In our global and interconnected world we knowingly or unknowingly purchase stuff from all over the world. There are a lot of merits of international trade, but sometimes governments encourage domestic sales over imports. They limit imports through financial and non-financial barriers, collectively called trade barriers. When countries repeatedly use trade barriers against each other it becomes a trade war.
Financial trade barriers are in the news a lot these days, but the use of non-financial trade barriers is becoming more common, even if they are less understood and less talked about.
Increasing the Price
First, let’s look at financial barriers like tariffs or quotas. These are a tax importers pay to the government on top of the price of the good.
Tariff: The U.S. government states there is a 10 percent tax on oranges from Brazil. When an American importer purchases oranges from Brazil, they pay the Brazilian exporter for the fruit. When the oranges arrive in Miami, the importer pays a 10 percent import duty to U.S. Customs and Border Patrol. If Florida oranges cost the same amount as Brazilian oranges, after the tariff, the Florida oranges are 10 percent cheaper than Brazilian oranges. Most people would chose to purchase Florida oranges, helping Florida orange farmers.
Quotas: The U.S. government says that the first 1,000 pounds of oranges from Brazil are duty free. However, if more oranges are imported they face a 20 percent import tax.
Financial trade barriers are pretty straight forward. They have been used for centuries, but since World War II they have become less popular. Free trade agreements reduce financial trade barriers. That is until 2018, when the United States started imposing tariffs on washing machines, solar panels, steel, aluminum, and goods from China.
Increasing the headache
Non-financial barriers to trade have become more popular as countries look for ways to limit imports while still upholding their trade agreements. Non-financial barriers superficially serve to regulate markets, protect consumers, or preserve natural resources. However, when they are abused they become trade barriers. Abused regulations are overly bureaucratic or not based in science, making it difficult for exporters to meet the requirements. If they can’t meet the requirements, they cannot sell into the market. This gives the domestic industry an advantage because they don’t have to comply with these rules.
China is employing non-tariff trade barriers in response to new U.S. tariffs on over $260 billion worth of Chinese goods. China vowed to respond to any U.S. trade barriers. However, China only imported $190 billion worth of American goods in 2017, so they can’t directly match the United State’s actions.
In this case, China may turn to non-financial barriers to respond to the U.S. tariffs. Here are a few examples of how China could make it harder for Chinese people to buy American products.
Import permits
These are certificates that are often required to import food and agriculture products.
Issuing delays: The Chinese government could take one day, two weeks, or even three months to issue the import permit to limit imports.
Testing requirements: Issuing an import permit might be dependent on a series of tests to make sure the imports don’t have any pests or diseases. One problem I’ve seen is import permits that require tests that don’t exist. Since the requirements of the permit cannot be met, the permit is rejected. I’ve also seen testing requirements for a disease that can not infect the product being shipped. In this case the test can be run, the result will be negative, and ultimately the permit will be issued. But tests are expensive and time consuming for companies to run, increasing the time and expense of selling to China.
Permit reviews: Import permits are reviewed at the port of entry. If a customs officer questions the permit or any information on it they can hold the shipment at the port until it is resolved. For food products, the quality could deteriorate. Also, Chinese buyers might find another supplier that can deliver on time.
Additional safety requirements
Different countries have different safety requirements. Some safety requirements are part of manufacturing, while others are part of package labeling.
Safety requirements for vehicles differ from country-to-country. For example: in the United States, turn signals are amber colored, while in Europe they are white. China could pass a new regulation stating: on February 1st, all Chinese cars must have blue turn signals. Car companies will change the lights or stop selling in China. A more complicated problem might be a change to the shape of the car. American cars and European cars have differently shaped hoods. These shapes are defined by regulation. If China decided to abruptly change its hood requirements, that would require car companies to completely redesign their cars.
Package labeling also varies from by country. Have you ever compared labels on cigarettes? In China, the label must indicate the grade of tar content and announce "Smoking is hazardous to your health" in the Chinese language on the packs and cartons. It must cover 35% of the package. Again, if these requirements changed, companies would have to redesign all of their boxes.
Approvals
Many products have to be approved by the government before they can be sold. The United States Food and Drug Administration approves all drugs sold in the United States. China has a similar agency that could use its authority to prevent U.S. drug manufacturers from getting drug approvals in China or make it easier for Chinese companies to get approval.
Economic controls
Trump has several goals for the tariffs. He wants to reduce the United States trade deficit with China. He also wants the Chinese government to let the Chinese economy run freer, without so much government intervention. Some of the Chinese interventions are the non-tariff trade barriers listed below.
Business licenses: Chinese government defines how many companies can operate in a specific space. Companies must apply for a business license. China rejects foreign businesses to limit competition for domestic companies.
Financing: The Chinese government can offer low- or no-interest loans to Chinese companies to give them a competitive advantage. They might subsidize sectors that are competing with American products or they might provide a subsidy to companies to encourage them to buy non-U.S. products.
Business ownership: Foreign companies must create joint ventures to operate in China. The Chinese company owns 51% of the business and the foreign company only owns 49%.
More non-tariff trade barrier, not less
Companies report that doing business in China is more difficult because of tariff and non-tariff trade barriers erected during the trade war. If tensions continue to escalate, these conditions will continue to get worse. It’s easy to track the tariff trade barriers, but non-tariff trade barriers are often anecdotal and hard to calculate the impact. The U.S. Embassy in Beijing is watching for increased incidents of non-tariff trade barriers that are harming U.S. exporters, but the fix is often diplomatic meetings to remove them.
The growth of non-tariff trade barriers is not a secret. Many new free trade agreements try to address tariff and non-tariff trade barriers. Free trade is no longer synonymous with duty free. It needs to be defined free from tariffs and non-tariff trade barriers.