Question

NAFTA has been in place for several years now. Assume that the USA decided to increase tariffs on all imports from Canada and Mexico. Based on the "effects of a tariff" model presented in class, we know that US producer output would increase, imports would decline, and prices would rise.

Using this information and adequate electronic-based research, answer the following questions:

Would you agree with such a move by the USA?

If so, why? If not, why not?

What economic arguments can you present in support of your position?

Elaborate on your position.

Answer 1

No, I do not agree with the USA move to increase tariff on imports from Mexico and Canada.

First, Mexico and Canada are a labor-abundant country and the wage rate there is very low as compared to the US. This makes the manufactured goods cheaper when manufactured in these countries. These cheaper goods increase the consumer satisfaction in the US and allow people to consume more at a cheaper price. If we put tariffs the consumer surplus will decrease and this could lead to some deadweight loss i.e. wastage of resources.

Second, THe USA has a comparative advantage in the production of capital-intensive goods, research and development. With the limited resources the US has, it's beneficial if they spend more on capital goods, this will give them more benefit as the opportunity cost of producing capital goods is less as compared to producing labor-intensive goods in the country. By specializing in the capital good they can divert scarce resources towards those goods and increase overall consumption in the economy.

Being the technologically advanced country that the US is they can produce whatever they want but its more beneficial to produce those goods where the opportunity cost is less and benefits are high. If the tariff is imposed the US has to produce some of the labor-intensive goods which they are importing right now. As the labor is limited in the US and wages are high these goods will be produced at a high price and bring the demand down.