Nontariff Barrier: Definition, How It Works, Types, and Examples

What Is a Nontariff Barrier?

A nontariff barrier is a way to restrict trade using trade barriers in a form other than a tariff. Nontariff barriers include quotas, embargoes, sanctions, and levies. Some countries frequently use nontariff barriers to restrict the amount of trade they conduct with other countries as part of their political or economic strategies.

How Nontariff Barriers Work

Countries commonly use nontariff barriers in international trade. Decisions about when to impose nontariff barriers are influenced by the political alliances of a country and the overall availability of goods and services.

Any barrier to international trade, including tariffs and nontariff barriers, generally influences the global economy because it limits the functions of the free market. The lost revenue that some companies may experience from these barriers can be considered an economic loss, especially for proponents of laissez-faire capitalism. They believe that governments should abstain from interfering in the workings of the free market.

Countries can use nontariff barriers in place of or in conjunction with conventional tariff barriers. These are taxes that an exporting country pays to an importing country for goods or services. Tariffs are the most common type of trade barrier and they increase the cost of products and services in an importing country.

Countries often pursue alternatives to standard tariffs because they release countries from paying added taxes on imported goods. Alternatives to standard tariffs can have a meaningful impact on the level of trade while creating a different monetary impact than standard tariffs.

Types of Nontariff Barriers

Nontariff barriers exist in several forms.

Licenses

Countries may use licenses to limit imported goods to specific businesses. A business is permitted to import goods that would otherwise be restricted for trade in the country when it's granted a trade license.

Quotas

Countries often issue quotas for importing and exporting both goods and services. They agree on specified limits for products and services allowed for importation to a country. There are no restrictions on importing these goods and services in most cases until a country reaches its quota which it can set for a specific time. Quotas are also often used in international trade licensing agreements.

Embargoes

Embargoes are the result of a country or several countries officially banning the trade of specified goods and services with another. Governments may take this measure to support their specific political or economic goals.

Sanctions

Countries impose sanctions on other countries to limit their trade activity. Sanctions can include increased administrative actions or additional customs and trade procedures that slow or limit a country’s ability to trade.

Voluntary Export Restraints

Exporting countries sometimes use voluntary export restraints to set limits on the number of goods and services they can export to specified countries. These restraints are typically based on availability and political alliances.

Advantages and Disadvantages of Nontariff Barriers

Pros of Nontariff Barriers

The primary advantage of nontariff barriers is the protection of domestic industries from foreign competition. Governments can shield their industries from low-cost imports, supporting local businesses and preserving jobs, by imposing regulations and standards,

Nontariff barriers related to product standards and regulations help ensure that imported goods meet specific quality and safety standards. This can be advantageous for consumers by reducing the risk of substandard or unsafe products entering the market.

Nontariff barriers are also implemented to safeguard national security interests. These measures can include export controls on sensitive technologies or restrictions on imports of certain strategic goods to prevent them from falling into the wrong hands. They're used to counteract the practice of dumping where foreign producers sell goods in a foreign market at prices below their cost of production to seize the competitive market.

Cons of Nontariff Barriers

One of the most significant disadvantages of nontariff barriers is their potential to distort international trade.

Nontariff barriers can disrupt the natural flow of goods by creating obstacles to imports, leading to trade imbalances, inefficiencies, and market distortions. This is obviously intentional because nontariff barriers often limit the variety of goods available to consumers but it impacts consumers who then have fewer options. They may be denied access to potentially superior or more affordable products.

Compliance with nontariff barriers can be costly for both producers and consumers. Manufacturers may have to make adjustments to their production processes to meet specific standards. Importers can incur additional expenses related to documentation, inspections, and compliance checks. Nontariff barriers are often more complex than tariffs with sometimes uncertain implications.

Nontariff barriers can discriminate against foreign goods in favor of domestic products in some cases. This violates the principles of non-discrimination and fair trade enshrined in international trade agreements. Overly restrictive nontariff barriers can also hinder economic growth by limiting access to global markets and stifling competition. This can slow down innovation and productivity globally.

Nontariff barriers can promote activities that don't promote the best resource allocation. Resources may be misallocated when nontariff barriers protect inefficient domestic industries. Capital and labor may be directed toward industries that might not be globally competitive without trade restrictions. This puts an overall efficiency strain on the global economy.

Nontariff vs. Tariff

Both tariffs and nontariff barriers are two distinct mechanisms that countries employ to regulate international trade. Tariffs are monetary barriers in the form of taxes imposed on imported or exported goods. Nontariff barriers encompass a diverse range of non-monetary measures.

Tariffs target specific products or industries but nontariff barriers can have a broader and often less transparent impact on trade. Tariffs are typically a subject of negotiation in trade deals and offer some flexibility in adjusting rates. Nontariff barriers can be more challenging to quantify and may require complex compliance measures, making them a critical focus in international trade negotiations.

Tariffs directly affect the prices of imported goods in many cases and they can be used strategically to influence trade volumes and generate revenue for governments. Nontariff barriers are often employed to achieve various policy objectives beyond revenue generation although they can indirectly impact prices. Nontariff barriers may be put in place to safeguard domestic industries or to ensure product quality and safety. There can be incidental pricing impacts as part of this barrier.

Trade agreements often involve negotiations regarding both tariffs and nontariff barriers, as their distinct characteristics require nuanced approaches for trade facilitation. In some contexts, both are used in tandem, as it may be easier to manipulate one (i.e. tariffs) based on agreed-upon nontariff barriers.

Example of Nontariff Barriers

The United Nations adopted a round of nontariff barriers against North Korea and the Kim Jong Un regime in December 2017. The nontariff barriers included sanctions that cut exports of gasoline, diesel, and other refined oil products to the nation.

Nontariff barriers can be significant roadblocks for businesses looking to expand their markets in international trade. The United States is actively committed to addressing this issue on multiple fronts. The U.S. is pushing for the reduction or elimination of nontariff barriers in various regional contexts including the Asia Pacific Economic Cooperation and for contributing to analysis at the Organization for Economic Co-operation and Development.

The United Nations has also prohibited the export of industrial equipment, machinery, transport vehicles, and industrial metals to North Korea. The intention of these nontariff barriers was to put economic pressure on the nation to stop its nuclear arms and military exercises.

The Bottom Line

Nontariff barriers are obstacles to international trade that don't involve traditional import tariffs. They can take various forms, including regulatory requirements, technical standards, licensing procedures, and quotas. Not trading can make it difficult for businesses to access foreign markets, hindering trade by imposing additional costs and administrative burdens.