Tariffs and Non-Tariff Measures: Definitions, Types, and Examples

World Bank

The World Bank is an international financial institution that provides loans and financial assistance to developing countries for various development programs and projects. Its primary mission is to reduce poverty and support sustainable economic growth.

By law, all of the World Bank’s decisions must align with its commitment to promote foreign investment, encourage international trade, and facilitate capital investment in member countries.

It is important to distinguish between the World Bank and the World Bank Group. The World Bank itself consists of only two institutions:

International Bank for Reconstruction and Development (IBRD)
International Development Association (IDA)

In contrast, the World Bank Group includes these two institutions along with three additional organizations:

International Finance Corporation (IFC)
Multilateral Investment Guarantee Agency (MIGA)
International Centre for Settlement of Investment Disputes (ICSID)

Together, these institutions play a vital role in providing financial resources, policy advice, and technical expertise to help countries overcome challenges, reduce inequality, and achieve long-term development goals.

Nontariff Barrier (NTB)

What Is a Tariff?

In simple terms, a tariff is a tax imposed on imported goods. It increases the cost of foreign products and is one of several trade policies a country may adopt to regulate international trade.

What Are Nontariff Barriers?

A nontariff barrier (NTB) refers to a trade restriction that takes a form other than tariffs. Instead of directly taxing imports, countries may impose various rules, regulations, or restrictions that make it harder for foreign goods to enter their markets.

Common examples include:

Quotas – limiting the quantity of goods that can be imported.
Levies and surcharges – additional costs imposed at the border.
Embargoes and sanctions – complete or partial bans on trade.
Licensing requirements and complex procedures – bureaucratic hurdles to slow down imports.

These barriers are frequently used by large and developed economies to control trade either for strategic, protective, or political purposes.

Economic Impact

Any barrier to trade disrupts the free functioning of markets, creating economic losses. These losses arise from reduced competition, inefficiency, and higher costs for consumers.

Types of Nontariff Barriers

Nontariff barriers can be broadly divided into two categories:

Direct Price Influencers

Export subsidies or drawbacks
Exchange rate manipulations
Customs surcharges and lengthy customs procedures
Minimum import price requirements
Unreasonable product standards and inspection rules

Indirect Price Influencers

Import licensing systems
Import restrictions through complex documentation or administrative delays

Global Trade Context

Although many NTBs violate World Trade Organization (WTO) rules, their use has been increasing, particularly since the Tokyo Round of multilateral trade negotiations (1973–1979), where they were formally discussed.

Nontariff barriers are also referred to as non-tariff measures (NTMs) and remain a key concern in modern trade negotiations.

Tariff vs. Nontariff Barrier

Aspect	Tariff	Nontariff Barrier (NTB)
Definition	A tax imposed on imported goods.	A trade restriction other than tariffs that limits or regulates imports.
Form	Monetary – adds cost to imported goods.	Non-monetary – rules, quotas, standards, or restrictions.
Objective	To raise revenue and protect domestic industries.	To restrict or control trade without direct taxation.
Examples	Import duties, customs tariffs.	Quotas, embargoes, import licensing, technical standards, customs delays.
Transparency	Clear and easy to measure – stated as a percentage or fixed rate.	Less transparent – often hidden in procedures, regulations, or standards.
Impact on Prices	Directly increases the price of imported goods.	May increase costs indirectly through restrictions or compliance requirements.
Compliance with WTO	Generally permitted within agreed limits.	Often considered trade distortions and, in many cases, a breach of WTO rules.
Economic Effect	Creates some economic loss but easier to quantify.	Creates larger inefficiencies and hidden trade costs.
Usage Trend	Declining globally due to trade liberalization.	Increasing since the Tokyo Round (1973–1979), especially among developed economies.

Why Are Tariffs and Trade Barriers Used?

Tariffs and trade barriers are not just economic tools they are also political and strategic instruments. While they are often associated with protecting infant industries and developing economies, advanced economies also use them for various reasons.

Here are the five main reasons tariffs and trade barriers are imposed:

1. Protecting Domestic Employment

Reasoning: Imported goods often create tough competition for domestic producers. If domestic firms struggle, they may lay off workers or shift production overseas, increasing unemployment at home.
Argument: Domestic industries often argue that foreign competitors have lower labor costs due to poor working conditions or weaker regulations, making it unfair competition.
Economic View: According to comparative advantage theory, countries should specialize in goods where they are most efficient, but in practice, governments often intervene to shield vulnerable industries.

2. Protecting Consumers

Reasoning: Tariffs may be levied on goods considered unsafe or harmful for consumers.
Example: South Korea imposing tariffs on U.S. beef imports if concerns arise about possible contamination or disease.
Purpose: This serves both as a health safeguard and a political reassurance to the public.

