Tariffs and Quota to Foreign-Made Goods - Article Example

Sur Supervisor Article – Tariffs versus Quota The article is all about tariff and quota applicable on foreign made goods. According to Ed, tariffs and quotas are essentially different things. A tariff is equivalent to tax imposed on foreign goods while a quota is the fixed quantity that is allowed to come in the US. Dave opines that quota increases the price of the product for the consumers. Therefore, in a way, it is just like a tariff. Tariffs make the imports costlier for consumer to spend more. Dave asserts that quota decreases supply and due to that price of the product goes up. Dave firmly opines that the effect of tariffs and quota are same on consumers that they have to spend higher. Dave says that money simply changes hands. At times, government prefers voluntary quotas in which a foreign nation on its own agrees for its exports to a fixed number. It helps the US because then they need not pass any legislation to enforce any quota on the foreign nations. Importers get scarce licenses to import the goods and in turn make huge profits. Whether tariffs, quotas or voluntary quotas are imposed, finally, the price to consumers goes up. It is estimated that impact of such voluntary quota restriction to import cars from Japan is almost $400 per car. Overall, consumers paid an extra $4 billion because free imports were not allowed. Tariffs, quotas restrict innovation in the domestic industry. Tariffs and quota provide cushioning to the domestic industry as they can sell goods at higher prices. Whenever the government resorts to a voluntary quota kind of system, foreign manufacturers establish manufacturing facilities in the US itself. This way, American jobs are created but products are certainly expensive compared to imports due to high labor costs involved. In tariff, or quota system, producers spend more time lobbying with the government to maintain or increase those restrictions so that they are safeguarded. Manufacturers become less innovative when free trade is not allowed and consumers do not get novelty and better products, processes or systems. Nations differ in available resources such as skilled or unskilled laborers, land, technology, metals, minerals, or energy resources and accordingly, they differ in their ability to produce goods at the most competitive prices. Technologically advanced country such as US can produce Boeing planes, high tech ammunitions or other high tech products and can earn much higher. The point is that the US has absolute advantage in agriculture production due to huge land stock; does that mean that the US should put all its resources on agriculture? Certainly, the answer is negative. The fact is that not all nations can produce all goods. Each nation’s comparative advantage in producing a specific good differs significantly. As discussed in the article, the US does not have comparative advantage in producing television sets due to higher labor costs compared to Japan. The discussion is all about tariffs and quota; their drawbacks and how it hampers free trade internationally. Free trade benefits consumers because best quality products are available at the most economical prices. Consumer satisfaction is at its top if free trade is allowed to take place. That also enhances disposable income of the consumers (due to savings realized while purchasing imported goods) diverting the money for buying other goods. This eventually boosts economy of the nation. The biggest argument that is put forward in favor of tariffs and quota is for protecting employment within the country. For example, the US cannot produce garments and other textile apparels at the cost that countries such as China or India can produce due to high involvement of laborers in its production processes. If the US imposes tariffs or quota on these countries for importing textiles then that means that, the US textile industries and laborers are protected at the cost of US consumers. In such a situation, increased spending on textiles and garments by consumers will result into lesser spending on some other goods affecting overall economy. While discussing on tariffs versus quota, Bhagwati says that the imposition of tariff does raise the domestic price in the country. He also argues that in the perfect competition the two instruments are equivalent (Bhagwati). The moot question is whether domestic industries should be protected against foreign good by imposing tariffs or quota. Thinking rationally on this, the answer does not come in affirmative. It has two major drawbacks. Firstly, consumers of the country at large are prevented to buy best quality imported products at much lower cost. That is not at all a fair treatment to the citizens or consumers of the country. Secondly, protecting domestic industries build up inefficiencies over time. Protected industries do not initiate required innovation nor do they work toward making their products equivalent to imported stuff. In this process, consumers suffer. What Dave says about Ford Fairlane is correct. Due to less competition and quota imposed on imported Japanese cars, the manufacturer never cared much to innovate and meet customer needs. Those Japanese cars came in the American market with many features such as safety bags, more mileage per gallon of fuel and lesser maintenance expense. These features were not there in the American cars initially, but soon they realized and began improving their cars with matching features. Such is the benefit of international competition. Many raise the question of unemployment in the domestic industries when imported stuff freely enters the country. Here, the answer lies in shifting the workers to the other manufacturing or service industries through skill enhancement where the country has a comparative advantage. The principle of comparative advantage states that the country must produce those goods in which the country has a relative advantage over trading country. Assuming that the US has a relative advantage in manufacturing computers and software products then the country needs to divert its resources for producing more computers and software instead of using those resources for producing textiles. Money earned by exporting computers or software can be used for importing textiles or other goods where the nation does not have any comparative advantage. This certainly has more economic sense rather than trying to manufacture everything within the country and make consumer suffer (Investopedia). Work-Cited Bhagwati, Jagdish. “On the Equivalence of Tariffs and quota”. The American Economic Review. Vol. 58, Mar, 1968. 142-146. Print Investopedia. “Comparative Advantage”. Web 2013. 20 June 2013. http://www.investopedia.com/terms/c/comparativeadvantage.asp Read More