Everyone has heard about how trade restrictions help certain industries keep the upper hand over foreign competitors.
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It is important, as a small business owner to understand the implications of trade restrictions on your business.
What does it mean to you, your foreign competitors and your consumers? These are three questions you will have to ask when determining whether or not you can compete on a global scale.
The United States generally does not protect industries that entrepreneurs may be headed into, but other countries will protect their infant industries so that clever entrepreneurs, like you, cannot take advantage of their countries. While this theory is based in antiquity, it is certainly prevalent in many countries today. That is why it is important to know about a couple basic trade restrictions, and how they affect the consumers domestic producers and foreign producers.
Quotas limit the amount of a product that can be imported into a country. This has several effects on the market place. First, it can create intense competition between foreign producers to become one of the providers for the domestic market. This can be done through competition or even political agenda. Either way, some foreign producers who may have superior product may be blocked out of the domestic market. This hurts domestic consumers.
The law of supply and demand makes it clear that if the supply of an item is restricted, and demand stays constant, then price will rise. This hurts domestic consumers but helps domestic producers. Since some foreign producers are blocked from importing into the domestic country, it also hurts their chances of selling their product. Domestic producers can raise their prices because of the restricted supply and constant demand. Quotas protect domestic producers.
Tariffs are easy to remember because they are basically a tax. Just think, tax = tariff. They are basically the same thing. When a good is imported into a country, it goes through customs. At this point, the government can levy fees and taxes on the goods. Generally, they are a percentage of the value of the good or a per item unit tax.
This is what tariffs do to the domestic market. They raise the price of the goods coming into the domestic country and hurt domestic consumers. As a result, it hurt foreign producers because it makes their products more expensive. The only party that a tariff helps is the domestic producer of the product.
Of course, the government also receives a marginal benefit from the tariff revenue generated by the tariffs. Tariffs are one way to help protect a domestic industry. Tariffs always hurt domestic consumers.
Basically, both of these restrictions on trade hurt domestic consumers and help domestic producers. These are ways for the government to protect industry. Take, for example, the sugar industry. If lobbyists in the capitol didn't constantly badger the government to maintain the restrictions on sugar imports, then sugar in this country would cost a fraction of what it does not. This is simply an example of the government protecting a domestic industry.
All of these things hurt the economy as a whole.