Question

1. Explain how a tariff reduction leads to an increase in the quantity of imports and a decrease in equilibrium price.

2. Explain how trade barriers raise wages in protected industries by reducing average wages economy-wide.

3. You have been placed in charge of trade policy for the U.S. Suppose corn is a crop that is doing well and the export market is beginning to expand. Corn production is considered an infant industry. Corn producers come to you and ask for tariff protection from cheaper corn grown in Canada. What sorts of policies will you enact and why?

Answer 1

1st Ans)

Tariff reduction leads to an increase in the quantity of imports and a decrease in equilibrium price.Tariffs are an important barrier to free trade; they are often imposed to protect domestic industry from cheap imports. However, it often leads to retaliation with other countries placing tariffs on their exports.

There are many benefits available with an decrease in the tariff.The benefits of tariffs are uneven. Because a tariff is a tax, the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from a reduction in competition, since import prices are artificially inflated. Unfortunately for consumers - both individual consumers and businesses - higher import prices mean higher prices for goods. If the price of steel is inflated due to tariffs, individual consumers pay more for products using steel, and businesses pay more for steel that they use to make goods. In short, tariffs are the barriers for the trade.

Tariffs can effect prices. Tariffs increase the prices of imported goods. Because of this, domestic producers are not forced to reduce their prices from increased competition, and domestic consumers are left paying higher prices as a result. Tariffs also reduce efficiencies by allowing companies that would not exist in a more competitive market to remain open.

Tariffs and new modern trade :

The role tariffs play in international trade has declined in modern times. One of the primary reasons for the decline is the introduction of international organizations designed to improve free trade, such as the World Trade Organization (WTO). Such organizations make it more difficult for a country to levy tariffs and taxes on imported goods, and can reduce the likelihood of retaliatory taxes. Because of this, countries have shifted to non-tariff barriers, such as quotas and export restraints. Organizations like the WTO attempt to reduce production and consumption distortions created by tariffs. These distortions are the result of domestic producers making goods due to inflated prices, and consumers purchasing fewer goods because prices have increased.

Conclusion : This is the opposite case of the Work It Out feature. A reduced tariff is like a decrease in the cost of production, which is shown by a downward (or rightward) shift in the supply curve.

2nd Ans)

Trade barriers raise wages in protected industries by reducing average wages economy-wide.Trade based on comparative advantage raises the average wage rate economy-wide, though it can reduce the incomes of importsubstituting industries. By moving away from a country’s comparative advantage, trade barriers do the opposite: they give workers in protected industries an advantage, while reducing the average wage economy-wide.

Trade barriers raise the price of goods in protected industries. If those products are inputs in other industries, it raises their production costs and then prices, so sales fall in those other industries. Lower sales lead to lower employment. Additionally, if the protected industries are consumer goods, their customers pay higher prices, which reduce demand for other consumer products and thus employment in those industries.

Even if trade does not reduce the number of jobs, it could affect wages. Here, it is important to separate issues about the average level of wages from issues about whether the wages of certain workers may be helped or hurt by trade.

Because trade raises the amount that an economy can produce by letting firms and workers play to their comparative advantage, trade will also cause the average level of wages in an economy to rise. Workers who can produce more will be more desirable to employers, which will shift the demand for their labor out to the right, and increase wages in the labor market. By contrast, barriers to trade will reduce the average level of wages in an economy.

However, even if trade increases the overall wage level, it will still benefit some workers and hurt others. Workers in industries that are confronted by competition from imported products may find that demand for their labor decreases and shifts back to the left, so that their wages decline with a rise in international trade. Conversely, workers in industries that benefit from selling in global markets may find that demand for their labor shifts out to the right, so that trade raises their wages.

Conclusion : Trade based on comparative advantage raises the average wage rate economy-wide, though it can reduce the incomes of import-substituting industries. By moving away from a country’s comparative advantage, trade barriers do the opposite: they give workers in protected industries an advantage, while reducing the average wage economy-wide.

3rd Ans) Traders were provided bounties for exporting rye, malt and wheat (all classified as corn at the time), and the same commodities were taxed. There are certain policies are enacted to provide the trade and subsidy for the export of corn production.

Corn is the most widely produced feed grain in the United States (U.S.), accounting for more than 95 percent of total production and use. The other three major feed grains are sorghum, barley, and oats. Most of the corn crop provides the main energy ingredient in livestock feed. Corn is also processed into a wide range of food and industrial products including cereal, alcohol, sweeteners, and byproduct feeds.

For a comprehensive overview of feed grains production and use, see Background, and for information on U.S. and global trade in feed grains Trade.

Production Benefits. Our economy is strongly affected by corn it uses almost all of the U.S manufacturing bringing large amounts of profit to the economy. Corn contributes to the economy in numerous ways such as taxes, agriculture and product sales

Corn in the United States has been subsidized since the 1930s, when a drop in demand from post-war Europe caused a food glut and prices crashed. In the 1980s, subsidies increased substantially.

The direct payments portion of subsidies was abolished, and subsidies were mostly replaced with two programs. Farmers may pick Price Loss Coverage (a guarantee that the farmer will get a certain price for their crop) and Agricultural Risk Coverage (which guarantees a certain amount of revenue).

The subsidies have been criticized for:

high and unpredictable expense to taxpayers
disincentivizing crop diversification and planning for extreme weather
harming public health; supporting meat and processed food by subsidizing durable staples (mostly corn and soy) rather than fruit and vegetables ("specialty crops")

Tariff protection from cheaper corn grown in Canada.

In practice, little changed on January 1st. Tariffs on maize have gradually been dropping since 1994 (when they stood at over 200%). Nearly all maize imports already entered tariff-free under government import quotas. Most of the imports are of yellow corn, used to feed livestock, while Mexico produces mainly white corn. Even so, without cheap imports Mexicans would pay more for their daily tortillas. They were reminded of that a year ago when a temporary shortfall in imports combined with distribution snags to cause the price of tortillas to soar.