Dear Jara6650:
I have composed the following essay for you. There is no copyrighted
material in it. If you are interested in learning more about
protectionism and free trade, please consult "Economics" 14th edition
by Samuelsson & Nordhaus, McGraw-Hill Inc., pages 677-691.
Sincerely,
Wonko
Companies utilizing a certain product or service in their business
desire to minimize its cost in order to maximize their profits. In
the absence of trade barriers, the local price of a product will be
equal to that of the world price, adjusted for transportation
expenses. If it is not, someone will acquire the product or service
where it is less expensive and sell it in the local market, driving
the local price down.
Trade barriers adversely affect the equilibrium price of a product or
service from a company's perspective by causing it to pay more than it
otherwise would. This can cause the business' profits to be decreased
both because of higher expenses and because, if it has to price its
products higher than it otherwise would, sales could be lost. For
these reasons, companies strongly oppose trade restrictions on
products or services used in their businesses. For example,
automakers were quite upset when the Bush Administration imposed
tariffs on imported steel because it is a key raw material in
automobile production.
Tariffs are one type of trade barrier, which are essentially a tax on
imported goods or services. The presence of the tariff prevents the
local price of a product or service from being the same as the world
price. The difference allows local suppliers to keep prices higher
than they otherwise would, thereby increasing the expenses of the
industry using the good or services, because imports cost more than
just the world price and transportation expenses.
Quotas, which limit the amount of a product or service that can be
imported, also allows local suppliers to keep prices higher than they
otherwise would because only a limited amount of the less expensive
imported good is available, and the importers have little incentive to
sell it at the world price level. Quotas can also leave an industry
vulnerable to supply shocks if the amount supplied by foreigners
unexpectedly decreases.
In order to ensure profitability and global competitiveness, companies
are eager to acquire the inputs to their businesses as cheaply as
possible. Because trade barriers cause local companies to pay more
than companies in other countries, trade restrictions can adversely
affect local companies' ability to compete. While many companies
lobby for trade restrictions on their finished products and services,
they are resistant to trade barriers being imposed on the products and
services they consume. |