Customs Barrier: What It is, How It Works, Example

What Is a Customs Barrier?

A customs barrier is any implementation of fees, rules, or regulations designed with the intention to limit international trade.

How a Customs Barrier Works

A customs barrier—also called a trade barrier—acts to limit trade across borders by creating and enforcing various restrictions. These restrictions can come in the form of tariffs, levies, duties, and trade embargoes. All customs barriers are put in place in order to discourage trade.

Additional types of customs barriers include the use of import and export licenses, quotas, and subsidies. In some cases, changes in a country's currency price can be used as a customs barrier or form of trade limitation.

Customs barriers may be put in place by governments who are looking to give an advantage to a domestic industry over that of a foreign competitor. In some instances, these levies are put in place to limit exports of goods and services that may be vital to the local economy. Customs barriers may also be put into place in response to undesirable actions by other nations.

Many economists feel that these customs barriers should only be used as a last resort because they may create hostile trade environments. However, the prevailing opinion is that there are valid reasons to implement customs barriers. Whether it’s to protect an emerging domestic industry or a tactical strategy for engaging in a trade war, customs barriers play an important role in international trading.

Example of Customs Barriers

In 2018, the United States, under President Donald Trump, began imposing numerous new tariffs on steel, aluminum, and a variety of other goods from China in response to concerns about national security and intellectual property theft. In response, China placed retaliatory tariffs on goods from the United States.

These policies have benefited some businesses while hurting others. Some steel manufactures reported increased revenue and earnings as a result of the increase in prices following the trade sanctions. For example, Reliance Steel & Aluminum (RS) reported record sales after the new tariffs were implemented.

However, not all businesses have benefited. Harley Davidson, General Motors, General Electric, 3M, and many other manufacturers hurried to increase prices and adjust their supply chains to combat the rising prices that have been impacting their profits since the tariffs began. And although Reliance Steel & Aluminum reported record sales, not all steel companies experienced the same rise in earnings from the price bump. Many smaller companies didn't see an increase in revenues like their larger counterparts. In some cases, the reason for this is that companies were locked into fixed pricing agreements and wouldn't see a change in their numbers until those contracts expired and could be re-written.

At the time the Trump administration's tariffs were proposed, some economists warned that such customs barriers could be capable of ushering in a recession. Customs barriers can have a negative effect on trade, which in turn hurts certain segments of the economy. This can lead to diminished demand for exportable goods and a lack of supply for imported goods, which may strain corporate profits and, thus, eventually slow economic growth. The general consensus amongst economists is that the trade war negatively impacted both the economy of the U.S. and the economy of China.