a). A tariff can be described as a fee placed on all imports. The aim of the tariff is to raise the price of the foreign product so that domestically produced products are more attractive to the consumers. The individuals transporting the imports into the country pay the tariff. A tariff will increase the costs of the imported sugar and decreases the quantity demanded by the U.S. public. The consumers will lose from the implementation of a tariff as this means they will have to pay more if they want to purchase the imported sugar.
b). The domestic producers of the sugar will gain from the government imposing a tariff on imported sugar. They will be able to produce sugar in bulk unlike instances where there is no tariff. In such a scenario, they would not be able to produce sugar in bulk and compete favorably with the foreign producers. Now, with the tariff, the local producers are able to produce sugar and even have a surplus known as the producer surplus.
c). the imposition of the tariff has led to the loss of welfare by the US. The American sugar producers are not competitive. In addition, the price of the sugar is a resource cost and the tariff meant higher costs for the consumers and fewer supply. Therefore, the consumer surplus decreases while the producer surplus only increases to a certain extent then the benefits begin to level off. The government’s surplus will only reach a certain amount the net result of the tariff is therefore a loss of total welfare for the country. The net cost to the importing country can be calculated by subtracting the profits to producers from the government revenues and then subtracting the result from the cost to consumers. This is known as the efficiency loss that is because of the distortions to the international pricing system.
d). many large countries use tariffs to influence income redistributions. Whenever a tariff is imposed in a country, the domestic producers and the recipients of government spending will benefit. However, consumers will lose because of the increased prices. In this scenario, if the tariffs were removed then the domestic producers will miss profits meaning that they will earn less income (Siddiqui and Iqbal, 2001; McMahon, 1990). The foreign producers will have an increased income while the government will experience a decrease in income. Households will also have higher income because of higher disposable income due to the reduced prices of the imported goods.
e). Replacing the tariff by the quota could prove beneficial especially because of the inelasticity of sugar products in the country. The quotas are also more manageable instruments in times of foreign exchange uncertainty.
2. a). the optimum theory states that a country can gain by imposing a tariff even if other countries retaliate. In this scenario, the welfare improvement occurs when the trade gain is greater than the total deadweight losses. From the free trade position or a position of tariff distorted trade, a country can increase its tariff unilaterally and the terms of trade improve and the volume of the trade declines steadily (Broda, Limao, and Weinstein, 2006).
b). The infant industry argument is a theory that supports trade protectionism. The economists who support this theory argue that emerging industries do not have the economies of scale that their foreign competitors might have. Therefore, the government needs to protect these nascent industries justifying the imposition of tariffs on imports.
3. a). There are several reasons as to why the WTO prefers and advocates the use of tariffs over quotas. Based on real life scenarios, quotas are disadvantageous because they can promote smuggling and administrative corruption. Tariffs do not promote corruption because they simply control the number of foreign goods entering the domestic market.
b). the removal of a tariff does cause a change in the income distribution of a country. The foreign producers will increase their income because the lower price of the goods in the domestic market will lead to an increase in demand. Consumers’ welfare will also increase because of the lower prices and high quality, competitive goods. The government’s revenue will decrease and so will the revenue/income of the domestic producers.
Broda, C., Limao, N., & Weinstein, D. (2006). Optimal Tariffs: the evidence. The National Bureau of Economic Research No. 12033.
McMahon, G. (1990). Tariff policy, income distribution, and long-run structural adjustment in a dual economy. Journal of Public Economics, 42(2): 105-123.
Siddiqui, R., & Iqbal, Z. (2001). Tariff reduction and functional income distribution in Pakistan: a CGE Model. Pakistan Institute of Development Economics.