Question

When the U.S. Government imposes a tariff on imports,

1. what happens to the price of the imported good?

2. who pays the tariff?

3. who (which domestic businesses) gains from the tariff? How?

4. how can American jobs be saved as the result of imposing tariffs on American imports?

5. how can American jobs be lost as the result of retaliation?

Your opinion: What would be your preferred trade policies?

Answer 1

1. Tariff is a tax imposes on the imported goods. When tariff is imposed the price of the imported item is equal to Tariff plus foreign supply price. Tariff may be specific tariff or Ad Valorem tariff. A specific tariff is a fixed tax levied on per unit of goods imported. But an Ad Valorem tax is levied according to the percentage of the value of goods imported. Both raise the price of imported goods to the extent of tariff. If U. S imposes a tariff the price of imported item increases.

2. The tariff is paid by the U. S importers. But the financial burden ultimately falls on the U. S consumers who purchase the imported goods.

3. When is tariff is imposed the U. S government and domestic firms are the gainers. The domestic businesses which produce the same imported item (import competing industries) get an extra advantage in the form of increased price.

4. If there is a heavy import of goods in U.S, the domestic production decreases. The fall in domestic production reduce the domestic employment. But when a tariff is imposed the price of imported item rises which will reduce the demand for imported products. The consumers will switch from imported goods to domestic goods. Thus a tariff saves domestic employment in U.S

5. When U.S imposes a tariff on its import, the exporting country will retaliate by imposing tariff on the export of tariff imposing country (example trade war between U.S and china). Thus the volume of trade and gain from trade decreases between the trade partners. If one country impose a tariff and it is not subjected to retaliation by other country the tariff imposing country gain from the imposition of tariff. But if the other trading partner retaliate both the countries loss from fall in the volume of trade and revenue.

6. When a trade partner retaliate the export from the country decreases. This will create a job loss in export sector.

A free trade policy is better than restrictive trade policy. Under free trade, each country specializes according to its comparative advantage and this advantage is transferred to the other countries in the form of low price.

The consumer welfare will be maximized under free trade as it bring goods at lower price and facilitate the availability of variety of goods according to the changing needs of the consumers.

Free trade brings innovation and improved technology to the host country. Through free trade the countries benefit from doing by leaning and leaning by doing. The free trade thus promotes economic growth in trade partners.

The expansion of trade among trade partners increases the job opportunities. Under free trade there will be an expansion of domestic production for export and this enlarged export will create more employment opportunities and increased foreign exchange.

The restricted policy is often resorted on the protection of infant industries. But such an argument is meaningless since the restrictive trade policies like tariff and quota decrease the domestic demand. This will reduce the revenue of infant industries which prevent their growth.

Thus what is good for U.S is free trade policies rather than restrictive trade policies.