Economics Of Internationl Trade
Question 1
(a). Explanation regarding the impact of import tariff on the small nations economy
In the recent era of globalisation and economic modernisation, the concept and application of International Trade hold an area of great prioritisation. International trade has successfully created a new economic dimension that has taken economic activities to new heights, benefiting nations and their people’s interests. International trades not only broadened the global economic activities amongst nations but also enabled economic agility for global growth. As Tijan et al. (2019) has stated that the notion of international trade is interpreted as the group of actions that focuses on the exchange of services, goods, and capital across the different national jurisdictions. However, as per the economy of international trade, the phenomenon of tariff is deemed as most essential and influential for international trade and the global economy. A tariff is basically the duty or tax that is imposed by the government of different countries concerning a particular class of export and import of services and goods.
However, through undertaking a quick and acute evaluation it has been noted that the functioning of tariffs is deeply rooted in the context of international trade. For example, the imposition of tariffs by the government of different countries can ensure greater difficulties for the foreign exporters for exporting and importing their services and goods (Kawasaki, 2018). In such scenarios where exports tend to decline exporters might cut prices for saving their sales from falling drastically. For example, the foreign exporters might cut prices to $6.00 if the tariff is imposed around $1000. Furceri et al. (2018), states that, enhancement in tariff results in higher economic and trade inequalities. Thus it can be easily comprehended through this example that, tariffs, do have a greater impact on international trade and especially it has the ability to harm the economy of exporting and importing countries in terms of prices and quantities.
In such conditions, where fluctuations take place in import tariffs, the economy of small nations is harmed completely. In addition, the imposition of tariffs by international countries on the goods and services exported by the US, naturally the outcome of the enhanced cost results in less demand in the importing small countries, which is deemed as a sign of surplus in the country that exports. Hence, it is clearly visible through these aspects that, there is an economic linkage between the import and export tariffs and the economy of international entities, especially the small countries. Bouët and Laborde (2018) reflect that the sudden emergence of conditions like trade war can cause huge losses on small countries and less for huge countries. As an example, the author stated that the US-China trade war has impacted less on the Chinese economy and their trades however; the Mexican economy was in a complete loss due to being dependent on the countries engaged in the trade wars (Bouët and Laborde, 2018). The import tariff as trade barriers in the small countries enhanced prices and decreased availability of services and goods for consumers of small countries and that result in reduced employment, lower income as well as lower economic output.
Firstly it is essential to understand that when the tariff is indeed on the imports, two certain conditions within final equilibrium must hold, and these are the similar two conditions in the case of large nations. These two conditions are PTMex=PTUS+ T and XSUS(PTUS)=MDMex(PTMex). Hence, at the free trade prices, PTUS remains. This suggests that, in consideration of small countries, the import services and goods price within importing countries will enhance as per the tariff amount. To be precise, PTMex=PFT+ T. As illustrated in the above figure, the export supply and import demand is decreased to QT as a result of enhanced domestic prices.
The imposition of import tariffs can have various effects and impacts on the economy of small nations. Through undertaking a proper evaluation regarding the possible effects it has been observed that the import tariff will enhance the domestic prices. In fact, for small nations, it will result in leaving the foreign prices unchanged. The import tariff in small nations will decrease the import quantities as well domestic prices concerning the import-competing and import goods will be raised as per the full volume amount of the tariff. To be precise there are huge effects in the price and economy that will occur in small countries due to import tariffs. In the case of small nations, it is quite easily understandable that, the imports of these small nations are very small in comparison to the global market and complete elimination concerning imports can have an undetectable impact on global demand concerning the product. Therefore, the world price would not be impacted. Hence, it can be understood that tariffs applied by small countries leave no effect on global prices. However, import tariff has adverse effects on the economy of small countries. As per the view of Li et al. (2018), the US-China trade war has reduced the trade between these two major countries but enhanced trade with other international entities, causing an enhancement in the import tariff, which genuinely impacts the small nations as they are highly dependent on the trade benefits of these two large countries.
The enhancement of import tariff can enable severe outcomes like a loss on employment, production, import, export, less fulfilment of consumer demand and failure of overall trade. In light of these findings related to the effect of import tariffs on small nations, the application of some international trade theories can help in developing a better understanding. For example, there are four significant international trade theories that are Mercantilist Theory of trade, the Modern Theory of trade, the Classical Theory of trade and New Theories of trade. According to the Modern Theory of trade, there are several market imperfections that are structural and monopolistic in nature. These market imperfections emerge due to certain advantages that are deemed as ownership advantages that are availed by an enterprise. Hence, the utilisation of theory can help in the identification of market imperfections that will help in noticing the changes in the tariffs. Apart from the pricing impacts, there is some other impact of import tariffs on the small nation as well. For example, an import tariff enhances producer surplus and reduces consumer surplus in the periphery of the import market. In fact, it also impacts the national welfare for the small nations and enhanced import tariff reduces consumption efficiency for the small nations.
(b) Comparison of the import quota and equivalent tariffs effect on the imposing nation’s economy
In light of this significant question, it concentrates on doing a critical comparison on the impacts and effects of an equivalent tariff and import quota within the economy of the imposing nations. In view of this context, it is essential to evaluate the concept of import quota. The notion of the import quota in accordance with this context reflects a trade restriction of a certain kind that fixes a physical limit on the quantity of the goods that are to be imported to the different countries within a certain period of time. However, there are various means due to which an import quota is different from an equivalent tariff, in associations with the different nations. Through adhering to critical analysis, it has been observed that quotas concentrate on the limitation of quantities concerning a certain good that a foreign country exports and imports for a certain period of time. Whereas tariffs impose certain fees on those exported or imported goods (Griswold, 2019). It has been observed that tariffs or customs are quite different from quotas, which places taxes on exports and imports. Tariffs are designed by the government for raising the overall cost to the supplier or producer that are seeking to export their product into a foreign country.
