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This paper is aimed at explaining what tools modern economies use to protect themselves. Definitions of tariffs, quotas and non-tariff barriers are given. Advantages and disadvantages of using trade barriers are provided. Also, the paper observes some historic examples of protectionist policies. Question # 2 Nowadays, countries choose to maintain protection indefinitely in spite of the usual economic arguments against it, the interests of labor and the costs of labor-market adjustment should be considered in deciding which policy tools to use. The principal tools of protection in use today are tariffs, quotas, and negotiated export restraints non-tariff barriers.
These tools differ in the extent to which they permit changes in the domestic and world economies to be accommodated gradually and predictably. Quantitative restrictions, which include both quotas and export restraints, generally insulate domestic markets from changes originating abroad more effectively than do tariffs. But quantitative restrictions also tend to contain, and thus exaggerate, the effects of disturbances originating domestically. Thus an increase in supply of imports will not affect domestic markets if a quantitative restriction is in place, but will depress prices and output of import-competing goods under a tariff. A decline in domestic demand for a product, on the other hand, can appear partly as a decline in imports if no quantitative restriction is currently binding, but must be fully reflected in a reduced domestic output if a quantitative restriction is already in place and effective. The choice among policies depends, therefore, in part on whether disturbances are expected to originate at home or abroad.
According to Wikipedia, a tariff is a tax on foreign goods. When a ship arrives in port a customs officer inspects the contents and charges a tax according to the tariff formula. Since the goods cannot be landed until the tax is paid it is the easiest tax to collect, and the cost of collection is small. (Wikipedia) Tariffs are preferable to the other alternatives. First, continual change in world and domestic markets, plus the general growth over time of the world economy and trade, necessitate repeated changes in the quantities of imports to be admitted under a quota or negotiated as an export restraint. These changes are unlikely to be predictable, and will certainly not be announced far in advance. Thus they serve poorly as a guide to planning by any market participant.
Tariffs, on the other hand, are simple percentage taxes on imports and need not be changed frequently at all. Their effects can therefore be predicted much more readily in planning for the future. A large country with strong economy that can affect world prices may not find it advantageous to reduce tariffs unilaterally when faced by monopoly tariffs from abroad; multilateral tariff reductions should be mutually beneficial. On the other hand, small countries, which cannot affect world prices, can gain by reducing their import duties. Tariffs put barrier for free trade. It is surprising that high tariffs and other restrictive trade policies have been predominant in both developed and underdeveloped countries over the last hundred and fifty years.
Free trade has been the exception rather than the rule in international commercial relations. While there have been ebbs and flows since the early 1800 s, average tariff levels have generally been high. In practice, the policy recommendation of free trade has often been disregarded. While the monopoly tariff argument and possible retaliation may explain tariffs in particular situations, such as the OPEC (Organization of Petroleum Exporting Countries) oil cartel, it can hardly provide a complete explanation for existing restrictions on wide classes of both manufactured and agricultural products - particularly in less-developed countries. Tariffs also often reflect non-economic arguments for protection, such as national defense or the promotion of industries which increase national prestige (e. g. , steel mills).
From 1962 to 1967 there was a partial reversal of the protectionism of the 1950 s, manifested in the Trade Expansion Act of 1962 which empowered the president over a five-year period to negotiate reductions in tariffs and non-tariff barriers. The peril-point provision was considerably weakened, and the escape-clause criteria made more stringent. Financial adjustment assistance was to be provided to workers and firms injured by increased imports as a result of trade liberalization. To secure passage of the act, the Kennedy administration mollified textile and oil interests by extending mandatory import quotas, and further concessions were offered to the lumber, carpet, and glass industries. Quota is a limit put on the amount of a specific good that can be imported (The Free Dictionary). Most international commodity agreements will continue to rely on export quotas to defend floor prices, and on small stocks to defend price ceilings ineffectively.
Quotas have been introduced to some categories of products of major interest to developing countries, with the probability that more will follow. In recent years the most common response to protectionist pressure has been to impose formal or informal quotas through executive agreements, rather than legislatively mandated tariff increases. By 1933 it was clear that unilateral attempts to stimulate domestic output by erecting high tariff barriers only encouraged retaliation by other nations and further depressed the world economy. The combination of high tariff barriers and weak international demand meant that individual countries had little hope of gaining through unilateral action to reduce trade barriers. The industrialized nations realized that reciprocal trade reductions, coupled with expansionary monetary and fiscal policies, had the greatest potential for providing mutual increases in output and employment. Each countrys expansionary policies would reinforce similar policies taken by its trading partners.
Trade along lines of comparative advantage tends to reduce cost differences actually observed. In a world where transport costs, trade barriers, and lack of complete information together played a small role in determining trade flows, trade could virtually eliminate cost differences. This would not mean that comparative advantage was failing to operate, but rather that it was operating very well. Bibliography: Wikipedia, retrieved on Dec. 7, 2006: web Bernard M. Hoekman, Michel M. Kostecki: The Political Economy of the World Trading System: The WTO and Beyond, Oxford University Press, 2001 The Free Dictionary by Farlex, definition of quota, retrieved on Dec. 7, 2007: web
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Research essay sample on Tariff Barriers Comparative Advantage
