Government and Trade

3 Jul

Protective tariffs

People and whole society benefits from specialization and international exchange, but why sometimes governments try to restrict the free flow of imports and encourage exports? What types of world trade barriers exist and why are they applied?

There are four methods by which government can restrict free flow of goods among its country and other nations:

  • Protective tariffs– are some taxes designated to protect domestic producers of goods and services from competition with foreign firms and producers. They cause a rise in the price of imported goods so that buyers will tend to purchase more domestic goods.
  • Import quotas– are limits on the quantities or total value of an item that may be imported in a period of time. If quota if “filled” that good or resource can’t be anymore imported. Import quotas are more effective than tariffs, because with tariffs that items can continue to be imported in large countries, but with quotas all imports are prohibited once quota is filled.
  • Export subsidies-represent government payments to domestic producers of some goods or resources. By offering this money, production costs are reduced, so these firms can lower prices of their products, so that they may sell more goods in world market.
  • Non-tariff barriers (also non-quota barriers)-include burdensome requirements, unreasonable standards related to product’s quality. Some nations require importers of foreign goods to have some type of license and then government restrict number of licenses issued. Some countries may use these inspects to examine if goods aren’t harmful for people’s health, other use them to impede imports.

Why government would impede free trade when it’s beneficial for a nation? Why would it increase quantity and value of exported goods and decrease value and quantity of imported ones?

There is a misunderstanding that greatest benefit from international trade is greater domestic employment in export sector. It’s commonly thought that exports are “good” because they increase employment, but imports are bad because they deprive people from their jobs. Actually the true benefit of free trade is that a nation can get a higher output of goods obtained after international specialization and exchange. A nation can fully employ its labor force and resources with or without international trade. However, international trade enables the society to use its resources in a way that increase the total output and well-being of society.

A nation doesn’t need international trade to operate on PPC. That’s why a non-trading society can have all labor force employed. But, with international trade a nation can reach a point that’s upper than PPC. The gains from trade are “extra-output” –they are production obtained with less cost than if it was produced home.

Political Consideration

While a nation whole gains from trade, it may harm some particular domestic industries or groups of people. These who benefit from import protection are few in number but with enormous authority. The overall costs of quotas and tariffs exceed the benefits. It’s known that if government spends 1 million on protecting an industry, the latter one doesn’t pay back even half of this amount. Since the costs are spread over large number of people the cost related to each demander of that good is quite small. Since public doesn’t know about this stuff it can be won by this political groups by apparent plausibility (“Decrease imports, and so prevent unemployment”) or with some patriotic slogans (“Buy only Australian”).

 Cost for the entire Nation

Tariff and quotas benefit domestic producers but they harm the domestic consumers, who shall pay higher that world prices for that goods and services. They also harm the domestic firms that use protected resources in their production of goods. With less competition from foreign countries, domestic firms may be less efficient at implementing cost-saving methods and improving the method of production.

Protective tariffs

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