Arrears to Trade
It may seem odd, but governments often step in to restricttrade. Why might a government want to restrict trade? If domestic industries cannot compete against foreign industries, the government will restrict trade to help the domestic industries develop. Governments may also restrict trade to foster business at home rather than encouraging business to move out of the country. These protectionist policies encourage prices to stay high and help domestic industries to develop.
Government’s three primary means to restrict trade:quotasystems;tariffs; andsubsidies.
A quota system imposes restrictions on the specific number ofgoodsimported into a country. Quota systems allow governments to control the quantity of imports to help protect domestic industries.
Tariffs are fees paid on imported goods. Tariffs increase the price that consumers pay for the good, thus reducing the quantity of the good demanded and making the price more in line with the price charged by domestic producers. Tariff profits may go to the government or to developing industries.
Subsidies are grants given to domestic industries to help them develop and compete with foreign producers. Through subsidies, domestic producers can charge less for their goods without losing money due to outside grants.
Through judicious use of quotas, tariffs, and subsidies, governments are able to improve the domestic economy. This may increase the price that domestic consumers pay for goods, though this small annoyance is usually outweighed by significantly bolstered overall economic levels and long-term economic growth.
In the section on netexportswe learned that net exports equal exports minus imports. The difference between exports and imports is referred to as thetrade deficitor thetrade surplus. When exports exceed imports, a trade surplus exists. When imports exceed exports, a trade deficit exists.
There often talk about the effects of the trade deficit on the economy. What is the actual effect of the trade deficit though? Remember that when there is a trade deficit,net foreign investmentfills the gap between exports and imports, as NX = NFI. Thus, if a large trade deficit exists, foreigninvestmentmust be high. This is slightly problematic as domestic companies often enjoy domestic ownership--a large trade deficit threatens this condition. A trade deficit is often matched with a large governmentalbudget deficit. Though the specific effects of a trade deficit are nebulous, in general a large trade deficit is thought to stunt long-term economic growth slightly.
How can the trade deficit be resolved? First, exports can be increased to make annual net exports positive. When employed, this method will cause a trade deficit decrease over time. Second, funds can be used to pay off foreign investors, reducing balance due from trade and causing a lower trade deficit.
We studied the economic basis for specialization and exchange - or TRADE. People trade because they gain from trade. Remember: free trade is not forced trade. We don't have to trade with anyone if we don't want to. We learned that specialization and exchange occurs because of the principle of comparative advantage and we used this principle and production possibilities curves to show how both sides gain from trade. Everything discussed in that lesson applies to trade between me and Wal-Mart, between Illinois and Alabama , or between the United States and other countries. If you go to a store to buy something rather than produce it yourself, you support trade.
Here we will concentrate oninternationaltrade. The reason why we trade with other countries is the same reason why we trade with other states, counties, cities, or with each other - both sides gain.
Answering Commonly Asked Questions About Trade
Q: Doesn't free trade destroy American jobs?
Q: Doesn't free trade hurt low-wage workers by sending their jobs to other countries while favoring higher-wage workers?
Q: As U.S. exports have grown, so have imports. Doesn't an increase in imports displace Americans who could have manufactured those products here?
Q: Aren't U.S. factories moving overseas just to take advantage of cheaper labor?
Q: Aren't American jobs lost when American businesses move overseas?
Q: Don't import quotas, tariffs, and other barriers to trade protect domestic jobs?
Q: Don't foreign companies operating in the United States siphon off the wealth of Americans by sending their profits back home?
Q: Doesn't buying imports send too much American money overseas?
Q: Does the dramatic increase in the U.S. trade deficit over the past several decades mean that Americans are squandering their wealth overseas?
Q: Don't trade deficits with countries like Japan and China harm the U.S. economy and mean these countries are winning the economic war? Shouldn't we increase our barriers to imports from these countries to protect our own economy?
Q: Won't Americans' standard of living be lowered because some foreign countries subsidize their domestic businesses to make their products cheaper to buy?
Q: Isn't free trade destroying America 's manufacturing base and creating a service-oriented economy?
Q: Shouldn't less-developed nations protect developing industries with trade these questions came from the Heritage Foundation website ( According to the author of the web page, the answer all these questions is "NO". For a short explanation gohere. For a longer explanation gohere.
Unique Aspects of International Trade
Even though the fundamentals that support trade apply to both trade between Illinois and Alabama and to trade between the US and other countries, there are a few differences.
1. mobility differences
Distance does tend to make international trade more costly and therefore less likely than internal trade. But modern transportation has reduced these costs significantly.
2. currency differences
When we buy something from Alabama we pay for it using US dollars, but when we buy something from Japan , they want to be paid with Japan Yen. There is a cost and risk involved with exchanging currency and this makes international trade more costly than internal trade. In Europe they have decided to use the same currency (the Euro) to avoid these costs. Yet in developed economies with well-functioning foreign exchange markets this is not a major impediment to trade, but it can be in some developing countries.
3. politics
This is the main difference between domestic trade and international trade. The US constitution prohibits restrictions on trade between states. Therefore we in Illinois can't tax Wisconsin cheese to help Illinois dairy farmers. But we can tax cheese imported from other countries. This is one reason that we have political disagreements about trade with Mexico , but not about trade with Montana .
The Facts of International Trade
US Trading Partners
From which countries does the US buy the most and to which countries do we sell the most? Who are the most important trading partners of the US ? Please try guessing before scrolling down? China ? Japan ? Germany ? . . . . .
