADE ORGANISATION 15
IN REGULATING TRADE BARRIERS
7. CONCLUSION 16

2
CHAPTER 1- INTRODUCTION

International trade has been a driving force behind globalization, facilitating the exchange of
goods, services, and capital across borders and fostering economic growth. It allows countries
to specialize in the production of goods and services in which they have a comparative
advantage, leading to increased efficiency, innovation, and consumer access to a broader range
of products. However, despite the benefits of free trade, nations often impose various trade
barriers to protect their domestic industries or advance national interests.

Trade barriers are measures that governments implement to restrict or regulate the flow of
goods and services between countries. These barriers can take many forms, including tariffs,
quotas, subsidies, and non-tariff barriers like regulatory standards and import licenses. While
these measures are often introduced to protect domestic industries from foreign competition or
safeguard national security, they can also distort the free market, raise consumer prices, and
lead to inefficiencies in both domestic and global markets.

The motivations behind trade barriers vary from economic protectionism to political strategies.
For instance, tariffs on foreign products can generate government revenue and provide
temporary relief to struggling local industries. However, such policies can trigger retaliatory
measures from trading partners, leading to trade wars and disruptions in international relations.
Moreover, barriers disproportionately impact developing countries, limiting their access to
global markets and hindering their economic growth.

This project explores the types of international trade barriers, their causes, and their broader
implications for the global economy. It also examines the role of the World Trade Organization
(WTO) and other international institutions in regulating trade barriers, resolving trade disputes,
and promoting a more open and equitable global trading system. Through this analysis, the
project seeks to highlight the importance of balancing national interests with the benefits of
global free trade.

3
CHAPTER 2- TYPES OF INTERNATIONAL TRADE BARRIERS

International trade barriers are restrictions or obstacles imposed by countries that limit the free
exchange of goods, services, and capital across borders. These barriers are designed to protect
domestic industries from foreign competition, regulate imports and exports, or advance a
country’s political or economic agenda. Common forms of trade barriers include tariffs, which
are taxes on imported goods; quotas, which limit the quantity of goods that can be imported;
subsidies, which give domestic industries financial support; and non-tariff barriers like
complex regulations or standards that make it difficult for foreign goods to enter a market.

Some types of international trade barriers are:

Tariffs

Most countries are limited by their natural resources and ability to produce certain goods and
services. They trade with other countries to get what their population needs and demands.
However, trade isn't always conducted in an amenable manner between trading partners.
Policies, geopolitics, competition, and many other factors can make trading partners unhappy.
One of the ways governments deal with trading partners they disagree with is through tariffs.
A tariff is a tax imposed by one country on the goods and services imported from another
country to influence it, raise revenues, or protect competitive advantages.

Tariffs are used to restrict imports. Simply put, they increase the price of goods and services
purchased from another country, making them less attractive to domestic consumers. A key
point to understand is that a tariff affects the exporting country because consumers in the
country that imposed the tariff might shy away from imports due to the price increase.
However, if the consumer still chooses the imported product, then the tariff has essentially
raised the cost to the consumer in another country.

In pre-modern Europe, a nation's wealth was believed to consist of fixed, tangible assets, such
as gold, silver, land, and other physical resources. Trade was seen as a zero-sum game that
resulted in either a clear net loss or a clear net gain of wealth. If a country imported more than
it exported, a resource, mainly gold, would flow abroad, thereby draining its wealth. Cross-
border trade was viewed with suspicion, and countries preferred to acquire colonies with which
they could establish exclusive trading relationships rather than trading with each other.

This system, known as mercantilism, relied heavily on tariffs and even outright bans on trade.
The colonizing country, which saw itself as competing with other colonizers, would import raw

4
materials from its colonies, which were generally barred from selling their raw
materials elsewhere. The colonizing country would convert the materials into manufactured
wares, which it would sell back to the colonies. High tariffs and other barriers were
implemented to ensure that colonies only purchased manufactured goods from their home
countries.

The Scottish economist Adam Smith was one of the first to question the wisdom of this
arrangement. His "Wealth of Nations" was published in 1776, the same year Britain's American
colonies declared independence in response to high taxes and restrictive trade arrangements.
Later writers, such as David Ricardo, further developed Smith's ideas, leading to the theory
of comparative advantage. It maintains that if one country is better at producing a specific
product while another country is better at producing another, each should devote its resources
to the activity at which it excels. The countries should trade with one another rather than erect
barriers that force them to divert resources toward activities they do not perform well.
According to this theory, tariffs drag economic growth, even if they can be deployed to benefit
specific narrow sectors under some circumstances.

