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Tariffs and Quotas Essay

Tariffs and Quotas are inherently 2 different methods for increasing domestic demand and supply for a certain while reducing the import supply and demand for the exact same product or a close substitute. A tariff is simply a tax or duty placed on the import of a good by a domestic government. A quota on the other hand allows a certain amount of good to be imported while any quantity above the set value is absolutely restricted. In order to compare the 2, we need a viable and extremely simple example.

Lets take a scenario where it’s Christmas and everybody wants to buy bats being imported from China. Now if there was a tariff applied upon the bats, most people would be able to get it however at a price considerably higher than what they would have paid under normal circumstances. Now if there was a quota applicable on the import of the bats a situation, some people would go back empty handed. From the above example we have clearly defined what happens under both cases in extremely simple terms.

When a government imposes a tariff or quota on a certain good then it is known as ‘protectionism’. The advocates of protectionism state that in order to let an infant industry grow and become self sufficient, it is viable to restrict the import of certain types of goods which might hamper the development of the industry in question. However, opponents of this theory state in turn that protectionism results in a deadweight loss which is essentially a welfare loss to the society as a whole.

Free trade results in no such loss. Proponents of the free trade theory, basically say that protectionism is harmful for trade everywhere while it especially affects third world workers. It also hampers the ability of different countries to specialize in various products or comparative advantage. However, the arguments for protectionism state that the comparitive advantage theory is negated in today’s world because of the free mobility of capital. Goods will flow to the place where the cost is the cheapest.

But the strongest argument is the fact that in order to let an infant industry grow and modernize enough to compete internationally, it needs to be protected at the start from foreign competition. Bad goods or de-merit goods from abroad can also be curtailed using protectionism. Free trade also results in a lot of offshoring for example foreign countries can migrate production facilities to places where labor and health standards are not that strict. Therefore these companies can abuse human rights laws and never get caught.

Free trade also results in dependency of third world countries upon the developed world. Developing countries specialize in raw materials which are processed by developed countries hence a dependency relation is formed. From the above brief arguments, we can clearly see that the debate against protectionism and for it is two way. There are costs and benefits to be considered. Inherently, a balance should be struck between the two opposing theories in order to reap the highest rewards. Sources: www. wikipedia. com http://jobfunctions. bnet. com/abstract. aspx? docid=135617


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