Economic Issues: Tariff and Quota

Definitions

Theory of Reciprocal Demand

Aassumes that the interactions of trading countries depend not only on the relationship between factors of supply and demand. The main focus should be on the demand of countries for each other’s proposed goods. In this case, the demand for both countries matters and explains the relationship between the trading countries. An example of the theory is observed when India is interested in certain products proposed by China, and China also wants to purchase some products proposed by India. As a result, countries focus on developing their trading relations. In this case, the demand is reciprocal.

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Ricardian Trade Model

Is a one-factor model that compares two countries in terms of only one factor that is the factor of labor. Furthermore, the model mostly relies on the discussion of the supply conditions. Thus, the comparative advantage, in this case, is associated with technological differences in countries participating in trade relations. The model assumes that both countries developing trade relations can benefit from the trade, despite their status. Thus, comparing Brazil and Chile in terms of coffee production, it is important to pay attention to the labor costs per unit of produced coffee to state the comparative advantage according to the model. When the labor costs are lower, the comparative advantage is higher.

Comparative Advantage

Refers to the expected benefits gained from the trade between countries when these trading countries are different in technological factors, and they can produce some goods at a lower cost than the other countries. For instance, England traditionally has a comparative advantage in producing the cloth because production costs for this country are minimal, but potential gains are rather high. Besides, Portugal has a comparative advantage in producing wine because the country’s climate contributes to decreasing costs and increasing the quality of the product.

Factor Endowment Theory

States that international trade is based on the idea of exchanging products that are abundant in some countries and that are needed in other ones. According to this model, countries choose to export products that are produced at lower costs, and they import products that are highly needed. For instance, the United States chooses to export chemicals to China because the production costs are minimal, and China chooses to export toys and apparel to the United States to compensate for the high levels of production.

Factor Price Equalization

States that if the goods’ prices are equalized between trading countries, the result is the further equalization of prices related to capital and labor. Thus, if the European countries set equalized prices for trading goods, the expected result is the equalization of salaries and rents in these countries.

Stolper-Samuelson Theorem

Demonstrates how the price of a commodity influences the prices of the other factors. For instance, the inequality related to wages often increases in developed countries because of the abundance of skills, and it decreases in developing countries because of the lack of skills. Furthermore, the increased demand for the product that was previously abundant leads to increases in its price in the country-exporter. Thus, the Stolper-Samuelson discusses the aspect of inequality in export and import demands.

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Inter-industry specialization

Is observed when each nation chooses to specialize in a specific industry. For instance, India specializes in trading spice, and the country gains a comparative advantage in this sphere because of low costs and high profits.

Intra-industry specialization

Is observed when each nation chooses to specialize in producing particular products from a certain industry. An example is Japan that specializes in producing TV sets when South Korea specializes in producing TV turners because these countries have resources for the high-quality production of certain types of products in the identified industry.

Domestic production subsidy

Is proposed to manufacturers focused on producing the goods that are competitive about the import. The government chooses to support import-competing manufacturers. For instance, the protection of the domestic production subsidy is used for the development of the U.S. steel industry.

What is a tariff? Explain the various types of tariffs

A tariff is a usual tax that is applied to imported or exported goods. The import tariff that is imposed on imported goods is more common for international trade than the export tariff. The specific tariff is a duty that is calculated with references to the specific fee that has been set per a certain number of goods. The other types of tariffs include the ad valorem tariff that is the charge paid depending on the value of the imported product. The tariffs are also classified as protective and revenue ones. The protective tariff is imposed on imports to increase the cost of the goods’ import and support the domestic market. The revenue tariff is used to increase tax revenues in the country.

The effective tariff rate depends on Offshore Assembly Provision, Bonded Warehouse, and Foreign Trade Zone. Offshore Assembly Provision aims to give preference to goods that are being imported back to the United States when they are made abroad from the components that are manufactured in the United States. Thus, it contributes to decreasing the effective tariff rate that is related to foreign activities. Bonded Warehouse is usually duty-free, and it can decrease the effect of a tariff since the goods may be postponed for some years until the goods are claimed for use. Foreign Trade Zone can also cause decreases in the effective tariff rate because products are often imported without immediate payments. These conditions can be discussed as reducing burdens and costs of production.

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Referring to the large-nation model, it is important to focus on the effects of a tariff. The United States is an example of a large nation which changes in tariffs influence changes in world trade. The positive features of using a tariff are the possibility to control the situation that is associated with international trade because of setting trends in the sphere of import tariffs and prices. This possibility is related to the large-nation model, and its tariff policies can influence the import trends in international trade. There is often a protective effect and an increase in welfare. The negative effects are the decreases associated with the consumer surplus. Thus, it is relevant to speak about deadweight loss.

An optimal tariff is a tariff rate when the gains from increasing the tax can exceed the associated losses. It is possible to achieve the optimal tariff when the large nation chooses to reduce tariffs to gain more profits and to balance the supply and demand in the country with references to imports.

Tariffs can become burdens for exporters because they lead to high production costs. Tariffs result in increasing costs of input, and then, in the cost of living due to the high costs of producing each product. Consumers’ discretionary income becomes also affected. Exporters raise the prices, and this situation consequently reduces the demand for the goods in the market. Tariffs can also lead to adverse effects on international trade.

How is a quota different than a tariff?

A quota differs from a tariff about the quality of restriction that is imposed on imported goods. Thus, a quota is several goods that can be imported to a certain country. This number is set by the government to restrict the number of specific commodities that may be imported into the country despite the nation’s demand. On the contrary, a tariff is a specific tax that is applied to the import of a certain product.

Discussing the effects of tariffs and quotas on imports, it is necessary to state that tariffs and quotas contribute to increasing the price of the product when it is selling in the domestic market. In this case, the benefits are received by domestic producers. In contrast, consumers are most affected by tariffs and quotas. Referring to Figure1, it is possible to state that in both cases, consumers need to pay higher prices when domestic producers and the government can benefit from imposing tariffs and quotas significantly.

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The Comparison of Effects of Tariffs and Quotas.
Figure 1. The Comparison of Effects of Tariffs and Quotas.

However, a quota should be discussed as the more restrictive force to decrease the volume of the import in the country in comparison with the effects of a tariff on the imports and the domestic market.

The policies developed to protect domestic production are different types of subsidies, including export subsidies and domestic production subsidies. Export subsidies refer to payments to a producer of commodities important for export. The government makes these payments to increase the welfare effects. These subsidies can be discussed as an encouragement to the producers because they protect them from unfair trade practices. Furthermore, these policies increase profits and improve the competitive advantage of producers. The other type is the domestic production subsidies that stimulate increases in the outputs. The financial returns associated with domestic production subsidies are then shared by the producer and the government.

International trade can also be discussed as a substitute for labor migration when there is a debate on the movement of resources. It is often stated that the movement of labor is not necessary for the context of international trade. Thus, the circumstances when the labor does not choose the migration are changes in the resource prices. Changes in the wage associated with migration cause situations when employees need to find well-paid jobs in foreign countries, but the increased migration changes the wage levels in the countries from which they migrate. When countries establish trade agreements and mention the necessity of equalizing wages in countries-participants of the agreement, there is no need to migrate from developing countries to developed ones because there are equal conditions for employees of all levels. An example is the North American Free Trade Agreement for Canada, the United States, and Mexico. The other example is the Comprehensive Economic and Trade Agreement signed by the European countries and Canada.

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