Governments impose taxes for:

 Tariffs can be used to raise revenues for governments. This kind of tariff is called a revenue
tariff and is not designed to restrict imports. For instance, in 2018 and 2019, President
Donald Trump and his administration-imposed tariffs on many items to rebalance the trade
deficit. In the fiscal year 2018, customs duties received were $41.6 billion. In fiscal year
2019, duties received were $71.9 billion.
 Governments can use tariffs to benefit particular industries, often doing so to protect
companies and jobs. For example, in April 2018, President Donald Trump imposed a 25%
ad valorem tariff on steel articles from all countries except Canada and Mexico. In March
2022, President Joe Biden replaced the tariff on steel products from the United Kingdom
with a tariff-rate quota of 500,000 metric tons, and reached quota deals with several other
countries. This proclamation reopened the trade of specific items with the U.K. while taking
measures to protect domestic U.S. steel manufacturing and production jobs.
 By making foreign-produced goods more expensive, tariffs can make domestically
produced alternatives seem more attractive. Some products made in countries with fewer
regulations can harm consumers, such as a product coated in lead-based paint. Tariffs can
make these products so expensive that consumers won't buy them.

5
 Tariffs can also be used as an extension of foreign policy as their imposition on a trading
partner's main exports may be used to exert economic leverage. For example, when Russia
invaded Ukraine, much of the world protested by boycotting Russian goods or imposing
sanctions. In April 2022, President Joe Biden suspended normal trade with Russia. In June,
he raised the tariff on Russian imports not prohibited by the April suspension to 35%.1

Quotas

A quota is a government-imposed trade restriction that limits the number or monetary value of
goods that a country can import or export during a particular period. Countries use quotas in
international trade to help regulate the volume of trade between them and other countries.
Countries sometimes impose quotas on specific products to reduce imports and
increase domestic production. In theory, quotas boost domestic production by restricting
foreign competition. Government programs that implement quotas are often referred to
as protectionism policies. Additionally, governments can enact these policies if they have
concerns over the quality or safety of products arriving from other countries.

Quotas are different from tariffs or customs, which place taxes on imports or exports.
Governments impose both quotas and tariffs as protective measures to try to control trade
between countries, but there are distinct differences between them. Quotas focus on limiting
the quantities (or, in some cases, cumulative value) of a particular good that a country imports
or exports for a specific period, whereas tariffs impose specific fees on those goods.
Governments design tariffs (also known as customs duties) to raise the overall cost to the
producer or supplier seeking to sell products within a country. Tariffs provide a country with
extra revenue and they offer protection to domestic producers by causing imported items to
become more expensive.

Quotas are more effective in restricting trade than tariffs, especially if domestic demand for
something is not price-sensitive. Quotas may also be more disruptive to international trade than
tariffs. Applied selectively to various countries, they can be utilized as a coercive economic
weapon.

Highly restrictive quotas coupled with high tariffs can lead to trade disputes, trade wars, and
other problems between nations. For example, in January 2018, President Trump imposed 30%

1
Brent Radcliffe, The Basics of Tariffs and Trade Barriers, INVESTOPEDIA (Oct. 05, 2024, 9:28 PM),
https://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp.

6
tariffs on imported solar panels from China. This move signalled a more aggressive approach
toward China's political and economic stance. It was also a blow to the U.S. solar industry,
which was responsible for generating $18.7 billion of investment in the American economy
and which at the time imported 80% to 90% of its solar panel products.

Presidential proclamations like this occur all the time. In December 2023, President Joe Biden
released commentary on the import of steel and aluminium from the European Union. The
briefing detailed how “the Secretary of Homeland Security shall recommend to the President,
as warranted, updates to the in-quota volumes contained in this proclamation.”2

Subsidy

A subsidy is any financial aid provided by a government to a producer or seller of a good or

service that is designed to increase the competitiveness of a particular industry firm or entire
industry. For example, agricultural products are frequently subsidized by national governments
in an effort to increase domestically grown and raised food stock (among other reasons).

Various governments subsidize different industries, depending on the national priorities and
politics at play. Over time, industries as diverse as tobacco, steel, alcohol, agriculture, weapons,
and textiles have all been subsidized. There is no inherent limit to the industries that any
particular government will subsidize, although nations with different political leanings will
tolerate different levels of subsidization.