3. Supporting Infant Industries

Reasoning: Developing nations often use tariffs to protect new or emerging industries that are not yet strong enough to compete globally.
Strategy: This is part of the Import Substitution Industrialization (ISI) approach, where tariffs make imported goods more expensive, encouraging consumers to buy domestic alternatives.
Benefits: Encourages industrial growth, reduces reliance on agriculture, creates jobs, and helps economies diversify.
Criticism: If infant industries are sheltered too long, they may become inefficient, produce lower-quality goods, and rely heavily on government subsidies, slowing overall economic growth.

4. National Security

Reasoning: Some industries are considered strategically vital to a country’s security and independence.
Example: Defense industries in the U.S. and Europe enjoy strong protection, even though these regions are highly industrialized.
Purpose: Ensures that essential industries survive, especially during geopolitical tensions or conflicts.

5. Retaliation

Reasoning: Tariffs may be used as a response to unfair trade practices or violations of international agreements.
Example: France might impose tariffs on U.S. meat if the U.S. fails to enforce rules about labelling sparkling wines as “Champagne.”
Outcome: Such retaliation is usually temporary and lifted once the dispute is resolved. Tariffs may also be applied as leverage in foreign policy conflicts.

In summary, while tariffs and trade barriers can protect domestic interests in the short run, they often distort markets, raise consumer prices, and lead to international disputes in the long run.

Types of Tariffs and Trade Barriers

Governments can impose a variety of tariffs and trade barriers to regulate international trade. These measures are designed to protect domestic industries, raise revenue, or influence trade patterns.

Types of Tariffs

Specific Tariffs

A fixed fee charged on each unit of an imported good.
Example: A $15 tariff on each pair of shoes or a $300 tariff on each imported computer.
Impact: Simple to administer but disproportionately affects lower-priced goods, making them relatively more expensive.

Ad Valorem Tariffs

Based on a percentage of the value of the imported good.
Example: Japan imposing a 15% tariff on U.S. automobiles.
A $10,000 car would cost $11,500 to Japanese consumers.
Impact: Protects domestic producers from being undercut, but keeps consumer prices artificially high.

Types of Nontariff Barriers (NTBs)

Licenses

Businesses must obtain government permission to import specific goods.
Example: Only certain companies may receive licenses to import cheese.
Impact: Restricts competition, raises consumer prices, and creates opportunities for favoritism.

Import Quotas

A limit on the quantity or volume of a particular good that can be imported.
Example: A quota on citrus fruit imports.
Impact: Reduces supply, drives up prices, and often works hand-in-hand with licensing requirements.

Voluntary Export Restraints (VERs)

An exporting country “voluntarily” restricts how much of a product it sends abroad, usually at the request of the importing country.
Example: Brazil placing a VER on sugar exports to Canada, with Canada imposing a reciprocal VER on coal exports to Brazil.
Impact: Protects domestic industries but raises prices for both countries’ consumers.

Local Content Requirements

A rule requiring that a certain percentage of a product (or its value) be produced domestically.
Example: A regulation that computers must include at least 25% locally made components or that 15% of the product’s value comes from domestic production.
Impact: Encourages domestic manufacturing but may reduce efficiency and raise costs for businesses.

Who Benefits from Tariffs and Trade Barriers?

The benefits of tariffs and trade barriers are unevenly distributed among different groups in the economy. While governments and domestic producers often gain, consumers usually bear the cost through higher prices.

1. Government

Short-term benefit: Increased tax revenue from tariffs collected at the border.
Long-term challenge: Rising consumer prices (especially for essential goods like food and energy) can increase public demand for subsidies and welfare programs, creating fiscal pressure.

2. Domestic Industries

Short-term benefit: Reduced competition from imports allows domestic companies to sell more at higher prices, leading to greater profits.
Long-term drawback: With less competition, domestic industries may become inefficient, produce lower-quality goods, and lose their global competitiveness when substitutes emerge.

3. Consumers

Impact: Consumers, both individuals and businesses, are the biggest losers under tariffs and trade barriers.

Individuals face higher prices for goods.
Businesses pay more for imported raw materials (e.g., higher steel costs increase the cost of cars, appliances, and construction).

Result: Reduced disposable income, lower consumption, and slower economic growth.

Overall Effect

Short run:

Government → more revenue
Domestic producers → higher profits
Consumers → higher prices, lower consumption

Long run:

Government → more pressure to provide subsidies and social programs
Domestic producers → reduced efficiency and declining profits
Consumers → lower purchasing power and fewer choices

In short, tariffs and trade barriers are pro-producer but anti-consumer. They may offer temporary protection and revenue, but in the long run, they can undermine efficiency, competitiveness, and overall economic welfare.

How Do Tariffs Affect Prices?

Tariffs directly increase the price of imported goods. This has a chain reaction in the domestic economy:

Domestic producers are shielded from foreign competition and can charge higher prices.
Consumers end up paying more, both for imported goods and for domestically produced goods that no longer face pressure to remain competitive.
Efficiency losses occur because tariffs allow less productive companies to survive, even if they would not be viable in a truly competitive market.

