A truck crosses the Puente Internacional Comercio Mundial (World Trade International Bridge) while approaching the border crossing into the U.S., in Laredo, Texas, on October 21, 2011.

What is free trade?

Free trade, in theory, is the ideal situation in which individuals and companies in different countries can buy and sell goods to and from each other without any interference from governments. Free trade between countries can increase the variety and reduce the cost of goods, generate job growth, and improve relations between countries.

The benefits of free trade, such as future job growth, are often hard to see at first, and countries sometimes prioritize immediate goals—such as protecting struggling domestic industries—by putting up trade barriers. But most countries agree that free trade is a goal to strive for, which is why 164 of them joined the World Trade Organization (WTO).

The WTO regulates trade between countries.

The WTO is an intergovernmental organization that creates global trade rules and settles disputes between countries that might disagree on how the rules apply. Each WTO agreement is meant to uphold five basic principles.

Trade should be

  1. nondiscriminatory between foreign and domestic products and between different countries,
  2. predictable and transparent,
  3. more competitive,
  4. more beneficial for less developed countries, and
  5. better for the environment.

While these principles seem fairly straightforward, countries frequently choose to skirt them. Not all trade barriers violate the rules of the WTO. But if you think of the free trade ideal as an open road, they all present some type of roadblock.

Free Trade

Here are some of the barriers to free trade that countries have used in the past, and some examples of what happened as a result:

TARIFFS

Tariff

Definition: A tax on an import.

Why do countries use them?

To make a foreign product more expensive to buy than a domestically made one. Tariffs are supposed to encourage people to buy from their country’s producers, instead of imports.

How are they used?

In 2018, to bolster its manufacturing industry, the United States announced that Canada, Mexico, and the European Union would face tariffs of 25 percent on steel and 10 percent on aluminum. In response, Mexico placed tariffs of up to 25 percent on U.S. dairy products. This caused U.S. dairy farmers to lose over $1 billion in revenue, even after receiving $127 million in aid.

QUOTAS

Quota

Definition: A hard limit on how much of a product a particular country can import. Sometimes instead of stopping all imports above the specified quantity, a quota will put a tariff on every product above a certain limit.

Why do countries use them?

To protect domestic manufacturing, usually. On their own, quotas do not generate government revenue, so they are often combined with tariffs.

How are they used?

After the United States signed the North American Free Trade Agreement, an existing 33 percent tariff on Mexican brooms made of corn was slashed to 22 percent. This hurt the six hundred–person industry of U.S. broom makers enough that the U.S. government instituted a quota instead. All brooms that exceeded the 2.6 million quota would be subject to the original 33 percent tariff. This resulted in two years of escalating tariffs between the United States and Mexico until, finally, a special panel was convened and decided that the corn broom quota had violated free trade rules previously agreed to by the United States and Mexico. U.S. President Bill Clinton removed the quota later that year.

SUBSIDIES

Subsidies

Definition: A broad term that covers various actions a government could take to financially boost an industry. Usually, subsidies are government programs that give money directly to companies in certain industries. They can also come in the form of tax breaks or other financial benefits, advantaging a domestic industry at the expense of foreign competitors.

Why do countries use them?

To support a struggling domestic industry or stabilize prices.

How are they used?

In the 1970s, the U.S. dairy industry experienced dangerously low prices. Farmers were unable to make enough money selling milk, leading to a shortage of dairy products. In 1977, the U.S. government responded with $2 billion in subsidies to boost this major industry. After the influx of cash, dairy farmers started producing as much milk as possible, resulting in an enormous milk surplus that would not sell. The government bought this excess milk and, mindful of milk’s short shelf life, processed it into other products, including cheese. Ultimately, the U.S. government owned a five hundred million–pound stockpile of “government cheese” stored across thirty-five states.

CURRENCY MANIPULATION

Currency Manipulation

Definition: When a country deliberately prints more money or uses other tactics to change the exchange rate of its currency.

Why do we use it?

