In an effort to encourage free trade, imagine that the members of the World Trad
ID: 1231467 • Letter: I
Question
In an effort to encourage free trade, imagine that the members of the WorldTrade Organization agreed to dismantle all tariff protection of domestic
industries in their respective countries.
Do you think that such a commitment will necessarily result in freer trade? Are there alternative means by which these nations can support their domestic industries that have the same effects as tariffs? Are there alternative means of supporting local industries that have lower efficiency cost than tariffs? Why do you think that a government might choose to protect its industry using a tariff rather than simply offering a production subsidy?
Explanation / Answer
such commitment to dismantle all tariff protection of domestic industries in their respective countries would definitely refer to freer trade as compared to when the tariff protection was enforced. These countries could create some convertible instruments which could lead to import substitution resulting in the support of domestic industries. Alternative ways could be to encourage these industries to reinvest their profit and interest incomes and also to look for opportunities to merge and acquise other small industries domestically or overseas to augment their portfolio and revenues. government might choose to protect its industry using a tariff rather than simply offering a production subsidy because tariff enhances the revenue of the government thus strengthening its fiscal consolidation whereas production subsidy would proliferate the debt of the government thereby enfeebling its fiscal consolidation.
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