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Example research essay topic: Domestic Producers Trade Deficit - 955 words

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The Classical Arguments For And Against The Tariffs To understand whether the barriers are good or bad, it should be first defined in what conditions trade barriers can generally exists. Assuming that we are living in the best world, we have to accept that there are good arguments for protection, but usually it is better to use some other policies than barriers to imports. The governments have to look for the best policies for their nation and as good as possible for the world as a whole. Many people believe that a tariff on a specific country's goods is necessary whenever the United States suffers from a high trade deficit with that country. (A trade deficit occurs when the monetary value of imports from a country exceeds the monetary value of exports to that same country. ) If trade deficits still seem dangerous, consider that everyone (who has a job) has a huge trade surplus with the city in which his or her employer is located, and a trade deficit with many other cities in the United States. Another popular justification for tariffs is the infant industry argument. According to this argument, a tariff is indeed bad in general.

However, a temporary tariff in a developing industry is a good thing, because it allows the domestic firms to mature and become competitive with foreign, established firms in the industry. Once the infant industry has caught up with the state of the art foreign competitors, the tariff can be removed. It is telling that such proposals never mention the duration of the "maturation" process. After all, if consumers are forced (by the tariff) to pay higher prices to relatively inefficient domestic producers for, say, two years, after which the domestic producers will out compete the foreign rivals and offer lower prices forever after, then the deal doesn't sound so bad. But if consumers are forced to indirectly subsidize inefficient domestic producers for eighty years in the hope that they will one day become competitive, then the proposal sounds far less appealing. The fact that those espousing the infant industry argument never even mention the time frame just shows how little thought they " ve actually given to their proposal.

The infant industry proposals notwithstanding, the free market contains a mechanism by which firms can suffer short-run losses so long as they are compensated by eventual long-run profits. That mechanism is simply a loan. Plenty of new firms, especially sole proprietorships, don't make money in their first few years of operation. But so long as the present value of the firm's expected future cash flows is positive, the firm's owners should be able to borrow money to finance the first few years as they develop experience, name brand trust, etc. If a firm or group of firms can't achieve funding from private investors to go ahead with their projects because the present values of their ventures are negative, then that is the market's way of saying that their schemes would squander valuable resources in the short run without sufficiently compensating gains in the long run. The advocate of a tariff to promote an infant industry is thus saying that he or she knows better how to determine intertemporal tradeoffs than the average person in his decisions to borrow or lend money at different rates of interest.

A third popular argument in support of tariffs is that certain industries, such as steel, are essential for war preparedness. People arguing this route may concede that steel prices will be higher, and the standard of living lower, from a purely economic point of view, but that it's better to lose a few dollars per year and have a guaranteed supply of steel rather than risk losing a war. In short, the profit system will automatically lead private businesspeople to take precisely those farsighted, cautionary measures that the steel tariff allegedly promotes. The difference is, the private actions would only be undertaken if the risks were high enough to make the cautionary measures worth their cost, whereas politicians will enact steel tariffs in the name of defense even if there is no real threat of a complete disruption in imports.

It is true that tariffs generate revenue and they are often the easiest taxes to administer. Historically countries have used tariffs as their first revenue raising method. In such nations the import tariff becomes a crucial source, not of industrial protection but of public revenue. However, there are a lot of other taxes that take the same revenue, and they are not so bad for the economy.

Valid arguments for tariffs do exists. These arguments rely on some type of distortion, or gap, between private and social costs or benefits. In the second-best world, a tariff may be better than doing nothing. But very often some other policy is better than a tariff in responding to the distortion. The specificity rule is important for selecting the best policy response to a distortion.

Why nations and voters choose tariffs and protection is a complex issue. Ideas from political economy offer some insights into the popularity of certain trade policies, and the unpopularity of others. The two mains arguments against protection are: Retaliation: protectionist policies often result in the protectionist country also facing high tariffs from other nations. There exist better policies to forward the particular policy goals.

Direct subsidies to production instead of tariffs. By reducing tariffs, quotas, and subsidies and by making sure that regulations affecting trade have a clear and scientific basis, a new agreement at the WTO could lead to significant improvements in the lives of almost everyone on the planet, especially people in developing countries. Bibliography: Some Subtler Arguments for Tariffs, Robert P. Murphy, December 9, 2003 web


Free research essays on topics related to: trade deficit, long run, monetary value, short run, domestic producers

Research essay sample on Domestic Producers Trade Deficit

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