Is free trade just an ideal?

In the field of economics, tariff trade is a given.

Without it, resources are not efficiently allocated, and nations do not grow, which in turn makes citizens richer from the wages they earn for their labour.

These ideas have been around since Smith (1789) and Ricardo (1817) when free markets and comparative advantage was first suggested. Since then there have been two periods of globalisation – the first was from 1850 until 1914 and the current globalisation expansion, which has been running since around 1950.

Before these periods were times of political and economic uncertainty where protectionism was practiced. Some would argue that the current globalisation has stalled, and some nations are flirting with protectionism. But is it just about tariffs? What are the true barriers to trade and are they worth removing?

Global logistics is reliant on continued removal of tariffs, but also other barriers that can slow cross border operations.

There is evidence of the issue of standards being used as barriers or rent seeking and licensing, (Yu 2000, Fliess 2006, Okumura 2015). These are known as Non-Tariff Barriers (NTB) or Technical Barriers to Trade (TBT) by the WTO (2019). They suggest that developed nations have led the way in reducing tariffs since they can raise tax revenue from other sources.

Developing nations often have tax collecting issues because of informal sectors within their economies and tariffs are easy ways to extract revenue from richer nations. As smaller developed countries have been pressured into eliminating or reducing tariffs, they have started to creatively invent other ways to extract revenue or protect their local industries.

Where did they find the ideas to create NTBs? They looked to western developed nations who have many NTBs and TBTs. The EU is committed to removing NTBs and constantly brings forward directives to ensure products are built using the same standards. Licensing to deliver services is one of the biggest barriers to foreign competition in both the EU and the USA. No wonder developing nations decide to emulate their richer competitors.

How does this affect global distribution networks? Just like tariffs, it increases the time and cost of operating logistics services to support supply chains. Much bureaucracy keeps government employees busy and slows down the speed of transport and time spent in ports and other terminals collecting and dispatching goods.

Will this ever be resolved? Information technology and digital systems can greatly increase the speed of processing the various inspections, documents and calculation of tariffs, but if they were eliminated completely these expensive technology solutions and the staff needed to operate them would not be needed.

Your task

Identify and share in the comments area a non-trade barrier and a technical barrier to trade being used by your home country, and give an example to illustrate each.


References

Fliess, B. (2006) ‘Overview of Non-tariff Barriers: Findings from Existing Business Survey’ in OECD, Looking Beyond Tariffs: The role of Non-Tariff Barriers in World Trade, OECD Publishing

Okumura, Y. (2015) ‘Free Trade Networks on Non-tariff Barriers’. Journal of Industry, Competition and Trade 15 (3) 223-238

Ricardo, D. (1817) On the Principles of Political Economy and Taxation

Smith, A. (1789) The Wealth of Nations 5th edn

WTO (2019) Understanding the WTO - Non-tariff Barriers: Red Tape, etc’ [online] available from https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm9_e.htm. [6 August 2018]

Yu, Z. (2000) ‘A Model of Substitution of Non-Tariff Barriers for Tariffs’. The Canadian Journal of Economics / Revue Canadienne D’Economique 33 (4), 1069-1090

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This article is from the free online course:

Principles of Global Logistics Management

Coventry University