Barriers to International Trade (Edexcel GCSE Business)

Tariffs

• Protectionism is when a government seeks to protect domestic industries from foreign competition

• A tariff is a tax placed on imported goods from other countries 

  • E.g. Tennis rackets imported into the UK from China have a tariff of 4.7%

• A tariff increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses

When the USA places a tariff on imported cheese from Britain, the price of British cheese in the USA rises

• American customers are more likely now to purchase American cheese as the tariff has now made British cheese more expensive

• The benefits of tariffs include

  • They protect infant industries so they can eventually become more competitive globally

  • An increase in government tax revenue 

  • Reduces dumping by foreign businesses as they cannot sell below the  market price 

• The disadvantages of tariffs include

  • Increases the cost of imported raw materials which may affect businesses who use these goods for production, leading to higher prices for consumers 

  • Reduces competition for domestic firms who may become more inefficient and produce poor quality products for their customers 

  • Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them

Trade Blocs

• A trading bloc is a group of countries that form an agreement to reduce or eliminate protectionist measures between each other

• Three of the largest trading blocs include The European Union (EU), The Association of Southeast Asian Nations (ASEAN), and The North American Free Trade Agreement (NAFTA)

The European Union (EU)

• The European Union is an economic union, originally formed in 1993

• Countries in Europe can apply to join the union and as of February 2023, there are 28 countries in the union

• Being a member of the EU includes free movement of goods and people

  • Countries within the union have no trade restrictions between themselves

  • Countries within the union have common external barriers (e.g. tariffs) to countries outside of the union

• The UK voted to leave the EU in 2016, and officially left in 2020

The Impact of Trading Blocs on Business Activity

• Businesses outside the trading bloc will face higher costs from protectionist measures such as tariffs and trying to meet legal requirements inside the trading bloc

  • This will make them less competitive when trying to sell goods to member countries within the bloc

  • Being outside the bloc is likely to decrease their sales volume to countries within the bloc

• There are advantages and disadvantages to businesses located within the trading bloc

The Advantages for Businesses Inside the Bloc

The benefits for businesses of belonging to a trading bloc  

1.Access to more markets 

• Businesses are able to sell to more customers due to free movement of goods

2.External tariff walls 

• An external tariff wall is a tax applied to imported goods from outside the bloc

• This protects businesses within the trading bloc from competition from businesses outside of the trading bloc

3.Infrastructure support 

• Businesses may gain additional support from the government to enable them to maintain their competitiveness against businesses in countries inside the trading bloc 

4.Free movement of labour 

• Trading blocs may also have free movement of labour allowing businesses to source workers from a wider pool

• A higher supply of labour may push wages lower, leading to reduced costs for business 

• E.g. Citizens of EU countries have the right to work in any Member State and to be treated equally as citizens of that State

The Disadvantages for Businesses Inside the Bloc

The drawbacks to businesses of belonging to a trading bloc 

1.Increased competition 

• There is increased competition for businesses within the trade bloc which may be more of an issue for small businesses as they have less resources available with which to compete

• Businesses with monopoly power can increase their monopoly by eliminating competitors in other countries within the bloc

• E.g. the UK supermarket industry faced increased competition from the German supermarkets Aldi and Lidl when the UK was part of the EU

2.Common rules and regulations 

• In order to operate as one market, new rules and regulations may be put in place that all businesses must adhere to

• E.g. The EU working time directive states that employees can only work a maximum of 48 hours per week

3.Retaliation 

• External tariffs set against countries outside of the trading bloc may lead to retaliation from these countries

4.Inefficiency 

• Although there is increased competition between countries within the bloc, there is less competition from businesses in countries outside of the bloc

• This may reduce the incentive of businesses to be more efficient

• Trading blocs also lead to trade diversion which means trade is taken away from efficient producers who operate outside of the trade bloc and replaced by trade within the bloc