Rather than looking at a trade war that is currently happening, I would like to look back at the night of the Boston Tea Party in 1773 and see how the colonists actions had effected not only Massachusetts terms of trade, but as well as the rest of the colonies and Great Britain. To understand the actions of the colonists, you have to know the events leading up to that night. Great Britain had been forcing all vessels leaving the Boston harbor to have a pass. So not only did Boston ships have to pay a fee to leave the harbor, but they also had to pay an import tax on any goods that were coming in from Great Britain such as alcohol and even on slaves.
These tariffs hurt the colonies economies because they were forced to have lower prices for British goods while still having higher prices for every other colony in order for them to have net growth. Terms of trade is defined as the relative price of exports in terms of imports. So, since more money is leaving the colonies than is coming in, then the terms of trade is less than 100% and therefore not ideal. This was good for Great Britain for a while until the colonies got fed up with what they called "taxation without representation".
This would eventually lead to the Boston Tea Party. The result of this was the complete shutdown of the Boston Harbor until all the tea was paid for. This placed an embargo on any export coming out of Massachusetts. This backfired in a way on Great Britain because by closing this port, it caused the supply do decrease and as a result, prices would have been raised. Rather than hurting the colonies' terms of trade, the embargo was helpful because the price of exports increased while the price of imports stayed the same. For Great Britain, although they controlled what the colonies traded, their terms of trade was hurt by this act as well. The price of their exports was not increased as much as the price of their imports causing their terms of trade to decrease.
I believe that this is a good example of how tariffs have effected a country/colony. If we take a closer look at the Tea act of 1773, where one of the main influences of the Great British economy, East India company was granted a monopoly on tea imports and sales. This was not necessarily to make a high revenue on the tea but to get out of the debt that the British economy was falling into. The monopolistic market that the Brits were trying to control in Boston meant that they could undersell the tea without an issue which heavily effected the trade in the colony.
ReplyDeleteIf we take a look at the standard trade model, the world relative price of tea would have been higher than the price it was being sold for in Boston, meaning in theory that they should be exporting the tea. Boston was not gaining anything from the trade of tea and the colony was effectively being exploited and the tea was being undersold compared to the market price, this led to the rebellion and the Boston Tea Party.
While the tariffs that were imposed by Britain certainly impacted the economies of the colonies, the most destructive part of the act was gifting a monopoly on tea to the East India Company. This is because the colonies were simply being used as a way to bail the East India Company out without having to put the strain on the already struggling British economy that was weakened from the seven years’ war. What is important to remember here though is that given how Britain simply wanted to provide a bailout to the East India Company, much like how the American government provided a bailout of General motors during the recession of 2008. If you were to apply the standard trade model to the way that the tea was imported and sold in the colonies, you would see that the inverse of what the model would predict happened. This is because all the East India tea was allowed to be imported without being taxed or having to go through Britain. Given how relaxed the regulations were with the tea, the colonies markets were soon oversaturated with tea.
ReplyDeleteI agree with Thomas's example of how important terms of trade can impact an economy, especially one that is at war and essentially not fair and not right to the consumers. "Taxation without representation" describes well an economy that is corrupt and trades not fair which in the provoked a strike or in this case the Boston Tea Party.
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