Barriers to international trade

Protectionism

when a government seeks to protect domestic industries from foreign competition

Tariff

a tax placed on imported goods from other countries

A tariff increases the price of imported goods…

which helps to shift demand for that product/service from foreign businesses to domestic businesses

Benefits of tariffs

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

• An increase in government tax revenue

• Reduces dumping (when a business sells their products abroad in export markets at significantly low prices) by foreign businesses as they can’t sell below the market price

Disadvantages of tariffs

• 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

Trading bloc

a group of countries that form an agreement to reduce or eliminate protectionist measures between each other

The European Union (EU)

• An economic union originally formed in 1999

• Countries in Europe can apply to join 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

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’ll 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.

The Advantages for Businesses Inside the Bloc

1. Access to more markets - businesses are able to sell to more customers due to free movement of goods

2. External tariff walls - 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

The Disadvantages or Businesses Inside the Bloc

1. Increased competition - businesses with monopoly power (a large business which dominates a market) can increase their monopoly by eliminating competitors in other countries within the bloc

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

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’s less competition from businesses in countries outside of the bloc. This may reduce the incentive of businesses to be more efficient.