Question

Explain the impact that tariffs and quotas have on a specific domestic industry of your choice. In your answer, please explain the impact that the two policies have on domestic producers, foreign producers, domestic consumer, foreign consumers and the U.S. government. Also, explain the key differences between the impacts that each policy has on the terms of trade between the U.S. and its trading partners.

Answer 1

International trade increases the number of goods that domestic consumers can choose.It also allows domestic goods easily to be exported.Firstly we will discuss what is a Tarif?

Tariff is a tax.It adds to the cost of imported goods.Tariffs and quotas are both ways for government to protect the domestic firms and industries.

Taking an example of trade between India and USA.

For example India is trading leather products and is an exportinh leather goods to USA, in return USA is importing soaps. Since Indian economy is growing economy and Indian government needs to give protection to the local firms and industries especially of soaps making. Therefore importers of USA may take domestic share of soaps firms, hence to save from 'big fish '(US importers) Indian government will impose tariffs.

There fore soaps which are imported will become more costlier and it will reduce the demand of imported soaps and people will be back to their domestic products. Thus it will safeguard domestic market.

Now let's talk about quota. An import quota is a restriction placed on amount of a particular good that can be imported. I have given above example of leather goods which are exported from India to US market, US government may impose quota on our leather products. In such a way both the countries are safeguarding their firms.

Who benefits?

Tariffs and quotas do have their benifits especially when trade is happening between developing and developed nations.

Tariffs do bring revenue to the nation's. But free trade brings lot of choice to the consumers it increases competition in local market and sometimes due to free market it brings uncertainty to the economy. So in moderation tariffs and quotas are beneficial.