Question

what is a tariff and how does impact international trade?

Answer 1

- Tariffs are taxes that a government levies on imported goods. The primary objective of tariffs is to protect domestic industries that produce the same or similar goods. They may also aim to reduce a trade deficit.

- Tariffs reduce the demand for imported goods by increasing their price above the free trade price.

- When a large country imposes a tariff, the exporter reduces the price of the good to retain some of the market share it could lose if it did not lower its price. This reduction in price alters the terms of trade and represents a redistribution of income from the exporting country to the importing country.

- So, in theory it is possible for a large country to increase its welfare by imposing a tariff if

o its trading partner does not retaliate and

o the deadweight loss as a result of the tariff is smaller than the benefit of improving its terms of trade.

- However, there would still be a net reduction in global welfare—the large country cannot gain by imposing a tariff unless it imposes an even larger loss on its trading partner