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Topic – Trade Barriers and Free Trade

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Trade Barriers and Free Trade

Oil and gas are examples of the thing that can be traded internationally.

Why do countries trade goods with other countries?

A country does not always produce everything it needs. Imagine there are two countries named Alia and Zeta. Alia might not be able to produce enough oil and gas to meet its energy needs. A solution is to let Zeta, which produces more gas and oil than it needs, sell some of its gas and oil in Alia.

Zeta may not be able to produce enough steel to meet its needs. If Alia produces more steel than it needs, then the two countries can make a trade agreement—Alia sells some of its steel in Zeta, and Zeta sells some of its oil and gas in Alia. Each country gets what it needs. Trade between countries is called international trade.

What are trade barriers?

Trade barriers are practices that make it more difficult for a country to sell its goods in another country. Two common types of trade barriers are tariffs and subsidies.

A tariff is a tax that a government charges on certain types of goods that are imported from another country. For example, Zeta might place a 10% tariff on the steel that comes into the country from Alia. Because of this tariff, people in Zeta pay $1100 for an amount of steel that a company in Alia is willing to sell for $1000. When the price of something increases, fewer people buy it. The tariff means that companies in Alia will sell less steel in Zeta, so those companies will make less money. (The money from a tariff goes to the government that put the tariff in place, and not to the company selling the product.)

A subsidy is financial help that a government gives to a business or industry. In response to Zeta’s tariff on steel, Alia might decide to subsidize its companies that produce steel. These companies can now sell their steel for less because the government subsidy covers some of the costs of producing the steel. The price people in Zeta pay for steel from Alia might go back down to $1000, even with the 10% tariff charged by Zeta.

Alia and Zeta have a trade agreement that allows companies in Alia to sell washing machines in Zeta.

Why do countries create trade barriers?

Trading with another country can sometimes cause problems. For example, imagine Alia and Zeta have a trade agreement that allows companies in Alia to sell washing machines in Zeta. Workers in Alia are paid less than workers in Zeta. This means that companies from Alia can sell their washing machines at a lower price than washing machines built in Zeta. Many people in Zeta will prefer to buy the cheaper machines from Alia. Companies in Zeta that make washing machines may need to cut jobs or even close down because they are not able to sell enough washing machines in their own country.

Zeta does not want people working at its washing machine companies to lose jobs. To prevent this from happening, Zeta might place a tariff on washing machines from Alia so they are no longer cheaper. Or, Zeta might provide subsidies to its washing machine companies so they can sell their washing machines at the same cost as machines from Alia. By using a trade barrier such as a tariff or subsidy, Zeta is protecting the jobs of workers at its washing machine companies.

Trade barriers can be used to address various types of problems that can happen when countries trade with each other. Taking steps to protect workers and industries in a country from problems created by international trade is called protectionism.

What is free trade?

Free trade is international trade without trade barriers, such as tariffs and subsidies. Countries can make a free trade agreement saying that they will not put trade barriers in place. While the idea of free trade has many supporters, there are also people who believe that free trade is not a good thing. International trade is complicated, and there are many arguments people make for free trade and against it. One sample argument from each side is presented below.

People who support free trade say: Removing trade barriers allows companies in a country to increase their sales in other countries. When a company is able to increase its sales, it may be able to expand and create more jobs.

People who do not support free trade say: If people are able to buy foreign-made products that cost less than the same products made in their own country, some of the companies in their country may go out of business, meaning loss of jobs.

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