Tariffs Without Trade Barriers (Free Trade Scenario)

Consider the situation illustrated in Figure 1 (a standard supply-and-demand graph):

DS = Domestic Supply
DD = Domestic Demand
P = Domestic price without trade
P* = World price (lower than domestic price)

At the world price (P*):

Domestic consumers demand Qw units of goods.
Domestic producers can supply only Qd units.
The difference (Qw – Qd) is filled by imports.

This setup benefits consumers with lower prices and greater supply, while domestic producers face competition.

Explanation of the Diagram:

Pw (green line): World price without tariffs.
Pw + Tariff (orange line): Higher price due to tariff.
Qd → Qd1: Domestic production expands because higher prices make it profitable for local producers.
Qw → Qw1: Domestic consumption falls because goods are more expensive.
Imports shrink: From (Qw – Qd) under free trade to (Qw1 – Qd1) with a tariff.

Key Takeaway:

Consumers lose (higher prices, fewer choices).
Producers gain (more sales at higher prices).
Government gains tariff revenue.
The economy suffers deadweight loss due to inefficiency.

World Trade Without Tariffs

In Figure 2, we see the effects of world trade when no tariff is present:

DS represents the domestic supply curve.
DD represents the domestic demand curve.
P is the domestic equilibrium price without trade.
P* is the lower world price, reflecting cheaper imports.

At the world price (P*):

Domestic consumers demand Qw units of goods.
Domestic producers supply only Qd units.
The difference (Qw – Qd) is met by imports.

This free-trade scenario benefits consumers, who enjoy lower prices and greater availability of goods, while domestic producers face greater competition.

Here’s a new diagram showing the effects of a tariff on trade:

DD (red line): Domestic Demand
DS (blue line): Domestic Supply
P* (green line): World Price without tariff
P′ (black line): World Price with tariff
Imports shrink when tariff is introduced (brown segment = free trade imports, orange segment = reduced imports under tariff)
Qd → Qd′: Domestic production rises with tariff
Qw → Qw′: Domestic consumption falls with tariff

This clearly shows how tariffs raise prices, reduce imports, and increase domestic production but hurt consumers.

Tariffs and Non-Tariff Measures: Key Terms and Definitions

Term	Definition
Ad Valorem Tariff	A tariff imposed as a percentage of the value of the good (e.g., a 5% tariff means the duty equals 5% of the appraised value).
Ad Valorem Equivalent (AVE)	When a tariff is fixed in specific or mixed terms, an estimated “ad valorem equivalent” is calculated (e.g., dividing duties collected by Customs value under MFN trade).
Automatic Import Licensing	Licensing where applications are always approved, ensuring imports are not restricted by the process.
Drawback Procedure	Customs process allowing total or partial repayment of duties/taxes when imported goods (or inputs used in their production) are exported.
Duty-Free Shop	Licensed retail outlets (at airports, ports, or borders) selling goods exempt from customs duties/taxes. Can be “outward” (for departing passengers) or “inward” (for arriving passengers, with limited goods/quantities).
Duty Deferral Program	Import schemes that defer duty payment, such as free zones, bonded warehouses, temporary imports under bond, or maquiladora programs.
Export Processing Zone (EPZ)	A designated industrial zone where firms producing mainly for export benefit from tax and trade incentives, operating outside the normal customs regime.
Harmonized System (HS)	International product classification system (developed by WCO) with ~5,000 commodity groups, each with a 6-digit code, used for tariffs and trade statistics.
Import Licensing	Administrative requirement for importers to submit applications/documentation (beyond customs purposes) as a precondition for importation.
Mixed Tariff	A tariff combining ad valorem and specific duties.
National Treatment	WTO principle requiring imported goods to receive the same treatment as domestic goods regarding taxes and regulations (no less favorable treatment).
Non-Automatic Import Licensing	Licensing that is discretionary and may restrict imports (used to enforce quotas or other trade limits).
Non-Tariff Barriers (NTBs)	Non-tariff measures that act as protectionist restrictions (e.g., quotas, tariff-rate quotas, licensing regimes, price bands).
Non-Tariff Measures (NTMs)	Any trade measure other than tariffs; may or may not act as barriers.
Performance Requirements	Legal obligations on producers (e.g., export certain shares, use domestic inputs, maintain minimum domestic content, or balance imports with exports/foreign exchange inflows).
Specific Tariff	A tariff imposed as a fixed amount per unit or quantity of goods (e.g., $100 per metric ton).
Tariff-Rate Quota (TRQ)	Trade protection system applying a lower tariff rate to imports within a quota and a higher rate to imports above the quota.
Voluntary Export Restraint (VER)	An exporting country voluntarily limits the quantity/value of exports to a partner country (usually under pressure from the importing country).

Fintaxman

Tariffs and Non-Tariff Measures: Definitions, Types, and Examples

World Bank