There are different forms of subsidies, including, but not limited to:

 Production subsidies
 Consumer subsidies
 Export subsidies
 Import subsidies
 Tax subsidies
 Transport subsidies

Their common feature is that they all seek to selectively provide a financial benefit to a
producer, consumer, or user of a particular good or service.3

2
Investopedia Team, What is a Quota?, INVESTOPEDIA (Oct. 05, 2024, 9:29 PM),
https://www.investopedia.com/terms/q/quota.asp.
3
Investopedia Team, What is a Subsidy?, INVESTOPEDIA (Oct. 05, 2024, 9:30 PM),
https://www.investopedia.com/terms/s/subsidy.asp.

7
Non-Tariff Barriers

Countries commonly use nontariff barriers in international trade. Decisions about when to
impose nontariff barriers are influenced by the political alliances of a country and the overall
availability of goods and services. Any barrier to international trade, including tariffs and
nontariff barriers, generally influences the global economy because it limits the functions of
the free market. The lost revenue that some companies may experience from these barriers can
be considered an economic loss, especially for proponents of laissez-faire capitalism. They
believe that governments should abstain from interfering in the workings of the free market.

Countries can use nontariff barriers in place of or in conjunction with conventional tariff
barriers. These are taxes that an exporting country pays to an importing country for goods or
services. Tariffs are the most common type of trade barrier and they increase the cost of
products and services in an importing country. Countries often pursue alternatives to standard
tariffs because they release countries from paying added taxes on imported goods. Alternatives
to standard tariffs can have a meaningful impact on the level of trade while creating a different
monetary impact than standard tariffs.

The United Nations adopted a round of nontariff barriers against North Korea and the Kim
Jong Un regime in December 2017. The nontariff barriers included sanctions that cut exports
of gasoline, diesel, and other refined oil products to the nation.

Nontariff barriers can be significant roadblocks for businesses looking to expand their markets
in international trade. The United States is actively committed to addressing this issue on
multiple fronts. The U.S. is pushing for the reduction or elimination of nontariff barriers in
various regional contexts including the Asia Pacific Economic Cooperation and for
contributing to analysis at the Organization for Economic Co-operation and Development.

The United Nations has also prohibited the export of industrial equipment, machinery,
transport vehicles, and industrial metals to North Korea. The intention of these nontariff
barriers was to put economic pressure on the nation to stop its nuclear arms and military
exercises. Nontariff barriers are enforced through a combination of regulatory and
administrative measures by the importing country's government authorities.4

4
Evan Tarver, Nontariff Barrier: Definition, How It Works, Types, and Examples, INVESTOPEDIA, (Oct. 05,
2024, 9:32 PM) https://www.investopedia.com/terms/n/nontariff-barrier.asp.

8
CHAPTER 3- NEED FOR TRADE BARRIERS

Trade barriers usually exist to protect domestic producers or to further political agendas. Other
reasons for the implementation of trade tariffs and barriers include:

Anti-dumping provisions

The term “dumping” is used here to describe the way that foreign producers can “dump” their
products onto the home market at much lower prices than what domestic producers offer. There
are two possible reasons why a foreign producer may choose to dump their products into
another economy. First, it may just be the case that the goods can be produced at a significantly
lower cost abroad due to lower input costs such as labor or raw materials compared to the home
market. In such a case, the foreign company is still able to realize profits despite advertising
lower prices than domestic producers.

Secondly, dumping can be a deliberate predatory move carried out by large multinationals to
gain market share. Such large organizations are able to bear taking losses in the short-term due
to their larger cash reserves and greater liquidity, compared to smaller players. The goal is to
force competitors to shut down by driving the market price below what domestic producers can
bear. Following the demise of home producers, the foreign entity will be able to
adopt monopoly pricing and see its profits rise.

A prime example of this is in the oil industry, where OPEC is able to produce oil at a lower
cost than other organizations, flooding the world market with cheap oil. The practice
jeopardizes the profitability of competing oil suppliers, an effect that is compounded by
OPEC’s ability to supply the market with large quantities of oil and drive the price down even
further.

To prevent such events, governments can put in place trade tariffs that will raise the prices of
dumped goods and protect domestic suppliers. Should the tactic not be aggressive enough,
governments can impose sanctions against certain companies and ban them from doing
business in the home country altogether.

Industries that are still in their early stages are particularly vulnerable to dumping. While a
certain industry may be very developed in a given nation, that same industry may just be
starting up in newer economies. Such industries are comprised of much smaller players that
cannot afford to compete on price with a foreign entity.

