The theory of comparative advantage is based on free trade in which there are no trade inhibitions among nations; but the government of a country may however decide to limit the amount of some products coming into the country so as to discourage the import of these goods. This concept is what is known as trade restrictions.
The following are the techniques and economic effects of international 1trade restrictions.
- Traditional Technique
Usually in the past, countries have used traditional techniques such as imposition of tariffs and quotas or both as a means of barrier to trade.
Tariff: A tariff is a tax imposed on imported goods. It is also called customs duty. Sometimes a customer duty is levied as a percentage of the value of the product. The former is known as specific tariff while the latter is known as advalorem tariff. The higher the tariff rate, the more restrictive the tariff and vice versa. Obviously, if the tariff rate is set higher enough it may stop all imports of that item.
Import Quota: Quota work the same way as tariff. In reality, there is indication thatthere is a major difference being that while tariffs work through prices,quotas restrict quantity.
However, while a tariff raises revenue for the government, a quota goes to protect domestic producers and also benefit importers who manages to get some of this scarce import at low foreign price and resell at the higher domestic price. And absolutely, assuming domestic demand increases, with a tariff the quality of imports would increase, while a quota only price will increase.
- Non-Tariff Barriers
Nations have been using other techniques set up to keep foreign goods from being imported. These means include:
Government Legislation: These are kind of government barriers in law. Some are domestic preference laws which are preference to domestic suppliers in government purchases, others are laws which were for domestic reasons which makes it more difficult for foreign supplies to compete e.g. difference in safety standards and labeling requirements.
Government commercial policy: This is sum total of actions that a country undertakes to deliberately influence trade in goods and services. Any other commercial policy in any nation other than the ones earlier explained fall under this category.