Question

The US has threatened new trade tariffs on beer, chocolate, and olives from the European Union, as part of a long-running row over subsidies to plane maker Airbus.

The US Trade Representative said it was considering duties on 30 products worth $3.1bn (£2.5bn) in trade every year.

It has already put 15% to 25% tariffs on $7.5bn worth of other EU goods as part of the dispute.

The EU warned it would damage firms on both side of the Atlantic.

And UK Trade Minister Liz Truss said she was disappointed by the move, warning against the use of "tit-for-tat" tariffs.

The row centres on EU subsidies given to Airbus before 2004, which Washington says created an unfair advantage over the US aircraft manufacturer Boeing.

Last year, the World Trade Organization (WTO) ruled the subsidies were illegal and allowed the US to levy tariffs on EU goods, including aircraft, wines, and cheese.

But it is now considering a parallel case involving illegal support for Boeing, which could see the EU imposing duties later this year.

The US said pastry and cakes, gin, cashmere clothes and hardware products could all be in the firing line for new tariffs, affecting exporters across the continent.

In a statement the EU said Washington was going beyond what was allowed by the WTO.

"It creates uncertainty for companies and inflicts unnecessary economic damage on both sides of the Atlantic," it added.

"This is particularly the case as companies are now trying to overcome the economic difficulties in the aftermath of the Covid-19 crisis."

Questions: (Your answers should not exceed 400 words).

1. This story raises two major international trade issues. What are they?

2. Give two reasons why retaliatory tariffs are wrong in international trade. Name the remedy allowed under WTO rules for government subsidies?

Answer 1

The story raises international trade issues of rising amount of tariffs and subsidies given by the governments. Imposition of tariffs because the imports turn out be cheap vs. domestic products and subsidies given by the governments to propel the domestic industry.

Retaliatory tariffs are wrong in international trade because it reduces trade activity in the long run and companies fail to attain economies of scale because of the rising tariffs. It reduces comparative advantage and increases the level of inflation as cheap imports are made expensive, and domestic products are also expensive, which leads to rising costs of production. This ultimately leads to less employment generation and low demand for goods and services in the economy. Thus the two reasons are reduction in trade activity and increase in the level of inflation.

Remedy allowed under WTO rules for government subsidies is to levy tariffs in order to correct the adverse effects raised because of the government subsidies and withdrawal of the subsidy. Thus a countervailing duty can be charged on subsidized imports which are hurting the domestic suppliers of these products. Duty can be charged on subsidized imports such as aircrafts, where it is proven that the products were subsidized and increased the advantage for such countries.