9
If the industry holds the promise of becoming a major economic contributor in the future,
governments are incentivized to protect the industries by imposing trade tariffs on predatory
foreign players. Conversely, governments can reactively subsidize the domestic market in order
to enable them to compete on price.

National Defence Suppliers

Just like most developed industries, the defence sectors of many nations rely on a worldwide
network of suppliers to build and maintain national defence mechanisms. However, it is
important for nations not to become overly reliant on other nations when it comes to the supply
of artillery, ammunition, planes, boats, etc. This is because, in the case of an international
conflict, the supplying economy could easily cease to supply the enemy with national defence
goods, thus jeopardizing the home nation’s ability to protect itself.

To prevent such situations, governments may place trade tariffs on foreign-made national
defence systems in a bid to make them less attractive to domestic national defence providers.
While the practice may force domestic suppliers to pay more for goods, it will prevent them
from becoming overly reliant on foreign suppliers.5

5
Tim Vipond, Trade Barriers: How Govt’s can protect domestic economies, CFI, (Oct. 05, 2024, 9:34 PM)
https://corporatefinanceinstitute.com/resources/economics/trade-barriers/.

10
CHAPTER 4- HOW DO THESE BARRIERS WORK

Tariffs

Domestic consumers face higher prices, which also means that there is a loss of consumer
surplus. However, there is a gain in domestic producer surplus as producers are protected from
cheap imports, and receive a higher price than they would have without the tariff. However, it
is likely that there is an overall net welfare loss.

At $10, the domestic quantity supplied is Qs and domestic quantity demanded is Qd. If the
government now imposes a 20 percent tariff on imported wines (or a $2 per bottle tax), foreign
wine sells for $12 a bottle, inclusive of the tariff and the domestic quantity supplied and
demanded now becomes Q’s and Q’d respectively.

Through this graph we can clearly infer that:

Q’s > Qs
Qd > Q’d

Since the tariff is a type of tax, its impact in the market depends upon the elasticities of
supply and demand. The more elastic is the demand curve, the more a given tariff reduces
imports. In contrast, if it is inelastic the quantity of imports declines less.

Subsidies

The figure illustrates the effect of a subsidy to a domestic supplier. As in the figure, the
amount Qd is demanded in the free trade equilibrium and, of this, Qs is supplied domestically.
With a subsidy per unit of output sold, the government can reduce the supply cost of the

11
domestic supplier, thereby shifting the supply curve downward from S to S’. In this illustration,
the total quantity demanded remains at Qd, but the domestic share increases to Q’s.

Before the subsidy was introduced by the Government, the products which had to be imported
from the international market was (Qd - Qs) and after the subsidy, the products that need to be
imported to match the demand is (Qd - Q’s). It could be inferred from the graph:

Q’s > Qs
(Qd - Qs) > (Qd - Q’s)

Thus, less products need to be imported when subsidies are imposed by the Governments from
the international markets.6

6
Duglas Cortis, Trade Barriers, LIBRE TEXTS, (Oct. 05, 2024, 9:36 PM)
https://socialsci.libretexts.org/Bookshelves/Economics/Principles_of_Microeconomics_(Curtis_and_Irvine)/06
%3A_Government_and_Trade/15%3A_International_trade/15.05%3A_Trade_barriers-
_Tariffs_subsidies_and_quotas.

12
CHAPTER 5- IMPLICATIONS OF TRADE BARRIERS

The implications of trade barriers are far-reaching, affecting not only the economies of
individual countries but also the dynamics of global trade and international relations. While
some countries impose trade barriers to protect domestic industries and maintain economic
stability, these measures often have unintended consequences that can disrupt both local and
global economies.

Impact on Domestic Economy

Trade barriers such as tariffs, quotas, and subsidies are primarily used to shield domestic
industries from foreign competition. By imposing tariffs on imported goods, governments can
make foreign products more expensive, encouraging consumers to buy domestically produced
alternatives. This, in turn, can lead to job preservation and the growth of local industries. For
example, tariffs on steel imports can benefit domestic steel manufacturers, allowing them to
compete more effectively in the local market.

However, these short-term benefits often come at a cost. The higher prices of imported goods
caused by tariffs are ultimately passed on to consumers, who may face limited choices and
higher costs for essential goods. For instance, if a country imposes tariffs on agricultural
imports, food prices may rise domestically, disproportionately affecting lower-income
households. Additionally, protecting inefficient domestic industries through trade barriers may
reduce incentives for innovation and competitiveness, leading to stagnation in the long term.

