Trade barriers

0:00- [Instructor] What we're gonna do in this video is think a little bit about free trade, why, in theory, it could make a lot of sense, but then we'll think about the edge cases, why that might not make sense, and what countries might want to do in order to make that trade a little bit less free.

0:16How they might try to erect barriers. So let's start with a very simple example where we have two countries, Country A and Country B, and they each produce two things. So they each produce wheat and they each produce cars. Now, Country A, if it only focused on wheat, it could produce 10 tons per year.

0:44And if it only focused on cars, it could produce five cars in a year. Now, Country B is the other way around. If it only focused on wheat, it could produce five tons per year. And if it only focused on cars, it's pretty good. It could produce 10 cars in a year.

1:05Now let's take the situation where they don't trade, they don't trade, and just for simplicity, we could make other assumptions. Let's say they spend half a year on each of them. So they spend half a year on each. Well, what are they going to produce? Well, they're gonna produce half a year's worth of wheat.

1:28So they're going to produce five, Country A is going to produce five tons of wheat and two and a half cars. And you might say, "How's it two and a half cars?" Well, they got halfway through one car and then the next year, they'll finish that one up. But let's see, two and a half cars.

1:47And what would Country B do? Well, they would have two and a half tons of wheat if they spent half a year doing that. And then they would produce five cars. Total we have seven and a half tons of wheat and we have seven and a half cars. Now let's imagine a world where they do trade and in that trading world, each focuses on what they are better at.

2:17What is their comparative advantage? Well, actually I think I have enough space to this. So let's say they trade. Let me draw a little line here. So in the trading world, Country A only focuses on wheat 'cause that's their comparative advantage relative to country, I should say, to Country B.

2:37So they produce 10 tons of wheat, and Country B produces 10 cars in that year. And so you can already see, in total, they're producing both more wheat and more cars. And if they trade, they can both be better off. Let's say they just split this down the middle.

2:59You could see a world where they each get five tons of wheat and five cars, and if they each get five tons of wheat and five cars, well, they're gonna be better off than in the don't trade scenario. So I know what you're thinking, "Trade is awesome. You should have free trade."

3:17But now let's think a little bit about when that trade might get a little bit less free or why someone might wanna stop that trade from happening. There are certain industries that you might want to keep in your country. For example, you might decide that wheat is really strategically important to your country.

3:35You don't wanna be dependent on other folks for your food. And so even though in a free trade scenario, Country B would focus on cars, they might say, "Hey, you know what? We wanna make sure that we are producing some wheat ourselves in case something happens to Country A, in case we go to war with Country A, we need to be able to feed ourselves."

3:54Similarly, Country A might say, "Look, I know Country B is better at producing cars, but we don't wanna be only farmers all the time. We should build an industrial base and the ability to build cars, that might help our ability to build tanks and planes." And once again, there might be a national security issue here, or we wanna build other skills, become a more industrialized economy.

4:14And so what might countries do in order to stop the free trade? Well, they have a lot of tools in their toolkit. The most extreme is just an outright embargo. And that's when one country says, "I'm just not going to buy cars from you." That sometimes happens. It's usually when there's a pretty serious problem between countries.

4:36Another technique is a quota where you say, "Hey, I'm only gonna import so much from that other country. So that allows us to protect our industries." Another very common technique is using tariffs. Tariffs mean when an import comes from another country that you put essentially a tax on it.

4:58So you charge either the producer a little bit more or more likely the person importing into your country a little bit more. And so that makes your, domestically, the things you're producing in your country more competitive so that you could retain those. There's other things.

5:14You might have import licenses. Licenses. You could have licenses, you could have standards and regulations and standards and regulations aren't necessarily just to protect trade. It might just be because maybe Country A, when they produce that wheat, they do it in a way that pollutes a lot or maybe they don't make sure that there aren't chemicals in their wheat.

5:39And so when you say, "Hey, I can only import wheat from folks who are doing it in a way that doesn't pollute, in a way that I know that the wheat is going to be safe to eat", that might keep Country B from importing from Country A. So as we just talked about, free trade can be a very good thing and in general, most economists are in favor of it and the general trend of the world has been, seems to be one towards more trade.

6:05But there are reasons you might wanna protect a domestic industry, both for strategic reasons or political reasons, or you might find that the other country is being unfair in some way. Maybe they're doing some of these things or maybe they're subsidizing, subsidies, where they're making it really cheap to produce in their country so that they can get that industry and so that they can compete with other countries.

6:29And then because they're subsidies, they're the people producing in their countries, they can sell into your country really cheap and undermine your industry. And that's known as dumping, where you sell at such a low price, you import into a country it's, or export into a country at such a low price that the local industry goes outta business and then you're in control of it.

6:52And then maybe you could jack up the price or whatever else, but you now have control of that industry or you have a lot of weight in that industry.