Political Considerations and Trade Barriers

Political factors can influence global trade in significant ways. It is often difficult to separate political from economic factors because government policies often include economic objectives. Nationalism is the sense of national consciousness that boosts the culture and interests of one country over those of all other countries. Strongly nationalistic countries, such as Iran and New Guinea, often discourage investment by foreign companies.

In other, less radical forms of nationalism, the government may take actions to hinder foreign operations. France, for example, requires pop music stations to play at least 40 percent of their songs in French. This law was enacted because the French love American rock and roll. Without airtime, American music sales suffer. Businesses have to be aware of the political climate and assess whether government policies would be biased against foreign investment.

Natural Trade Barriers

Businesses would like to be able to freely trade between nations but sometimes there are obstacles that prevent free market trade. Natural barriers to trade can be either physical or cultural. For instance, even though raising beef in the relative warmth of Argentina may cost less than raising beef in the bitter cold of Siberia, the cost of shipping the beef from South America to Siberia might drive the price too high. Distance is one of the natural barriers to international trade. Language is another natural trade barrier. People who can’t communicate effectively may not be able to negotiate trade agreements or may ship the wrong goods.

Tariffs

Governments sometimes impose a tariff, or tax, on imported goods. The tariff may be a charge per unit, such as per barrel of oil or per new car; it may be a percentage of the value of the goods, such as 5 percent of a $500,000 shipment of shoes; or it may be a combination. No matter how it is assessed, any tariff makes imported goods more costly, so they are less able to compete with domestic products. The United States, for instance, has tariffs on imported poultry, textiles, sugar, and some types of steel and clothing. This means that if Target imports clothes from Bangladesh that are subject to a tariff, Target as the importer would pay the tariff and factor that expense into the price that you pay in the store. On the other side of the world, Japan imposes a tariff on U.S. cigarettes that makes them cost 60 percent more than Japanese brands. U.S. tobacco firms believe they could get as much as a third of the Japanese market if there were no tariffs on cigarettes. With tariffs, they have under 2 percent of the market.

However, in order to avoid losing sales because of tariffs, some companies may engage in a practice called transshipping. This happens when a business routes their goods through a third country. For example, a Chinese auto parts company may ship their products through countries like Thailand and Vietnam, whose goods are subject to lower or no tariffs.^[1] The business do transshipping take a risk in breaking the law and hope they don’t get caught by customs officials in the destination country.

Non-Tariff Trade Barriers

Governments also use other tools besides tariffs to restrict trade. One type of nontariff barrier is the import quota. An import quota limits the quantity of a certain good that can be imported. This decreases competition for domestic producers by ensuring that large quantities of imported goods will not decrease prices. The United States protects its shrinking textile industry with quotas.

A ban against importing or exporting a product is an embargo. Often embargoes are set up for defense purposes. For instance, as of 2022, the United States does not allow some high-tech products, such as advanced computing chips, chip making equipment, and other products to be exported to China unless the U.S. manufacturers of those items are approved for a special license. Most of applications for those licenses will be denied.^[2] Although this type of restriction costs U.S. firms billions of dollars each year in lost sales, it keeps potential adversaries from using the latest technology in their military hardware.

Government Favoritism

Government rules that give special privileges to domestic manufacturers and retailers are called buy-national regulations. One such regulation in the United States bans the use of foreign steel in constructing U.S. highways. Many state governments have buy-national rules for supplies and services. You may have noticed that in the U.S., government vehicles such as police cars tend to be produced by American manufacturers such as Ford and Chevrolet. In a more subtle move, a country may make it hard for foreign products to enter its markets by establishing customs regulations that are different from generally accepted international standards, such as if the U.S. required bottles to be quart size rather than the liter size that is more common in other countries.

Foreign Currency Policies

Exchange controls are laws that require a company earning foreign exchange (foreign currency) from its exports to sell the foreign exchange to a control agency, usually a central bank. For example, assume that Rolex, a Swiss company, sells 300 watches to Zales Jewelers, a U.S. chain, for US$600,000. If Switzerland had exchange controls, Rolex would have to sell its U.S. dollars to the Swiss central bank and would receive Swiss francs. If Rolex wants to buy goods (supplies to make watches) from abroad, it must go to the central bank and buy foreign exchange (currency). By controlling the amount of foreign exchange sold to companies, the government controls the amount of products that can be imported. Limiting imports and encouraging exports helps a government to create a favorable balance of trade.

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