Friday, December 6, 2013

Both developed countries and poor countries would get hurt from tariffs.

As the textbook (chapter 8) says, under perfect competition, each country or firm is a price taker in its market. The use of an import quota is a limit on the quantity of a good that can be imported from a foreign country. Past Examples of import quotas in the United States include limits on the imports of agricultural goods, automobiles, and steel. More recently, the United States and Europe have imposed quotas on the imports of textile and steel from China. Here is the example about the deadweight loss due to a tariff with the U.S. steel tariff in place from March 2002 to December 2003.
I think the major reason why the U.S. would do so was the political motivation. We could use small-country model to explain how costly these tariffs were in terms of welfare. Because the U.S. was a large country so it can earn itself by finding its optimal tariffs (sometime), and American prices were falling in the steel industry from 1998 to early 2001. Those losses, along with falling investment and employment, met the condition of ‘serious injury’. So the U.S. was willing to protect the steel industry by setting a tariff of steel to many developing countries. President Bush made other supplier countries including Europe, Mexico and China crazy and stressful. Then, these small countries did not want to stand the deadweight loss (especially the big hurt to native consumption). In response, many European countries pushed tariffs of juices, papers and meats to America, which almost caused the greatest loss and political impact in America in 2002.

In general, I criticize someone sets trade barriers policy on the developing world. Because trade barriers such as taxes on food imports for farmers in poor-country players usually leads to vicious circle, dumping, overproduction on world markets. Thus, we need to support free trade and restrict government right on managing market-oriented economy.

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