Question

Over the decades trade volume has increased due to reduction in tariffs, increased trade agreements, and subsidies among other trade enhancing measures. Gerber (2018) observed that the trade system has established trading rules and reduced tariffs under the GATT and WTO umbrellas. Although there has been significant reduction in tariffs and trade barriers there are still advances to eliminate tariffs even further. One might argue that such a move would only have diminishing returns to trade negotiations and a minor impact on GDP. Why would nations then continue to desire further market openings?

Please respond to either following and use examples where applicable: NB: You can choose to respond to 1 or 2 but 3 is mandatory. So, in total respond to at least 2 topics, 3 being one of the 2 topics.

1. Cite at least three reasons why economists trade openings.
2. Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to nation.
3. Which industries are more heavily protected in the United States and Japan? Are high income or low income nations more affected by American and Japanese trade barriers? Explain.

Grading will be based on both quality and frequency. Your original post must well detailed and should demonstrate an understanding and ability to apply relevant key concepts. In addition to your original post, you should respond to at least two of your peers. Make your responses constructive, and include your sources of information where applicable. Refer to the syllabus for comprehensive rubric.

Answer 1

a) every decision is taken after analysing its cost benefit ratio -

• We know that exports will make the price of a product lower because it increase competition --> consumers are benefitted but producers are not. But because number of consumer is always more than producer --> benefitting consumer --> net benefit of producer
• In long run, producers(who were able to survive the competition) will also be benefitted as competition will increase the quality of their product.
• Also as we know from Ricardo model that if the opportunity cost of producing a good is higher in home country, it's better to import it, as it will increase the overall welfare of both the countries.
• Consider the effect of imposing tarriff ---

• Due to tariff, price increases from $1 to $2
  • Consumer surplus (area above price abd below demand curve) decrease by 'a+b+c+d'
  • Producer surplus (area below price and above supply curve) increase by 'a'
  • Government revenue increase by 'c'
  • Thus total surplus = (a+c)-(a+b+c+d) = -(b+d)= dead weight loss.
• So ultimately there will be net loss

b) To protect the domestic workers, US and Japan impose tariff on imports of goods which are produced by industries not having high opportunity cost of producing goods.

• This is done to protect the industries in their nascent stage of development.
• These are either the startups or industries with less skilled workers.

c) it is the low income countries that are mostly affected due to tariff imposed by US and Japan.

• In our above argument we have seen that tariff is imposed on the industries with less skilled labours in US and Japan.
• But in low income countries, which has high population have comparitive advantage in producing the goods which intensively use labour. Since labours are not skilled enough, export basket of such countries consist of goods produced by unskilled labours.
• And because US and Japan impose tariff on export of such countries -->export of low income countries will decrease which will make them worse off
• Now other high income countries can also have the comparitive adavatage in producing capital intensive goods relative to US and Japan, where they have imposed no tariff. So high income countries can still benefit from trade with US and Japan (even if they impose tariff, because tariff is not on capital intensive industries).