International Business Is a Term Research Paper

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(5).

This paper provides further illustration of trade barrier to provide greater understanding on the method barrier to trade hurts economy. Fig 1 reveals the effects of international trade without trade barrier. From the graph, DD refers to domestic demand and DS means domestic supply, and the price of good is found at P, and the world price is found at P. However, domestic consumer will consume at Qw because the home country could only produce Qd. Thus, the home country must import Qw-Qd worth of goods to enhance efficiency in the economy.

Figure 1. Price without Trade Barrier

However, Fig 2 reveals the economy with trade barrier. It is revealed that the economy will not achieve maximum allocation of scarce resources because trade barriers reduce efficiencies because it would allow companies that would not have existed in a more competitive market environment to exist.

Figure 2. Price with the Effects of Trade Barrier

While there is shortcoming to trade barrier, government can still benefit from the imposition of tariffs. There could be increase of government revenue, and domestic industries will benefit from the decline in competition. Since the prices of imported goods are artificially inflated through trade barriers, consumers are likely to suffer because they will pay high prices to purchase goods.

Benefits of Economy without Trade Barrier

Realization of the benefits that could be derived from free trade, many countries have started to eliminate trade barriers to take advantages of international trade. One of such measures is the introduction of North American Free Trade Agreement (NAFTA), and creation of European Union. After the post war era, the world economy has enjoyed significant growth by reducing the trade barriers.

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The world has enjoyed the increase in the world output three times, which has contributed to the growth of some economies such as the United States, many countries in Europe and many emerging economies. The study conducted by Frankel and Romer to access the effect of openness on 123 countries with relation to their per capita income. The study reveals that each percentage point of free trade leads to the increase of 0.34% in the per capita income. In the United States, 12.7% increase in openness leads to the increase of 4.3% in per capital income. Typically, global trade in the IT hardware between 1995 and 2002 led to the cumulative gain of $230 billions to the U.S. economy. By reducing the trade barriers, it is found that the economy will enjoy welfare gains.

Conclusion

Trade barriers are a form of government policy to discourage the importation of foreign products. While some sectors within the economy may benefit from the implementation of trade barriers, the whole economy may suffer by adhering to trade barriers policy. Industry without competition may remain stunted because of the policy of protectionism. Thus, free trade is beneficial to both domestic and international economy. The trade barriers hurt the economy. While many advanced countries have started to take advantages of free trade, the developing countries are still using tariff policy to protect the local industries. The developing countries should emulate the free trade policy of advanced countries by allowing the local industry to face competitions to allow efficient allocation of scarce resources within the economy.

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