Question

1. This question is about trade policy.

1. List and briefly explain two distinct reasons that a country might want to have positive tariffs on foreign goods.

2. Given that there are many reasons why governments might be motivated to have significant tariffs on foreign goods, why do we have so many trade agreements to limit them?

Answer 1

1.A tariff is a tax imposed by a government on goods and services imported from other countries.

Following are two reasons, which explains why government prefers a positive tariff on goods and services.

1)Tariffs have protective effect

Domestic Industries can be protected from foreign competition by embossing Paris and there will be increase in the domestic production.

2) Tariffs have balance of payment effect

A country having a deficit balance of payment deficit can restore and maintain equilibrium by means of Tariff imposition on imports.

2. Still we have trade agreements to restrict trade restrictions due to the following reasons

*It helps the promotion of trade

* Facilities the transfer of technology from member countries (especially for developing countries)

* Imposition of high tariffs will invite tariff war and retaliation .lt raises the costs of doing export business for the domestic producers. So it's better to get into trade agreements.

*It enables the creation of employment opportunities via foreign investment

*Increases availability of goods as well as choices for the consumers than in the presence of tariffs.

The rationale behind on the limitations on trade regulations can be explained as follows. Reduction of a tariff, mitigates the " loss of efficiency" costs generated by the distortions to the price system that tariff causes. Reducing the degree of market protection also expands the market, allowing producers in exporting countries to enjoy economies of scale and bringing benefits to the economy as a whole.