Cadbury Economics

There is a widespread belief that trade barriers are a useful tool for development and can be used to “protect” infant industries from foreign competition.

The problem with barriers to trade is that they reduce the sourcing options for firms; firms either have to source locally or pay a premium to source internationally. This makes the supply chains of local firms less efficient than the supply chains of firms in countries that do not have trade barriers. The chart shows an example for chocolate manufacture; it is cheaper to manufacture chocolate in a developed country with low import tariffs than in a developing country.

(Source: disguised industry information)

The greater the level of processing, the more this cost handicap of supply chain inefficiency impacts on competitiveness. Because the cost disadvantage is higher for higher levels of processing, countries with trade barriers end up having a comparative advantage in primary commodities over processed and manufactured goods. The result is that countries with high trade barriers get stuck in basic agriculture and extractive industries and are unable to industrialise.