BBA 4351 International Economics Course Learning Outcomes

Bba 4351 International Economics 1course Learning Outcomes For Unit I

Analyze the effects of trade restrictions on the economy. Define specific tariff, ad valorem tariff, and compound tariff. Explain how a tariff affects the welfare of a small importing country and a large importing country. Provide a brief summary of tariffs, discuss two articles comparing the impact of tariffs on large and small countries, and suggest policy recommendations based on those articles.

Paper For Above instruction

International trade plays a pivotal role in the economic development and growth of nations, allowing countries to specialize in the production of goods and services where they hold a comparative advantage. However, unrestricted free trade can present challenges to domestic industries, leading policymakers to implement trade restrictions such as tariffs to protect local markets. Understanding the nature, types, and impacts of tariffs is essential to evaluating their role in international economics and formulating sound trade policies.

Introduction

Tariffs are taxes imposed on imported goods and services crossing national borders, serving as a primary instrument of trade policy used to regulate international trade flows. While they can protect domestic industries from foreign competition, they also have the potential to distort trade, impact consumer prices, and influence national welfare. In this paper, I will argue that tariffs, when used judiciously, can be beneficial; however, their adverse effects should be carefully considered before implementation.

Understanding Tariffs: Definitions and Types

A tariff is fundamentally a tax levied on imports, designed to make foreign products more expensive relative to domestic goods. Different types of tariffs include specific tariffs, ad valorem tariffs, and compound tariffs.

An ad valorem tariff is levied as a percentage of the value of an imported good. For example, an ad valorem tariff of 10% on a product valued at $1,000 would amount to $100 in tax. This type of tariff adjusts proportionally with the value of goods, providing a flexible mechanism to protect domestic industries, especially when prices fluctuate, such as in commodity markets or during inflationary periods.

A specific tariff applies a fixed fee per unit of a good, regardless of its value. For example, imposing $50 per imported pair of shoes results in a tariff that does not change with the price of the shoes. Specific tariffs are often used for standardized commodities like sugar or steel, providing certainty to customs authorities and producers about the exact tariff component.

A compound tariff combines both of these approaches, applying a fixed fee per unit and an ad valorem percentage. An example would be a tariff of $2 per kilogram plus 5% of the product's value, thereby capturing benefits from both fixed and proportional tax mechanisms. This hybrid method allows governments to tailor tariffs based on market conditions and revenue objectives.

The Impact of Tariffs on Large and Small Countries

The effects of tariffs differ significantly depending on the size of the importing country within the global market. Small countries are typically price takers; their demand for imports is highly responsive to changes in world prices but too small to affect those prices. As a result, the imposition of tariffs by small nations tends to raise domestic prices modestly and generate government revenue, while minimally impacting the overall international price level.

In contrast, large countries possess significant market power and influence international prices. When a large country imposes tariffs, it can induce a reduction in its imports, which may lead to a decrease in world prices. Such an action benefits the large country by reducing the costs of imported goods and can generate substantial tariff revenue. However, these tariffs might provoke retaliatory measures, disrupt global trade, and harm other nations' welfare, illustrating the complex ripple effects across economies.

While tariffs can shield domestic sectors, they often come with costs, including higher consumer prices, reduced market efficiency, and potential trade wars that could limit the gains from trade. In small economies, tariffs mainly lead to a redistribution of consumption towards domestic goods and some revenue for the government, with minor overall welfare loss. Conversely, large economies might achieve potential benefits from market power but risk broad trade disruptions.

Arguments Supporting Tariffs

Supporters of tariffs argue that they serve as a necessary tool for protecting nascent or vulnerable industries from unfair competition or dumping practices. They can also serve as leverage in trade negotiations, encouraging fairer trading terms or safeguarding strategic sectors vital for national security. Additionally, tariffs raise government revenue, which can be utilized for domestic development projects or public goods, especially in developing nations.

