Economic Barriers to Trade

ECONOMIC BARRIERS TO TRADE

In this chapter we will discuss economic barriers to foreign trade in great detail. Physical and technical barriers are discussed in lesser detail.

I. Economic Barriers

Economic barriers to trade consist of the economic structure of a foreign country, its foreign trade policies and strategies, exchange rate regime as well as its macroeconomic policies.

A) The economic structure: This refers to the sectoral allocation of resources, its production, distribution and transportation system, its infrastructure as well as consumption patterns. The economic structure of a country can present an obstacle to imports in a number of different ways. Countries with large internal markets are more likely to have a production system with a high degree of 'home bias’ (former Soviet Union, India and China before the 1980s, United States in the second half of 19th century and early 20th century). As the size of population and income are two significant determinants of the strength of the internal market, countries with large populations and high GNP have a greater absorption rate for domestically produced goods. Of course another point about a large country is the geographical expanse of the country: a large country is more likely to be self-sufficient in raw material. Another factor is the stage of development of a country. A large country in early stages of its development will tend to produce a sizable portion of its output internally (for instance through the government’s pursuit of import-substitution industrialization). Imports are limited to raw materials not producible at home and manufactured goods for which the technology is not available in the country. At a higher stage of development, benefits of specialization become more apparent as the economy matures to a point where several sectors will become internationally competitive while the remaining sectors will exhibit inefficiencies. USA, particularly after World War II, having arrived at a stage where almost everything were produced domestically, gradually moved in the direction of greater specialization. In fact production in certain sectors ceased completely as foreign producers became much more efficient and internationally competitive. For instance VCRs are not produced in the US anymore. China and India went through a similar transformation in the 1980s and 1990s. Thus a large country at its early stage of development may represent a formidable obstacle to imports from abroad. On the other hand a small or medium-sized country is much more likely to attempt to specialize and engage in foreign trade. There is a high negative correlation between the size of a country and the degree of its openness to international trade.

The infrastructure of country, i.e. its network of roads, waterways, bridges, railways, airways, port facilities etc. may discourage imports if it is not well developed. For instance shortage of port facilities, may discourage imports into (as well as exports from) a country, as importers may face higher freight, insurance costs and interest charges due to delays in the processing of goods in ports of entry. After goods are processed at a port of entry, lack of good roads and inefficient transportation facilities may increase the cost of imported goods for consumers and thus discourage importers.

The distribution system in economy, as distinct from the transportation system, involves the entire network of economic agents acting as producers, wholesalers, retailers and intermediaries between them. Developed countries have a more concentrated wholesale and retail system, eg. the existence of large department stores with sizable branches operating in all large, medium and often small cities, compared to many less-developed countries, where the retail system is often fragmented, consisting of thousands, hundreds of thousands and even millions of small and independent retailers. In the latter countries, there is also a greater number of intermediaries operating between wholesalers and retailers. In Iran, for instance one such group of intermediaries, called Bonakdars, specialize in purchasing from wholesalers items in bulk and then breaking them down into smaller packages for delivery to small and independent retailers, as the latter obviously cannot afford to buy in bulk, or do not have sufficient storage or display facilities in their shops. Furthermore, most of their customers cannot afford to buy goods in bulk. Thus it is very common in these shops to sell sugar, tea, washing powder, rice, wheat and many items of day-to-day consumption in small quantities, taken out of bins and weighed and then put in brown bags. This may seem as an inefficient distribution system. However,