Effects on Global Trade

On a global scale, trade barriers can distort international trade flows. Countries that rely heavily
on exports may experience decreased demand for their products if tariffs or quotas are imposed
on their goods. This can lead to trade imbalances, reduced economic growth, and the risk of
retaliatory measures. For example, a country that faces high tariffs on its goods might impose
its own tariffs in response, sparking a trade war. Such retaliatory actions can escalate quickly,
causing significant disruptions to global supply chains and affecting industries across multiple
countries.

Trade barriers can also undermine international cooperation and diplomatic relations. When
countries engage in protectionist policies, they often disregard the interconnected nature of the
global economy, where cooperation and open trade contribute to mutual growth. Over time,

13
these policies can strain relationships between trading partners, leading to political tensions
and diplomatic disputes.

Impact on Developing Economies

Developing countries are particularly vulnerable to the effects of trade barriers. Many
developing nations rely on exports to drive economic growth, particularly in sectors such as
agriculture, textiles, and manufacturing. When developed countries impose tariffs or quotas on
goods from these regions, it limits market access for developing economies, reducing their
ability to grow and diversify. For example, agricultural subsidies in developed countries can
artificially lower the price of food exports, making it difficult for farmers in developing
countries to compete on the global market.

Furthermore, non-tariff barriers such as strict regulations or complex standards can be

particularly challenging for developing countries to navigate. These countries may lack the
resources or infrastructure to comply with stringent regulations, further hindering their ability
to participate in international trade.

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CHAPTER 6- ROLE OF WORLD TRADE ORGANISATION IN
REGULATING TRADE BARRIERS

The World Trade Organization (WTO) plays a crucial role in regulating trade barriers and
promoting fair trade practices on a global scale. As the primary international organization
responsible for overseeing global trade rules, the WTO provides a framework through which
member countries can negotiate the reduction of trade barriers, resolve trade disputes, and
ensure that international trade flows as smoothly and predictably as possible. One of the key
functions of the WTO is to reduce tariffs and other trade barriers through multilateral
agreements. These agreements, such as the General Agreement on Tariffs and Trade (GATT),
encourage member countries to commit to lowering tariffs and eliminating quotas, thus
promoting free trade. By facilitating negotiations between countries, the WTO ensures that
trade policies are transparent and predictable, fostering a stable global trading environment.

Another critical aspect of the WTO’s work is addressing non-tariff barriers, such as regulatory
standards, licensing requirements, and subsidies, which can often be more restrictive than
tariffs. Through various agreements, including the Agreement on Technical Barriers to Trade
(TBT) and the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS),
the WTO ensures that such barriers are not unnecessarily restrictive and are applied in a non-
discriminatory manner. This helps prevent countries from using overly stringent regulations as
a means to protect their domestic industries at the expense of foreign competitors.

In addition to its regulatory role, the WTO provides a forum for resolving trade disputes that
arise when countries believe that their trading partners have violated WTO agreements or
imposed unfair trade barriers. Through its Dispute Settlement Mechanism, the WTO ensures
that member countries have a structured and impartial process for addressing these disputes,
thereby preventing trade conflicts from escalating into broader economic or political
confrontations.

The WTO also supports developing countries by offering technical assistance and capacity-
building programs to help them comply with international trade rules and benefit from global
trade. By providing a level playing field, the WTO aims to ensure that all member countries,
regardless of their size or level of development, have access to the global marketplace.

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CHAPTER 7- CONCLUSION

The international trade barriers, while often implemented to protect domestic industries and
promote economic stability, can have wide-ranging negative consequences for both national
and global economies. Tariffs, quotas, subsidies, and non-tariff barriers can disrupt trade flows,
increase costs for consumers, and reduce market efficiency. These barriers not only impact
domestic markets but also strain international relationships and limit economic opportunities,
particularly for developing countries. While trade barriers can offer short-term protection for
certain industries, they often lead to long-term inefficiencies and hinder innovation and
competitiveness.

The efforts of international organizations like the World Trade Organization (WTO) are critical
in addressing these challenges. Through the reduction of tariffs, the regulation of non-tariff
barriers, and the resolution of trade disputes, the WTO plays a key role in promoting a fair and
predictable global trading system. Ultimately, striking a balance between protecting local
interests and fostering open trade is essential for sustaining economic growth and development
in an increasingly interconnected world.

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