In class we have
been talking a lot about tariffs and the effects of them: the costs, the
benefits, and the reasoning behind implementing them. To begin I’d like to assess
the gains from trade, then assess why someone would impose a tariff and the consequences
of said tariff, to finally analyze if the effects of a trade war are beneficial.
Ralph Ossa states
that the gains from trade account for around one-quarter of worldwide real
income; the gains from trade can be thought of as the division of labor, which
allows for specialization and thus efficiency. Trade is exactly this—it
specializes the output of countries pendent on their endowments, technologies,
and capital, to increase the welfare of and production of a country.
Why would someone
put a tariff in place? For many reasons: it can be political, it can be a form
of revenue for a country’s government, it can be to incentivize production of
goods, to incentivize the consumption of domestic goods, etc. In a study by Ralph Ossa, he
found that tariffs put into place for 30% approximately reduced the gains from
trade by one-eighth. He goes on to say that this would affect the real income
of China and the US by minimal amounts. However, if the US started a trade war
with the EU (e.g., on automotives), they would triple their losses to about
-1.2%. We know, that when a large country places a tariff on goods, it can have
a net gain if the revenue and TOT is greater than the deadweight losses.
However, with the information posed by Ossa, we can see that getting into a
trade war is not good for the country overall. He subsequently adds that these
calculations were done in a long-term model and he thinks that in the
short-term a trade war would be much more damaging than the evidenced
calculations here—all-the-more justifying the costs of a trade war.
Mark, I would this is a great analysis of the study done by Ossa. However, I would love to hear your thoughts and opinions on this. How could a country maximize the gains from trade and continue to reap welfare gains for their consumer population? This is something I have found my self questioning the most in this class. Finding the "secret sauce" of trade would be astounding. One solution that benefits all involved. What trade policies could do this?
ReplyDeleteMark, you do an excellent job of summarizing the key points and details in the study done by Ossa. Since tariffs will most likely never go away, is there a way for a country to impose a tariff that doesn't greatly decrease the TOT for a country? Or is it black and white where either you don't impose a tariff and lose out on home production or you do impose a tariff and TOT decreases?
ReplyDeleteWhat really stood out to me when reading this was the reasoning behind why someone would put a tariff on anything, your reasons were spot-on. You did well on defining trade and summarizing key details explained by Ralph.
ReplyDelete