To encourage exports by making domestic products cheaper in foreign currencies, and particularly in the U.S. dollar (USD), since that is the most widely accepted currency. Here’s how it works: if 1 USD is worth 10 Japanese yen, then a product that costs 400 yen is worth 40 dollars. If the yen is devalued compared to the dollar, and 1 USD becomes worth 100 yen, then that same product is now worth only 4 dollars. Japan, the country that made the product, will probably sell more of it in the United States. But this is also a barrier to U.S. trade, since U.S. products then become more expensive to export to the country that manipulated its currency—in this case, Japan.

How is it used?

After its loss in World War II, Japan experienced a rapid period of economic growth, in part because of its increased focus on industrial production and exports. Then, in the beginning of the 1990s, Japan’s economy crashed, leading to a decade of stagnation. A few years later, the yen’s value began rising rapidly against the dollar, and Japan’s Ministry of Finance worried that a strong yen would discourage the exports Japan needed to stimulate its economy. So in 2003, the Japanese Ministry of Finance worked to keep the price of the yen as low as possible. The results were mixed: although exports increased, the intervention also made it harder for people in Japan to buy foreign goods.

DUMPING

Dumping

Definition: When a foreign company sets the price of a product lower than its normal price.

Why do countries use it?

To get more people abroad to buy a product, and to increase a company’s market share. If the company can control enough of the market for that product, they can start to change the price—and quality—with less competition.

How is it used?

From 2014 to 2017, Chinese electric bikes flooded the European market. By the end of 2017, 35 percent of the electric bikes in Europe were from China. This shift began crowding out European companies, who could not compete with Chinese prices. Chinese bikes sold for as low as four hundred fifty dollars in Europe, while the European alternatives were usually priced in the thousands of dollars. Eventually, a European Union commission decided that Chinese bicycles were being unfairly priced and instituted a punishment tariff on each bike-importing company, with some taxes as high as 83.6 percent. 

EXPORT CONTROLS

Export Control

Definition: The regulation of exports the government decides are important for national security, economic security, or foreign policy. These exports include physical technology, but also intellectual property such as software and research. The export control might require a license to export a certain product, or could prevent the export altogether.

Why do countries use them?

To protect the national interests of the home country. Governments sometimes think certain products, such as nuclear materials or secret technology, should not be traded freely across borders.

How are they used?

Some Chinese firms that work with U.S. companies have been accused of stealing U.S. technology and algorithms and using them for Chinese military purposes. In response, the United States passed a law that would allow the government to investigate those Chinese companies. But because of how the law is worded, even Netflix, which uses algorithms to recommend movies, could fall under the new definition of advanced technology governed by export controls.

SANCTIONS

Sanctions

Definition: When a country limits or entirely prevents trade with another country.

Why do countries use them?

To convince another country to take a certain political action, such as stopping human rights abuses or the development of nuclear weapons.

How are they used?

In 1979, the United States banned imports from Iran after a group of Iranian college students took fifty-two American diplomats and citizens hostage in the U.S. embassy in Tehran—the so-called Iran Hostage Crisis. Partly as a result of the ensuing increase in hostilities, in 1992 the U.S. Congress passed the Iran-Iraq Arms Nonproliferation Act, which outlawed transferring goods or technology to Iran if those products could be used to build a nuclear weapon. The European Union supported the United States on some of those sanctions. The effects of the sanctions varied: while Iran has built an economy in resistance to these sanctions, it has experienced serious setbacks. Because of the difficulty in transferring money into and out of the country, for example, Iran experienced shortages of non-sanctioned products such as cancer medications in 2012.

For the most part, countries put up trade barriers to make it easier to sell their goods abroad or at home, and a variety of economic and political developments can make countries prioritize security, politics, or domestic industry over free trade. But these trade barriers almost always come with unintended consequences and do not always accomplish their goals.

In the end, trade is always going to be messier than the open road the WTO is supposed to protect, but as globalization continues to bring markets closer together, every country is going to have to grapple with the implications of free trade and the barriers that come with it.

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