A non-tariff trade barrier is a regulatory measure other than traditional tariffs that governments use to control the flow of goods and services across borders. These barriers include licenses, quotas and sanctions, which are often employed to protect domestic industries, safeguard public health and safety, or promote national security. For the average investor, non-tariff trade barriers can impact global trade, market competition and investment opportunities.
A financial advisor can help you stay informed about non-tariff trade barriers and provide critical insights into potential risks and opportunities in international markets.
What Is a Non-Tariff Trade Barrier?
Non-tariff trade barriers are policy measures that governments use to restrict or regulate international trade without imposing direct taxes or duties. These barriers aim to protect domestic industries, control market entry or achieve policy objectives, such as environmental protection or public health. While tariffs explicitly add costs to imported or exported goods, non-tariff barriers often rely on regulations, certifications or restrictions to limit trade.
For example, a country might require imported goods to meet specific safety or environmental standards. These requirements can make it more expensive or time-consuming for foreign businesses to access that market. Non-tariff trade barriers can also include outright bans on certain goods, as seen with embargoes or sanctions. By influencing supply chains and market access, these measures play a significant role in shaping the global economic landscape.
Unlike tariffs, which are straightforward taxes on imports or exports (more on that below), non-tariff barriers often have a more indirect but equally significant influence on the economy. They can create inefficiencies, increase costs for businesses and disrupt supply chains, ultimately affecting not only stock performance and commodity prices but also overall market trends.
Non-Tariff vs. Tariff Barriers
The primary distinction between non-tariff and tariff barriers lies in their mechanism of action. Tariff barriers impose a direct cost on goods through taxes or duties, while non-tariff barriers regulate trade through policies or restrictions. Both have significant economic impacts but operate in fundamentally different ways.
Tariff barriers are easier to quantify as they directly increase the cost of imported or exported goods. Tariffs generate government revenue and provide a price advantage to domestic industries by making foreign products more expensive. However, they can lead to retaliatory measures and trade wars.
Non-tariff barriers are less visible but can be more complex and far-reaching. By imposing quotas, licensing requirements or product standards, non-tariff barriers can limit competition and protect domestic markets. Unlike tariffs, they do not generate revenue but can increase administrative costs and reduce trade efficiency.
For investors, non-tariff barriers may present more uncertainty as they can change abruptly based on political or economic priorities, affecting the global supply chain and market dynamics.
Types of Non-Tariff Trade Barriers
Non-tariff trade barriers come in various forms, each with unique implications for international trade. Here are the five most common types of non-tariff trade barriers to consider.
1. Licenses
Licenses are government-issued permits required to import or export specific goods. These measures often aim to regulate sensitive products, such as pharmaceuticals or agricultural items. As an example, a country may require an import license for certain chemicals to ensure environmental safety. While licenses can protect public interests, they may also limit market access for foreign producers, leading to reduced competition.
2. Quotas
Quotas restrict the quantity or value of goods that can be imported or exported during a specific timeframe. Say the U.S. has imposed quotas on steel imports to protect domestic steel manufacturers. By capping trade volumes, quotas can stabilize domestic industries but may also lead to supply shortages and higher consumer prices.
3. Embargos
An embargo is a complete ban on trade with a specific country or the exchange of certain goods. For instance, the U.S. embargo on Cuba significantly restricts trade between the two nations. Embargos are often politically motivated and can have severe economic consequences for both the imposing and target countries.
4. Sanctions
Sanctions are targeted restrictions imposed on a country, entity or individual, often for political or security reasons. For example, international sanctions on Iran limit its ability to trade oil. While sanctions aim to achieve geopolitical objectives, they can disrupt global trade and commodity markets.
5. Voluntary Export Restraints (VERs)
A voluntary export restraint is a self-imposed limitation by an exporting country to avoid stricter trade restrictions from an importing country. For example, Japan agreed to limit car exports to the U.S. in the 1980s to avoid harsher tariffs. Although termed “voluntary,” these measures are often the result of political pressure.
Pros and Cons of Non-Tariff Trade Barriers
Non-tariff trade barriers have both benefits and drawbacks that affect economies, businesses and consumers. From helping to protect domestic businesses and whole industries to increasing costs for consumers, there’s a lot to consider. Here are the pros and cons to keep in mind when it comes to non-tariff trade barriers.
Pros
- Protect domestic industries: Shield local businesses from foreign competition, preserving jobs and economic stability.
- Promote public welfare: Ensure safety, environmental standards and product quality for consumers.
- Support strategic goals: Strengthen national security by controlling sensitive goods like technology or weapons.
Cons
- Increase costs: Administrative requirements and compliance with regulations raise costs for businesses and consumers.
- Reduce efficiency: Restrict market competition and limit the availability of goods.
- Encourage retaliation: Other nations may impose reciprocal barriers, leading to trade disputes or economic downturns.
If you think your finances might be impacted, consider talking to a professional financial advisor.
Bottom Line
Non-tariff trade barriers play a significant role in shaping global trade by regulating market access and competition. While they offer benefits like protecting domestic industries and promoting public safety, they also pose challenges such as increased costs and reduced efficiency. For investors, maintaining awareness of non-tariff barriers can provide valuable insights into market trends and potential risks in international investments. Staying informed can help you make smarter decisions in today's interconnected global economy.
Tips for Financial Planning
- Tariffs can impact your overall finances, especially your investment portfolio. Enlisting the help of a financial advisor can help you make sure your long-term financial goals stay on track. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
- Using an asset allocation calculator can help you see how certain assets might grow over time, which can be helpful when you need to shift the focus of your portfolio.
Photo credit: ©iStock.com/vladans, ©iStock.com/piranka, ©iStock.com/simonkr
The post What Is a Non-Tariff Trade Barrier? appeared first on SmartReads by SmartAsset.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
