President Obama on Thursday began a through Ohio and Pennsylvania, where he touted his rescue of the auto industry.
First Published: July 5, 2012: 8:23 AM ET
Outline-
Recapitulation- the article is about the rising tariffs in the trade of American made automobiles between China and America. The rising tariffs of Us-made automobiles were argued by USA to be unfair, and therefore USA was looking for the assistance of the World Trade Organization in order to reduce the tariffs on more than $3 billion worth of automobiles and get back the gains from free trade.
Definition-
International trade - The buying and selling of goods and services which across international boundaries.
Trade protection involves government intervention in international trade through the imposition of trade restriction to prevent the free entry of imports into a country or to protect the domestic economy from foreign competition.
Tariffs – taxes on imported goods, and are the most common form of trade restriction.
The world Trade Organization – An international organization that provides the institutional and legal framework for trading system that exists between member nations worldwide, responsible for liberalizing trade, operating a system, of trade rules and providing a forum for trade negotiations between governments, and for settle trade disputes.
Application-
First of all this is the topic of international trade, so define what international trade is.
- Explain the rising tariffs of U.S.-made vehicles are a type of trade protection.
- State what is trade protection.
Tariff is the most common form of trade restriction.
Trade protection involves government intervention in international trade through the imposition of trade restriction to prevent the free entry of imports into a country or to protect the domestic economy from foreign competition.
- State what is tariff.
“The United States is looking for the World Trade Organization's help in fighting Chinese tariffs on U.S.-made automobiles.”
The Chinese tarffs on U.S.-made automobiles, which is taxes on imported American vehicles, is used for two proposes, one is to protect a domestic industry from foreign competition, and the other is to raise revenue for the government.
- Relate to the article, explain the effect of rising tariffs of U.S.-made vehicles.
- Refer to the article and cite the important passage that can explain the effects, particularly the quantitative data.
“Initiated late last year by the Chinese government, the tariffs raised the cost of U.S.-made vehicles to Chinese buyers by between 2% and 21%.”
- Draw a diagram to explain the effects.
The effects of a tariff are illustrated below
When the tariff raises, the price of the imported U.S.-made vehicles rises from Pw to Pw+t, causing the domestic price of the good to rise above the word price by the amount of the rising tariff, to Pw+t. The shift of price leads to increase in quantity supplied, decreases in quantity demanded and decreases in imports, which the domestic car market expands from Q3-Q2 to Q4 to Q1.
Analysis-
- Analyze the substantial changes and effects for the trade itself, the domestic consumers, domestic producers, domestic employment and foreign producers.
- The higher price, Pw+t leads to the smaller quamtity, Q3 is bought by the Chinese domestic consumers, who are worse off, simultaneously the Chinese domestic vehicles producers gain from this situation, because the higher price means the larger quantity that they can sell, Q2.
- Since domestic producers are willing to produce larger quantity of vehicle, this has the effect of increasing employment in the domestic economy.
- The foreign producers are worse off, the export revenues of the foreign producers fall by an amount equal to the fall in the quantity of exported from Q4-Q1 to Q3-Q2, which is leaded by the higher price.
- Analyze the increased inefficiency in production and global misallocation of resources.
- The increase in domestic output represents an increase in production by relatively inefficient domestic producers, resulting in a inefficiency in production. In the other words, the domestic producers are not as efficient as foreigners who produce and export the same good with specialization, and therefore gain the comparative advantage. Namely, the domestic producers, who have a comparative disadvantage, reduce the efficiency in production.
- The decrease in consumption, and the shift of production away from foreign producers who have comparative advantage, mean that there is an increase in the misallocation of resources both globally and domestically.
- Evaluation-
- Advantage vs. disadvantage
Advantages –domestic producers and government gain, the first gains from the larger quantity supplied and higher price, and the second gains from the increasing taiff revenues. The domestic employment increases. Anti-dumping.
Disadvantage- domestic consumers are worse off, domestic income distribution worsens. Foreign producers are worse off, and global misallocation of resources. All of all the trade restriction reduces the positive effect of free trade.
- Improvement & Stakeholders-
“it will announce the launch of an enforcement action with the WTO, labeling the tariffs on more than $3 billion worth of autos as unfair”
Under the condition of reduction of U.S.-made vehicles tariff will increase the benefits of free trade, and this change itself is an improvement for most stakeholders. Although it may seem that we are stand at the viewpoint of U.S. and WTO, we actually stand at the side of free trade.
Improvement-
Increased competition and Increased efficiency in production -
In free trade, domestic firms need to compete with firms from other countries. They are forced to become more efficient, namely, to produce at the lowest possible cost.
Economies of scale in production –
In free trade, the amount of output that firm produce will no longer limited by the trade restrictions, that is, the reduction of any trade restriction expand in the size of the market, allowing firms to produce more output, achieve economies of scale with the benefit of lower cost.
Greater choice and lower prices for consumer –
The goods and services each country can produce differ widely with respect to their variety and their quality. Namely, the quality and style of car for each country is different. Therefore, in free trade, Chinese consumers have greater choice of car in the trade between U.S. and China. Second, increased competition and efficiency among firms leads to lower prices for consumer. Thus the Chinese car consumers can satisfy their needs with lower prices.
Free trade and a more efficient allocation-
If trade is free, meaning that there is no government intervention imposing restriction on trade, it can lead tp a more efficient allocation of resources.
- U.S. car producers – these stakeholders will be better off if the U.S. government and WTO is success of reducing the U.S.-made vehicles tariffs, which the U.S. car producers can maximize their comparative advantage and expand their car market in Chinese from Q3-Q2 to Q4-Q1. (the gains from free trade: increases in production and consumption as a result of specialization, economies of scale in production, increased competition, greater efficiency in production, Free trade and a more efficient allocation.)
Diagram of comparative advantage-
- Chinese U.S.-made vehicles consumers – these stakeholders will also better off from the reduction of tariff, namely gain from the free trade and its specialization. (the gains from free trade: greater choice for consumers, lower price for consumers.)
- Chinese government – worse off, because reduction of tariff decrease the government revenue.
- Chinese domestic employment worse off because the lower domestic quantity supplied in free trade.
- Chinese domestic car producers – they are worse off, because they are facing the fair competition with U.S.-made vehicles in free tarde.