Question

Suppose Representative I. M. Wright delivers a passionate speech at your college on tariffs. He argues tariffs are needed to a. Protect our young industries. b. Encourage consumers to buy U.S.-made products because it’s patriotic. c. Protect U.S. jobs and wages. d. Achieve a favorable balance of trade and balance of payments. Do you agree with Representative Wright? Evaluate each of his major points and decide whether you consider it valid. Be sure to justify your position.

Answer 1

a. Protect our young industries

The infant industry argument states that idomestic infant industries which can reap the advantages of economies of scale should be protected from foreign competition. Under tariff, the domestic prices for the imported goods will increase and quantity demanded by domestic consumers will fall. The domestic producers will gain because they can sell the goods at a higher price. There is a fall in the consumer surplus for the goods that are imported.

The infant industry argument is not valid because, once a domestic industry enjoys protection it will be difficult to remove it. The infant industry may never become efficient and reap economies of scale. This will cause inefficiency.

b. Partriotism may not fully justify purchase decisions. Consumers need good quality and a compeitive price. This can happen only when international trade is free.

c. Protect U.S. jobs and wages

This is not valid because foreign countries will also retaliate and impose traiff which means loss of jobs in export industries and gains from international trade are not realized. Trade will increase the wage level as goods that have comparative advantage will be exported. More production means higher wages.

d.Achieve a favorable balance of trade and balance of payments.

This is not valid as the other countries will also retaliate and impose tariff which will affect exports.