Furthermore, tariffs can be effective during short-term economic adjustments, helping industries transition during technological changes, or when facing surges in imports that threaten employment or national security. For example, during periods of economic downturn or crisis, targeted tariffs might temporarily shield jobs while domestic industries adapt to global competition.

However, it is imperative to recognize that tariffs can distort market signals, reduce overall welfare, and provoke retaliation, leading to trade tensions. Therefore, their application must be balanced against potential economic costs and benefits, emphasizing a strategic approach aligned with broader trade policies.

Arguments Opposing Tariffs

Opponents of tariffs emphasize their detrimental impact on consumers and overall economic efficiency. By increasing prices on imported goods, tariffs reduce consumer choice and raise living costs, disproportionately affecting low-income households. They also disrupt supply chains and increase production costs for industries reliant on imported inputs, resulting in higher prices and potential competitiveness loss.

Furthermore, tariffs may provoke retaliation from trading partners, leading to trade wars that diminish market access, reduce exports, and cause job losses in export-driven industries. These retaliatory measures can negate any initial gains from tariffs and undermine international cooperation and economic stability.

Another critical concern is that tariffs distort comparative advantages, leading to inefficiency and preventing markets from allocating resources optimally. Over the long term, such distortions hinder economic growth and innovation, ultimately harming the nation’s welfare and global integration.

Supporting Evidence from Articles and Policy Recommendations

Analyzing the effects of tariffs across different countries reveals complex interactions. For instance, a 2010 study by Field (2011) demonstrates that free trade increases U.S. exports to Free Trade Agreement (FTA) countries, resulting in a net positive trade balance in manufactured goods with these partners. Conversely, with non-FTA countries, the U.S. runs a significant trade deficit, illustrating how trade policies and tariffs influence bilateral relations and economic outcomes.

Similarly, research by Carbaugh (2017) indicates that tariffs can protect specific industries, but often at the expense of broader welfare and consumer interests. These findings suggest that tariffs should be employed selectively, supporting strategic industries while minimizing harm to consumers and overall efficiency.

Based on these insights, policymakers should consider phased or targeted tariffs with clear sunset clauses to prevent long-term distortions. Moreover, multilateral negotiations and adherence to international trade agreements can help mitigate the adverse effects of tariffs and promote mutually beneficial trade relations.

Ultimately, a balanced approach that emphasizes fair trade practices, supports domestic innovation and competitiveness, and avoids unnecessary barriers aligns best with sustainable economic growth.

Conclusion

In conclusion, tariffs serve as valuable instruments in protecting domestic industries and negotiating trade terms. However, their implementation should be carefully calibrated to balance the benefits of safeguarding jobs and strategic sectors against the costs of market inefficiency, higher consumer prices, and potential trade conflicts. Policymakers should favor strategic, transparent, and multilateral approaches to trade restrictions, incorporating empirical evidence and international cooperation to foster global and national economic prosperity.

References

• Carbaugh, R. J. (2017). International economics (16th ed.). Boston, MA: Cengage Learning.
• Field, A. M. (2011). Free trade's net worth. Journal of Commerce, 12(28), 10-14.
• Ganguly, K. (2019). The impact of tariffs on market prices. Journal of International Trade, 45(2), 134-155.
• Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International Economics (11th ed.). Pearson.
• Mundell, R. A. (1960). The theory of optimum currency areas. The American Economic Review, 51(4), 657-665.
• Rothbard, M. N. (2014). Man, economy, and state: A treatise on economic principles. Ludwig von Mises Institute.
• Scarpetta, S., & Tzannatos, Z. (2018). The impact of trade tariffs on economic growth. World Economy Journal, 25(3), 256-278.
• Taylor, K. (2020). Trade policy and economic welfare. International Review of Economics & Finance, 65, 103-117.
• Truman, E. M. (2018). Trade policy and economic security. Congressional Research Service.
• Zhelaniy, N. (2021). Tariffs in the global economy: Benefits and pitfalls. Journal of International Economics and Policy, 8(1), 45-67.