Trade, Regionalism, and Globalisation - Essay Example

? Trade, Regionalism, and Globalisation - Outline the welfare consequences of tariffs and quotas. Critically evaluate the potential justification forprotectionism measures. 1.0 Introduction The measures used by governments worldwide to secure the performance of national economy are not standardized. Usually, these measures are chosen based on the economic and social characteristics of local market but also the needs of the economy in terms of financing. Tariffs and quotas are common measures for improving market efficiency. Still, the effectiveness of these measures is not guaranteed. The welfare consequences of tariffs and quotas are discussed in this paper. The theories developed in this field reveal that tariffs and quotas cannot be imposed without appropriate evaluation of local market needs. Moreover, it has been proved that tariffs are more popular than quotas as tools for increasing profits from trade. Also, both tariffs and quotas often limit the attractiveness of a county as a trade partner. Besides their negative consequences, tariffs and quotas are extensively used by governments for improving public finances. It is suggested that protectionism measures, such as tariffs and quotas, would be rather avoided; instead, the rules of international trade should be reviewed ensuring that restrictions in trade, where applied, are limited and absolutely necessary for eliminating threats for the national economy. 2.0 Welfare consequences of tariffs and quotas In economics, the term welfare is used for reflecting mainly the material welfare, as this trend is highlighted in the work of Marshall (Reddy and Saraswathi 2007). 2.1 Evaluation of a market’s efficiency The introduction of tariffs and quotas is often considered as an effort to limit free trade, as the concept was first introduced by Adam Smith in 1776 (Van Marrewijk 2007). The specific view can be characterized as justified since tariffs and quotas can reduce the attractiveness of a market as a partner in global trade transactions. For this reason, before applying tariffs and quotas in a particular market it would be necessary to evaluate primarily the market’s efficiency. The Ricardian model is considered as the most popular model for evaluating a market’s efficiency. According to this model, in markets where the technology employed in the production process is unique market efficiency is considered to be high. Reference is made to all the phases of the production process, including the selection of raw materials, the process of these materials and the distribution of the final product in the market. The Ricardian model is not appropriate for all markets but rather for those markets that are free from protectionism measures, such as tariffs and quotas (Van Marrewijk 2007, 156). The Heckscher-Ohlin model is also used for checking a market’s efficiency. In the specific model the criterion used for evaluating market’s efficiency is not technology, as in the Ricardian model, but the level of abundance of goods. According to this model, a country is expected to export only those goods that are abundant in local market. A market where different types of such products/ goods are available is characterized as highly efficient (Van Marrewijk 2007, p.156). 2.2 Tariffs vs. quotas – welfare consequences In general, both tariffs and quotas result to the radical increase of costs related to various phases of the production process (McEathern 2007). Also, both tariffs and quotas can lead to the increase of a product’s price. More specifically, by imposing a tariff on a particular product a government makes the product more expensive compared to other markets (Mankiw and Taylor 2006). In this way, the consumers have to pay a higher price for the particular product, a fact that would decrease their welfare. Quotas have a similar effect on a product’s price. For example, the tariff-rate quota imposed by the US government has resulted to the increase of the price of raw cane sugar across US (Carbaugh 2012). As a result, consumers in US have to pay more for raw cane sugar, meaning that their welfare is decreased. In addition, it has been proved that in markets where competition is high tariffs and quotas are likely to influence prices at the same level (Baldwin et al. 2011). Furthermore, it seems that both tariffs and quotas can set barriers to the access of producers in a particular market (Yoon and Lim 2013). At the same time, the welfare consequences of tariffs and quotas have important differences: a) in tariffs the income involved is incorporated in the state income while in quotas any benefit goes to the private sector, meaning the individual who has the right to import the product involved, b) the strength of an economy can be threaten by extensive quotas; for example, if a foreigner has the exclusive right to sell foreign products in a country where economy is quite instable, then the payment of revenue from quotas to the foreign seller leads to the deterioration of the national economy (McEachern 2007); c) quotas, especially if imposed for a long period of time, can lead to the limitation of the number of products imported in a country (Gans et al. 2011). The differences in regard to the welfare consequences of tariffs and quotas, as related to a specific part of a market, the import sector, are presented in Figure 1 below. Figure 1 – Tariffs vs. Quotas – welfare consequences