Barriers to trade and trade blocs

Barriers to trade are government-created restrictions that make it harder for goods and services to flow between countries. A tariff is a tax on imports and is the most common barrier. Governments use tariffs to restrict imports and protect domestic industries from foreign competition.

How a tariff affects an exporter

A tariff makes an exporter's products more expensive in the foreign market, which can reduce demand and the exporter's sales revenue. For example, a firm sells skateboards abroad for £60 each. The importing country adds a 20% tariff, so customers there pay £72. If demand falls, the firm sells fewer skateboards and its sales revenue drops.

To absorb the tariff and keep the customer's price at £60, the firm must cut its price to £50. It then receives £10 less per skateboard, so profit per unit falls. Each sale also adds less contribution (the money left after variable costs to pay off fixed costs), so the break-even point rises: more sales are needed to cover the same fixed costs.

Trade blocs

A trade bloc is a set of countries that work together to encourage trade among members while making imports from non-members harder through trade barriers. Some trade blocs operate as a single market, with goods, services, people and money for investment (capital) able to move freely between member countries.

Membership can give a business free access to a larger market and reduce trade barriers between member countries, making it easier and cheaper to sell abroad. However, it can also mean greater competition from businesses in other member countries and reduced access to markets outside the bloc. Trade with non-members does not stop, but it can become harder or more expensive.