Trade Barriers
Even though there are significant efficiency advantages to free trade, as we have discussed, many people support trade restrictions (or barriers). Here we will discuss the types of trade barriers, look at their costs and benefits, and analyze why they exist.
Types of Trade Restrictions
- tariffs
Tariffs are taxes imposed on imported products
1) revenue tariffs
2) protective tariffs
- import quotas
- no tariff barriers
- voluntary export restrictions
- export subsidies
Why Trade Barriers Exist -- special-interest effect
a. who gains from trade barriers?
b. who loses from trade barriers?
c. why do trade barriers "look good"?
What are the principle reasons for international Trade?
Why would we want to restrict trade? What are Tariffs? What are Quotas? What are the differences between the 2? I need to write a 5 page paper please help!
There are many reasons why we restrict trade, but in recent years many countries are moving towards globalization with no restriction whatsoever.
Tariffs is tax that the government applies to imported goods to limit quantity imported. and Quotas is quantity restriction applied to imported goods to limit quantity imported.
Quotas and Tariffs are created to reduced quantity imported, which will give greater incentives to domestic producers.
In a free market, you have the domestic price which equals the world price. People will demand more, but domestic supply is limited. So, foreign producers make up the supply that is needed to meet the demand. By using any of those systems, you eliminate supply and allow the price to rise and consumption will decrease. Domestic producers will enjoy this since they can increase price at same level of production.
In general, if tariff is used, government receives revenue from foreign firms. Quotas means, instead of the government, foreign firms will receive the portion that government would have received if tariff was used.
There are many reasons why governments use trade restriction.
In developing nations, they would use restrictions to close the market for advance products (example: electronics). Domestic firms do not have enough power or capitals to compete with strong foreign firms, so the government gives them incentives to grow by letting them control the market until it rises.
In developed nations, governments use restrictions to support decreasing industries. The best example is Agriculture sector. Even though subsidy is used most of the time, you will see some restrictions. Farmers in the U.S. cannot compete against developing nations due to high costs. Therefore, the U.S. cannot let this sector die. There are many theoretical reasons, but mainly due to main food supply. We cannot depend on foreign foods entirely.
Other reason can be that struggling large firms can lobby to apply restrictions. For example, Harley Davidson in early years after WWII, struggled to keep up with European masters. They asked the government to restrict the imports. The government did that and now Harley is one of the biggest firm in the U.S.
Restrictions can help firms when there is decreasing demand as well. When demand was high enough, domestic firms will not feel as pressure from foreign competition. As demand declines, domestic firms will not be able to keep up with low cost production line that foreigners bring.
Keep in mind that restrictions will always hurt consumers. Therefore, there many questions on whether the government is making good decision. Let's say that the government is saying the best way for the U.S. is to guide the steel industry to save 50,000 jobs. That is great that we can save 50,000 jobs, but at same time all Americans will lose significantly in a long run.
If this is economics class, then professors love it when you make cases against trade restriction.
I hope this helps. There's a growing awareness that trade is not just a technical question, but a matter of high political importance. In the World Trade Organization (WTO), the world now has a permanent trade policy forum as well as a more effective means of negotiating commitments and making and enforcing trade rules. Trade and trade policy have been put back in the front row of international concerns, where they were intended to be by the architects of the post-war international institutions. With the establishment of the WTO, and the conclusion of comprehensive agreements for cooperation at every level with the World Bank and the IMF, the matrix of trade and finance and development is not only completed but updated to contribute to global prosperity and stability in the new century. This improved institutional cooperation is a major step towards fulfilling the mandate given to the WTO by governments to work for improved coherence in international economic policy-making!
In re: QUOTA. Explicit limit (usually measured by volume or sometimes by value) on the amount of a particular product that can be imported or exported during a specified time period. A quota may be applied on a selective basis, with varying limits set according to the country of origin, or on a global basis, which only specifies the total limit and thus tends to benefit more efficient suppliers.
In re: TARIFF. Customs duties (tax) on merchandise imports.
Now we're talking about economic sanctions, which are economic penalties applied by one country (or group of countries) on another for a variety of reasons. Economic sanctions include, but are not limited to, tariffs, trade barriers, import duties, and import or export quotas.
Economic sanctions are frequently RETALIATORY in nature. For example, in 2002 the United States placed import tariffs on steel in an effort to protect its industry from more efficient foreign producers, such as China and Russia . The World Trade Organization (WTO) ruled that these tariffs were illegal. The European Union threatened retaliatory tariffs on a range of US goods, forcing the US government to remove the steel tariffs in early 2004. Economic sanctions frequently result in trade wars. The World Trade Organization is the world governing body for trade disputes.
How do tariffs and sanctions on the import ofautoengines into the U.S. affect production and costs at a company?
At this time, due to NAFTA, there are no tariffs or sanctions for importingauto partsfromMexicothe United States . If there was, tariffs would increase thecostof theproductand thecostwould then be passed on to the consumer. We would have to reevaluate thecostof doing business in Mexico .
Do we agree with trade restrictions? Trade restrictions are used to protect local industry. This can be a double edged sword. Although trade restrictions protect local economy, it does not promotefreetrade nor does it help keep thecostof consumer good down. Trade restrictions can be successful in protecting the local economy. However, when using trade restrictions to deter terrorism, we need to look to better ways to control this type of activity.