Question

Topic: You are an employee of an U.S. firm that produces personal computers in China and then exports them to the United States and other countries for sale. The personal computers were originally produced in China to take advantage of relatively low labor costs and a skilled workforce. Other possible locations considered at that time were India and Mexico. The U.S. government decides to impose punitive 100 percent ad valorem tariffs on imports of computers from China to punish the country for administrative trade barriers that restrict U.S. exports to China. How should your firm respond? What does this tell you about the use of targeted trade barriers?

Whose interests should be the paramount concern of government trade policy - the interests of producers (businesses and their employees) or those of consumers?

300-400 words

Answer 1

When such targeted trade barriers are present between US and China the firm will lose its comparative advantage . The firm is located in China because there is relatively low labor costs and skilled work force . But if tariff is added to the computers then the price of computers rise when sold in US market and become similar to domestically produced US computers . So ultimately the set up in China will lose its purpose if the computers become substitute of domestically US made computers . And if the tax rate is too high then the China made computers can even become costlier .

The firm as an individual profit maximizing entity can either relocate to US to avoid tariff on its products or else the firm can export computers to such countries other than US where there is lesser barriers to trade . The decision depends upon trade volume is different countries , relocation costs , manufacturing costs etc . Use of targeted trade barriers disrupts trade and restricts free trade flow . The production of the US firm based in China produces and adds too US Gross National Product . In case of trade barriers it becomes detrimental for both countries . But sometimes barriers are required to protect infant industries .

Government trade policy should mainly support producers but government cannot ignore consumer interests totally . Protection of domestic industries , fair wage policy should be the aim when formulating trade policies . But rpice control and cnsumer interests should also be kept in mind .