The
United Kingdom is running its biggest trade deficit for a year. This is because
their biggest trading partner is the European Union where their demand has been
very weak. But consumer spending in the United Kingdom has been rising very quickly.
Which is sucking all their good from across the ocean to the UK. The EU has far
too many cars than it can sell. And the demand for them has been rising like
crazy in the UK. This has led to them importing a lot of goods and not
exporting as many because there is little demand in the EU.
This
is an interesting trade situation, because the UK has an issue of them
importing too many good without being able to export as much because of lack of
demand in the EU. I think that in order to fix this the UK should impose an import
tariff. This would help to regulate the amount of goods coming in and would
allow for them to close up the negative Terms of Trade. The could also consider
an export subsidy which would help them to produce and export more and have the
same effect on the terms of trade. Do you think that this would be a good idea?
Which one would you choose?
I would choose an export subsidy over an import tariff. With a subsidy, the producer surplus is increased and will help the producer become more efficient. However, if the EU cannot export much to the UK, maybe an import tariff will be more effective. The effectiveness will increase because the EU may be taking advantage of the UK because the trade pattern is not as strong. The terms of trade would improve with an export subsidy probably better than the import tariff. The EU would have a more decreased demand than even now.
ReplyDeleteIn response to your question, I would favor a production subsidy over an import tariff or an export subsidy. First off, as we discussed in class, for a large country a tariff can improve the terms of trade by small amount at first. Therefore, I would favor a tariff over an export subsidy. Remember that for a large country the terms of trade are always going to worsen with an export subsidy; the country is essentially increasing world supply, therefore decreasing world price, hence worsening their terms of trade and doing the rest of the world a favor.
ReplyDeleteMoving on, the benefit of a production subsidy is that the government could subsidize the auto industry in the UK (instead of restricting trade with a tariff) by only distorting production (an export subsidy for example distorts production and consumption).
I would agree with the Tyler's viewpoint on this question. A production subsidy could create similar situations that the government wants to accomplish without all of the potential negative implications.
ReplyDeleteAs we discussed in class the import tariff would create multiple deadweight losses. Another negative of an import tariff would be that the EU could respond by placing an import tariff on the UK. This could lead to a tariff war between the two. An export subsidy on a large country would lead to dead weight losses and a ToT worsening. A productin subsidy would only lead to a govenrnment loss and would leave the country better off than either of the other options.