Question

All else being equal, if a nation decided to intervene in free trade anyways, which of the following policy options would be most beneficial to the country and which would be the least beneficial? Please explain your answer clearly for full credit: Tariffs, Quotas and Voluntary Export Restraints (3 points)

Answer 1

Tariffs: It refers to imposing certain amount of tax by a country on imported goods.

Quotas: It refers to restricting the quantity of goods that can be imported in the country.

Voluntary export restraints (VER): It refers to voluntary restriction of type and quantity of goods exported by a country to avoid the tariffs and quotas of importing country.

In tariffs once the tax is imposed the prices of the importing goods rises. Consequently, the demand for product decreases. The product become costly for consumers. The government gets increased revenue due to taxes. The domestic industry production rises to capitalize on profits due to higher prices. This also reduce the import and thus helps in obtaining trade surplus with other countries.

Quotas on the other hand although are useful for traders since they sell limited stock at higher prices, there is no revenue generated for the government or the economy in form of taxes. The companies could avoid quota by setting up manufacturing plant in importing country. However, it encourages domestic manufacturers to compete with international companies to fulfill the demand. Also, the government might earn money by selling import licenses to highest bidder.  

Voluntary export restrictions (VER) are used in case the exporting country has trade surplus with importing country. To avoid tariffs and quotas the exporting country might limit the quantity of goods exported by it. This although provide temporary relief to importing country, there is no long term economic benefit in this for country. This is because the exporting company auctions the exporting licenses and earn money while importing country neither earn money through taxes nor through auction.

Thus, for an importing country most beneficial policy is tariff and least beneficial is Voluntary Export restrictions.