on the Import industry (source: Dunn 1991, p.20) In theory, different approaches have been used for measuring the welfare consequences of tariffs and quotas. Harberger has developed a theoretical model, known as the Harberger’s triangle, which shows the effects that the taxes promoted by the US government can have on market losses; the specific model makes clear that the intervention of government on trade can harm the market, leading to the decrease of the country’s GDP (Van Marrewijk 2007). In graph in Figure 2 below the Harberger’s triangle has been used for showing the welfare consequences of a tariff in a partial equilibrium context. Figure 2 – Harberger’s triangle in partial equilibrium (source: Van Marrewijk 2007, p.159) In the above graph, the use of a tariff in a product of a small country, as Chile, is explored. The elements of the graph can be analyzed as follows: p2 is the local price of the product, related to q2, which is domestic production. If the country participates in international trade, p2 is equal to q2. If no tariff is imposed on the product, then the price of the product would be p0, related to limited production of q0. However, if a tariff (t) is imposed the product price becomes po(1+t); in this case, production should be increased to q1; also, in this case, and because of the increase in price consumer demand would be decreased, reaching the point of q3 instead of the previous point of q4. Under these terms, the welfare effects of a tariff in a partial equilibrium can be described as follows: a) domestic producers are benefited by the introduction of the tariff; the relevant welfare is represented in the part of the diagram within the elements p0, p0(1+t), q0 and q1 (left from the Supply curve), as indicated in the diagram; b) government is also benefited by the tariff, as indicated in the diagram’s part described as ‘government revenue’ (Van Marrewijk 2007, p.159); c) for consumers the tariff had a negative impact leading to the increase of price, from p0 to p0(1+t) (Van Marrewijk 2007, p.159); this means that after the introduction of the tariff consumers would have to pay more for the same product, a fact that would lead to loss of their welfare. Moreover, in graph in Figure 3 Harberger’s triangle is presented as developed for a general equilibrium context. In the particular case the market of a large country, instead of a small country, is used as an example. In general equilibrium context also, as in partial equilibrium, the welfare of domestic producers and of the government is increased by the introduction of the tariff; again, the introduction of the tariff lead to the limitation of consumers’ welfare, since consumers would have to pay more for the same product after the introduction of the tariff. The changes in the welfare of producers, government and consumers are highlighted in the parts of the diagram appropriately shadowed, and presented at the bottom of the graph (Van Marrewijk 2007, p.161-162). Figure 3 – Harberger’s triangle in general equilibrium (source: Van Marrewijk 2007, p.162) The welfare effects of a tariff are presented in diagram in Figure 4. In the particular diagram the following facts are made clear: a) for manufacturers the introduction of the tariff leads to the increase of wealth since their production levels are increased, b) for the economy, the welfare is not clear; rather, because of the reduction of price, as compared to world price, the introduction of the tariff can lead to the limitation of economy’s welfare, c) also, because of the tariff, the quantity of goods imported/ exported are reduced (Van Marrewijk 2007, p.164); due to this fact, the prices of the products is expected to be increased, making consumers to pay more. Figure 4 – Harberger’s triangle in general equilibrium (source: Van Marrewijk 2007, p.163) On the other hand, it seems that quotas are more able to protect domestic market than tariffs. This view is based on the work of Bhagwati. The above theorist developed a model for showing how the restrictions imposed on the amount of goods imported in a country can strengthen the country’s domestic market. This model is presented in graph in Figure 4 below. The graph could be explained as follows: within a market there is a domestic producer who faces decreased demand in regard to his product; as a result, the specific producer has to respond to costs that are high, being represented by Marginal Cost curve (MC) which shows signs of increase and to revenues that are low, being represented by Marginal Revenue Curve which shows signs of decrease. If there is no competition from international trade, MC is equal to MR and are met at point C. At that point the price of the product would be monopolistic, being described as Pmon. In case of a competitive market though the cost would be equal of the product’s price, being met at point B; at the above point product’s price would become Pcom. Moreover, if the country is highly involved in international trade, then the domestic producer should change the price of his product to Pworld, at point D. At that point, the cost of the product would be at the same level with the product’s global price, and not to its domestic price. According to the specific graph, a government can protect the domestic market by imposing a tariff that would make the product’s local price lower than its global price, as increased by the tariff, following the sequence Pmon Read More