International markets for goods and services are often rendered imperfect by acts of governments.
Governments may impose tariffs, quotas, and other restrictions on export and imports of goods and services, hindering the free flow of these products across national boundaries.
Sometimes, governments may even impose complete bans on the international trade of certain products.
Governments regulate international trade to raise revenue.
protect domestic industries, and pursue other economic policy objectives Facing barriers to exporting its products to foreign markets, a firm may decide to move production to foreign countries as a means of circumventing the trade barriers. A classic example for trade barrier-motivated FDI is Honda's investment in Ohio. Since the cars produced in Ohio would not be subject to U.S. tariffs and quotas, Honda could circumvent these barriers by production facilities in the United States. The recent surge in FDI in countries like Mexico and Spain can be explained, at least in part, by the desire of MNCs to circumvent external trade barriers set up by NAFTA and the European Union. Trade barriers can also arise naturally from transportation costs. Such product as mineral ore and cement that are bulky relative to their economic values may not be suitable for exporting because high transportation costs will substantially reduce profit margins. In these cases, FDI can be made in the foreign markets to reduce transportation costs