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 when other things equal, the quantity demanded of a good falls when the price of the good rises (Mankiw). (See Graph Below)
Domestic producers increase supply after price increases, and foreign producers supply for the rest of the demand. Foreign producers’ revenue falls because they have to pay tariffs to the government. Tariffs also result in a decrease in consumer surplus and a loss of world efficiency since more of the world’s resources are used to produce certain products (represented by the deadweight losses on Graph 2).
The government attempts to protect domestic employment, sunrise industries, and prevent dumping through tariffs (most common anti-dumping measures). Dumping has negative effects on producers in developing countries. But any government that subsidizes a domestic industry may support dumping, therefore rather than protectionism, talks between governments are necessary. While India has “made tremendous strides to open up its economy, there is much more work that is left to be done”. The U.S. has said that it would ease restrictions on exports of high-technology goods to India in recognition of strong economic ties. The result of a tariff is reduced surplus and increased price. Tariffs can hurt an economy by reducing trade but also help protect some domestic jobs at the expense of consumers. Critics argue that trade barriers create fewer choices for consumers and the distortion of comparative advantage, resulting in the unproductive use of the world’s resources.
The Indian and U.S. governments should eliminate trade barriers so that they may reach the effectual outcome that would allow them to allocate their resources properly and efficiently. By eliminating tariffs, both countries could only produce what they specialize in and still obtain everything else they need from imports. Also, instead of worrying about trade barriers, the governments should invest more in education and make their workers more efficient.
Word Count: 747
Works Cited
Williams, Matthias, and Dua, Rohan. "U.S. concerned over Indian trade barriers | Reuters." Business & Financial News, Breaking US & International News | Reuters.com. N.p., 7 Feb. 2011. Web. 28 Feb. 2011. <http://www.reuters.com/article/2011/02/07/us-india-us-trade-idUSTRE7161G120110207>.
Mankiw, N. Gregory. Principles of Economics. 5th ed. Mason, OH: South-Western Cengage Learning, 2008. Print
Blink, Jocelyn, and Dorton, Ian. Economics: Course Companion. Oxford: Oxford University Press, 2007. Print.
Exchange of goods and services between countries (Blink).
Amount that consumers benefit buy being able to purchase a product for a price that is less than what they would be willing to pay. (Mankiw)
the price of a good that prevails in the world market for that good (Mankiw).
The policy of imposing duties or quotas on imports to protect home industries from overseas competition (Princeton).
A tax on goods produced abroad and sold domestically (Mankiw).
A country that sells large quantities of a commodity, at a price lower than its production cost, in another country (Blink).