Question

4) How does a tariff affect the government's revenue? How does an import quota affect the government's revenue?

5) Discuss the reasons why we see trade restrictions. Are any of these reasons valid?

6) Two arguments used to promote trade barriers are the infant-industry argument and the dumping argument. Explain each of these arguments and evaluate whether each one has any flaws.

Answer 1

4) Tariff is the tax on imports and import quota is a restriction on the quantity of import of certain goods. In case of tariff, the price of the imported goods increases in the domestic market which leads to a higher price being paid by the domestic consumers. This difference in price of the good and the price in domestic market leads to creation of deadweight loss and government revenue. So in case of tariff , there is an increase in government revenue.

While in case of import quota, there is no such government revenue because government is not increasing the price of the good, rather restricting the quantity which is being imported in the country. Hence it would not affect government revenue.

5) The reasons why there is trade restrictions are:

1) to protect infant industries: It is usually seen that the government wants to protect the budding domestic industry from the international competition. Hence they either impose an import tariff or simply restrict the imports by import quota.

But this protection continues for long and the domestic industries develop and gather a huge market share without the foreign competition.

2) Security reasons: One of the reasons cited for trade restrictions is the security of the country. Goods which are of vital importance are emphasised to be produced within the country and hence there are trade restrictions of such goods.

3)Domestic employment:It is seen that countries impose tariffs and quotas on the foreign countries because if there is free trade, there might be more supply of goods or higher imports from other countries which would increase the supply of goods and hence due to excess supply , the demand would reduce. This would mean a lower wages or even layoffs of employees. Hence to protect the domestic workers , there is tariff.

But this is also not always valid as the domestic producers can produce the good in which they have comparative advantage thereby benefitting both the countries.

6)Infant industry argument: This argument is a way of the country to protect the newer or the smaller domestic industries from the fierce international competition until the industry is strong enough to compete.

One of the major flaws is that there might be retaliation if the industry is made unprotected in the future which could mean a long run imposition of the trade barriers .

This could also mean that there could be inefficiency in such a market relating to the prices or quality of goods due to lack of competition from the outside world.

Dumping: Dumping is a practice to reduce the prices of exports which would lead to a higher market share of the international market. This implies that the price of the good in the domestic market is higher than that in the foreign market. One of the major flaws in such practice is that once the market share is gained and there is a near monopoly condition, the ompany tends to increase the price of the goods in foreign markets.