Economics Commentary - U.S. Concerned Over Indian Trade Barriers

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Sarwana 002292-120

U.S. Concerned Over Indian Trade Barriers

        Tensions are increasing between the U.S. and India over concerns of international trade and India’s restrictive trade policy. Both India and the U.S. need each other to “meet ambitious export targets” because of fears of global imbalances sparking a standoff. International trade results in countries having comparative advantage over the other. Comparative advantage, a theory developed by David Ricardo, is the ability to produce a good at a lower opportunity cost that another producer (Mankiw). Comparative advantage is based on the country’s resources and is the idea that if countries produce the goods that they specialize in then it would result in an efficient use of the world’s resources.

There are a number of gains to be made from trade including lower prices, greater choices, differences in resources, and increased competition between producers. By reducing imports, India is limiting its economic efficiency.  Trade results in a consumer surplus because consumers have the choice of buying the same goods at cheaper prices. (See Graph Below)

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In the graph above, the world price (PW) is perfectly elastic because as long as consumers are willing to pay the world price they can import as much as they want. Trade also results in domestic suppliers losing out. This is why trade barriers and protectionism are employed.

        Trade barriers are any government policy or regulation that restricts international trade (Mankiw). In this case, India has placed tariffs on imports from the U.S. (See Graph Below)

 

The graph above illustrates how after the tariff is placed, the market price rises causing a decreased quantity demanded. The law of demand says ...

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