Trade, Regionalism and Globalisation Essay Example | Topics and Well Written Essays - 1500 words

Trade, Regionalism and Globalisation - Essay Example The welfare consequences of tariffs and quotas are discussed in this paper. The theories developed in this field reveal that tariffs and quotas cannot be imposed without appropriate evaluation of local market needs. Moreover, it has been proved that tariffs are more popular than quotas as tools for increasing profits from trade. Also, both tariffs and quotas often limit the attractiveness of a county as a trade partner. Besides their negative consequences, tariffs and quotas are extensively used by governments for improving public finances. It is suggested that protectionism measures, such as tariffs and quotas, would be rather avoided; instead, the rules of international trade should be reviewed ensuring that restrictions in trade, where applied, are limited and absolutely necessary for eliminating threats for the national economy. 2.0 Welfare consequences of tariffs and quotas In economics, the term welfare is used for reflecting mainly the material welfare, as this trend is highli ghted in the work of Marshall (Reddy and Saraswathi 2007). 2.1 Evaluation of a market’s efficiency The introduction of tariffs and quotas is often considered as an effort to limit free trade, as the concept was first introduced by Adam Smith in 1776 (Van Marrewijk 2007). The specific view can be characterized as justified since tariffs and quotas can reduce the attractiveness of a market as a partner in global trade transactions. For this reason, before applying tariffs and quotas in a particular market it would be necessary to evaluate primarily the market’s efficiency. The Ricardian model is considered as the most popular model for evaluating a market’s efficiency. According to this model, in markets where the technology employed in the production process is unique market efficiency is considered to be high. Reference is made to all the phases of the production process, including the selection of raw materials, the process of these materials and the distributi on of the final product in the market. The Ricardian model is not appropriate for all markets but rather for those markets that are free from protectionism measures, such as tariffs and quotas (Van Marrewijk 2007, 156). The Heckscher-Ohlin model is also used for checking a market’s efficiency. In the specific model the criterion used for evaluating market’s efficiency is not technology, as in the Ricardian model, but the level of abundance of goods. According to this model, a country is expected to export only those goods that are abundant in local market. A market where different types of such products/ goods are available is characterized as highly efficient (Van Marrewijk 2007, p.156). 2.2 Tariffs vs. quotas – welfare consequences In general, both tariffs and quotas result to the radical increase of costs related to various phases of the production process (McEathern 2007). Also, both tariffs and quotas can lead to the increase of a product’s price. Mo re specifically, by imposing a tariff on a particular product a government makes the product more expensive compared to other markets (Mankiw and Taylor 2006). In this way, the consumers have to pay a higher price for the particular product, a fact that would decrease their welfare. Quotas have a similar effect on a product’s price. For example, the tariff-rate quota imposed by the US government has resulted to the increase of the price of raw cane sugar across US (Carbaugh 2012). As a result, consumers in US have to pay