Nontariff Barrier: Definition, How It Works, Types, and Examples (2024)

What Is a Nontariff Barrier?

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

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.

In general, any barrier to international trade–including tariffs and nontariff barriers–influences the global economybecauseit limits the functions of the free market. The lost revenue that some companies may experience from these barriers to trade may be consideredan economic loss, especially for proponents of laissez-faire capitalism. Advocates of laissez-faire capitalism 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, which are taxes that an exporting country pays to animporting countryfor goods or services. Tariffs are the most common type of trade barrier, and they increase the cost of products and services inan importing country.

Often times countries pursue alternatives to standard tariffs because they release countries from paying added tax 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

Licenses

Countries may use licenses to limit imported goods to specific businesses. If a business is granted a trade license, it is permittedto import goods that would otherwise berestricted for trade in the country.

Quotas

Countries often issuequotas forimporting and exportingboth goods and services. With quotas, countries agree on specified limits forproducts and services allowed for importation to a country. In most cases, there are no restrictions on importing these goods and services until a country reaches its quota, which it can set for a specific timeframe. Additionally, quotas are often used in international trade licensingagreements.

Embargoes

Embargoes are when a country–or several countries–officially ban the trade of specified goods and services with another country. Governments may take this measureto support their specific political or economicgoals.

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. Voluntary export restraints set limits on the number ofgoods and services a country 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 advantages of nontariff barriers are the protection of domestic industries from foreign competition. By imposing regulations and standards, governments can shield their industries from low-cost imports, thereby supporting local businesses and preserving jobs.

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 by requiring adequate manufacturing standards.

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. By creating obstacles to imports, nontariff barriers can disrupt the natural flow of goods, leading to trade imbalances, inefficiencies, and market distortions. Obvously, this is intentional as nontariff barriers often limit the variety of goods available to consumers. However, this impacts consumers who then have fewer options and 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 need to make adjustments to their production processes to meet specific standards, while importers may incur additional expenses related to documentation, inspections, and compliance checks. Compared to tariffs, nontariff barriers are often complex with sometimes uncertain implications.

In some cases, nontariff barriers can discriminate against foreign goods in favor of domestic products, violating the principles of non-discrimination and fair trade enshrined in international trade agreements. In addition, overly restrictive nontariff barriers can hinder economic growth by limiting access to global markets and stifling competition. Globally, this can slow down innovation and productivity.

Last, nontariff barriers may promote activities that do not promote the best resource allocation. When nontariff barriers protect inefficient domestic industries, resources may be misallocated. Capital and labor may be directed toward industries that might not be globally competitive without trade restrictions, thus putting 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, while nontariff barriers encompass a diverse range of non-monetary measures.

While tariffs target specific products or industries, 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, while nontariff barriers can be more challenging to quantify and may require complex compliance measures. In this light, nontariff barriers are a critical focus in international trade negotiations.

In many cases, tariffs directly affect the prices of imported goods and can be used strategically to influence trade volumes and revenue generation for governments. In contrast, nontariff barriers, though they may indirectly impact prices, are often employed to achieve various policy objectives beyond revenue generation. For example, nontariff barriers may be put in place to safeguard domestic industries or ensuring product quality and safety. It may so happen that there are incidental pricing impacts as part of the nontariff 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.