Question

1) If free trade is best then why is there so much pressure for protectionist measures? 2) Explain who wins and who loses if a tariff is implemented on a good. 3) Explain briefly the rationale behind the infant industry argument for a tariff. What are some of the problems with it? 4) What are quota rents? What is their equivalent with tariff? 5) Which are more restrictive, quotas or tariffs? When?

Answer 1

1) If free trade is best then why is there so much pressure for protectionist measures?

Answer-

• Because of the concept of Free Trade, the Economic interdependence and globalization has resulted in a unique capitalistic system, where each country is largely dependent upon other countries for economic sustainability.
• It has been observed globally, that conflict reduces trade. This highlights the risk of conflict harming an economy.
• A more specific context for trade and conflict can be the way in which trade is complicated during wartime. Indeed, trade during wartime can be a substantial threat to a nation, as economic levers such as sanctions can be utilized.
• A more specific context for trade and conflict can be the way in which trade is complicated during wartime. Indeed, trade during wartime can be a substantial threat to a nation, as economic levers such as sanctions can be utilized.
• Combining these ideas, it is clear that there is substantial national security value to trade protectionism.

Economic interdependence and globalization has resulted in a system, where each country is largely dependent upon other countries for economic sustainability (though to varying degrees). This results in a substantial national security threat in the form of conflicting or offensive trade strategies between countries. Indeed, economics is often used directly as a weapon of war and conflict via trade sanctions. This highlights a critical protectionist argument pertaining to the very real risk of dependency upon other nations for economic sustainability.

Combining these ideas, it is clear that there is substantial national security value to trade protectionism. However, the opportunity cost of leveraging the ever-growing global markets make this an unattractive prospect if taken to any extreme, as the benefits of global trade rapidly offset the risk of economic dependency upon hostile nations.

2) Explain who wins and who loses if a tariff is implemented on a good.

Answer-

When tariffs are implemented, resources are not used most efficiently and people end up paying more for products. There will be winners and losers in the Job Market in the different types of Industries but Tariffs go against the principles of Free Trade.

3) Explain briefly the rationale behind the infant industry argument for a tariff. What are some of the problems with it?

Answer-

The rationale behind the infant industry argument is as the name implies: protection. Economic markets are inherently competitive, and newer economies are highly vulnerable to their more developed counterparts in other countries for a variety of reasons. The infant industry argument is that new industries need protection until they have become efficient enough to compete in the world market.

Free trade results into prosperity but the problem with it is that it is often unregulated and of the greatest benefit to the influential players in established economies, sometimes at the expense of exploitation of developing nations (cheaper labor, reduced governmental oversight, etc.). As a result of this, protecting infant industries can benefit the nation employing them, but generally with the opportunity cost of global value.

4) What are quota rents? What is their equivalent with tariff?

Answer-

Quota rent is the economic rent received by the owner of the imported good that is subject to the quota. To calculate quota rent, first calculate the economic rent, which is the positive difference between the domestic price of the good and the free market price from around the world.

In the case of a quota, that generates the same level of imports at the tariff t, the difference between the domestic demand price p and the world. supply price p. * times the quota quantity is referred to as quota rent.

5) Which are more restrictive, quotas or tariffs? When?

Answer-

Import quota is a more restrictive trade barrier, because a quota is a physical limit on the number of goods a country can import from another. On the other hand, a tariff is a form of tax on goods a country imports but does not limit the numerical amount of goods allowed to be imported. With that being said, the import quota restricts the volume of international trade to a greater extent because imports between countries cannot exceed the stated limit. With imposed tariffs, countries can import as much goods as they want as long as they can pay the duties imposed on the goods they are importing. That is why import quota is more restrictive than import tariffs.

Increasing demand for foreign goods will not lead to increased imports. For exporting countries, quotas are more restrictive for this reason; even if they become more productive/efficient and are able to reduce prices, they can't sell more because of the quota (in case of tariffs, lowering prices in exporting countries or increasing demand in importing countries would enable them to export more).