Who bears the cost of import barriers protecting a job where the industry employ
ID: 1250463 • Letter: W
Question
Who bears the cost of import barriers protecting a job where the industry employing labor has lost its comparative advantage? Consider the use of tariffs on steel imports into the U.S. during the recent Bush Administration.Explain how international trade has altered the U. S. domestic manufacturing base. How has it made it more or less competitive?
In theoretical terms, explain the relation between globalization and poverty.
Discuss why a tariff on imports violates the principle of comparative advantage and makes winners out of losers and losers out of winners.
Explanation / Answer
International trade has definitely made the US domestic manufacturing base more competitive. Without trade, the domestic firms are just competing amongst themselves. The competition isn’t as fierce because all the firms share pretty much the same conditions. However, when you bring in the rest of the world into the picture, the competition kicks up a notch because now you have competition with other firms sharing your conditions added with international firms that may have a better condition than those in the US. For example, there may be Ford and Chrysler duking it out, but with international trade Honda and Toyota came into the picture. The Japanese had cars that were lower priced and had better performance. Thus, that forced Ford and Chrysler to have to think of better ways to produce their own cars, needing to manufacture at a lower cost or innovating to create incentive for consumers to purchase their cars. As countries that are developed look for new ways to produce their goods for cheaper (to become more competitive in the market), instead of looking for innovations and to make their production more efficient, they can now look for cheaper labor. But where can you find cheaper labor but countries that are already poor. (Afterall, who will you find in Europe that will work for a very small fraction of the average American income?) Thus, it seems like the only way to go is to find countries that are already poor and set up infrastructure there, and then hiring its citizens to work for a much lower cost than you would otherwise pay citizens from your own country. The consumers bear the cost of import barriers. Why? Because while it may protect the domestic industry by raising the price of imports or limiting its quantity (and thus driving up the price), it will ultimately cause consumers to have more expensive goods and also most likely inferior goods (not in the economic term, but in the quality term of the word). For example, a tariff on steel imports may protect the steel industry in the US. If the US can sell steel for $10, for example, but the US can also import Japanese steel for $5, then it’s obvious that consumers (including firms that need steel like the car industry) will benefit from having cheaper priced steel. However, putting a $6 tariff on Japanese steel will make the price of steel $11, which now makes it not beneficial to import steel. Consumers will now buy domestic steel, but will be paying $10 now. We see here that although the domestic steel firms gain from more sales, the consumers will all lose from having more expensive steel. Like I said above, a tariff violates comparative advantage because it causes a country that has a comparative advantage originally to not have one (the Japanese can produce steel for cheaper than the US and thus should produce steel and export steel, but with the tariff the Japanese no longer has that advantage). Thus, it is making winners out of the losers (American steel firms that can’t produce as efficiently as the Japanese) while it makes losers out of winners (Japanese firms that can produce steel at a fraction of the cost as their American counterparts, but cannot sell their steel because of trade restrictions placed by the Americans).
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