In addition, extra revenue is offered by tariffs to other countries and protection is offered by tariffs towards domestic producers causing items imported to become more expensive. In comparison to tariffs, quotas are deemed as most effective in the restriction of trade, mainly if something’s domestic demand is not considered price sensitive. In fact, in the case of international trade quotas can emerge as more disruptive than tariffs. However, there are some other possible comparisons that have been observed between the equivalent tariff and import quota concerning the economy of the imposing nations (Till and Kulkarni, 2021). The adherence to an effective analysis regarding these aspects has unveiled that, although the tariffs and quotas are both utilised for protecting domestic market industries through artificially enhancing price in the periphery of the domestic market, the effect and administration of both the elements differ in several ways. For example, the tariffs are interpreted as the charge levied on the value of the goods that are imported from another country and on the other hand quantity of goods that have been imported from another foreign country is restricted by quota.
The revenue generated by the tariff is paid to the treasury of the importing country. On the other hand, the quota rents that are widely known as the value of the certain quota is paid to the foreign exporters that are capable of selling and exporting goods that are subjected to quota at high prices and trains revenue higher per unit. In consideration of both cases, the domestic consumers of the importing countries pay the quota rents and costs regarding the tariffs. However, in view of the quota, the government concerning the importing country gains no revenue. In addition, considering tariffs, quotas can be much more complex to administer (Kawasaki, 2018). Moreover, whenever goods enter a specific foreign country, the tariff is attained by the customs authority. However, in the case of quotas, the customs authority can directly monitor the imports for ensuring that no volume of goods above the quota limit is imported or licenses can be awarded by them to certain companies for allowing them with the right for importing the number of goods that the quota has allowed. In addition, the exporting countries that administer the quota, quota can be formed into Voluntary Export Restraint.
In view of import quota and the equivalent tariff, there are some interesting comparisons that distinguish both economic components. For example, the central difference between the import quota and import tariff is that tariff works with prices and quantity are restricted by the quota. Hence, quota can be interpreted as a quantitative limit through imports. In view of the demand-supply approach or the partial equilibrium, the comparison between quota and tariff can be illustrated in an effective manner. In accordance with the figure illustrated below, through the symbol SD, the domestic supply curve is represented, while the Dd represents the demand curve. In light of these critical representations, it can be observed that at the N point these curves intersect with each other. In this concern, the price that is determined is interpreted as Pre-trade prices or autarkic prices. In view of this aspect, if the trade is considered free, the prevailing international prices will be assumed or interpreted as PW. Thus, in consideration of the International Price (PW) a nation produces and consumes OA and OB respectively, and thus, the country imports the volume AB.
However, the context of a comparison between quota and equivalent tariffs can be well understood through the utilisation of international trade theory. As per the New Trade Theory, international trade is liberalised in an increased manner, and several industries that are having competitive advantages are expanding (Carter, 2019). Along with the expansion, the disadvantages related to the comparativeness are shrinking, which leads to the uneven spatial distribution of the corresponding economic activities. The acute utilisation of this theory can help in the removal of comparison and the disadvantages related to it and remove the negative impacts that can arise from the comparative impacts of import quota and tariffs in the imposing nation’s economy.
(c) The means due to which Developing and Developed countries impose trade restrictions
In view of these significant assessment questions, it has been noted that the central theme of this question concentrates on discovering the means due to which developed and developing nations or countries impose restrictions on trade. Firstly, the developed nations impose restrictions on the trade for certain reasons like, the consumers are benefitted from free trade through enhanced choices and decreased prices. However, as it enables uncertainty in the periphery of the global economy, several governments of the developing countries impose restrictions on trade. In addition, for the protection of the industry from the uncertainty of free trade several developing nations’ government imposes restrictions on the trade. The developed countries’ governments impose restrictions, in order to protect and safeguard the workers and the companies in the home economic periphery from the foreign firm’s competition. As per the views of Udmale et al. (2020), the sudden emergence of health emergencies or the emrge3ncies like the food crises can enable both the governments of developed and developing countries to impose trade restrictions due to the wellness own people. According to the views of Bown (2019), trade restrictions can be imposed due to the emergence of aspects like national emergencies like the US-china conflict, where trade restrictions are imposed due to each other’s trade protection.
However, there are some other reasons for restricting trade in developed and developing countries that must be considered in an effective manner. The impact of global incidents like Brexit can have a deep influence on the restrictions of trade, which has already been observed with the EU and UK. The imposition of trade restrictions by developed countries causes limited choices of services and products which forces consumers in accepting inferior quality with a higher price. This favours the developed or the rich countries as the developing countries remain dependent on these countries and the rich countries teens to set up the international trade standards and policies.
As opined by Erokhin and Gao (2019), the situations like the economic threat that can emerge from the decline of food security, enhanced food inflation, food trade restrictions can lead both developed and developing countries to impose trade restrictions, as it happened in the time of the global pandemic. In fact, the trade barriers work as protective measurements as it advances or shields specific segments or industries of the economy. A tax or a protective tariff is interpreted as the most basic trade barrier that a country applies to the goods that have been imported from foreign and international entities. This assists the developed countries as well as the developing countries in the enhanced revenue generation as well as gain a competitive advantage. In order to protect the infant industries and improve the trade deficit and shield domestic jobs from the cheap labour of the foreign industries, trade restrictions are imposed by different developed and developing countries. In this concern the Global Strategic rivalry theory can be observed, that suggests through the imposition of trade barriers different industries of countries can gain sustainable competitive advantages. Also the barriers’ concerning entering the new trade markets depicts the challenges a foreign country may face while entering the new trade market.
Reference
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