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KW_Macro_Ch_18_Sec_03_Effects_of_Trade_Protection

KW_Macro_Ch_18_Sec_03_Effects_of_Trade_Protection - chapter...

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>> International Trade Section 3: The Effects of Trade Protection chapter 18 Ever since David Ricardo laid out the principle of comparative advantage in the early nineteenth century, most economists have advocated free trade. That is, they have argued that government policy should not attempt either to reduce or to increase the levels of exports and imports that occur naturally as a result of supply and demand. Despite the free-trade arguments of economists, however, many governments use taxes and other restrictions to limit imports. Much less frequently, governments offer subsidies to encourage exports. Policies that limit imports, usually with the goal of protecting domestic producers in import-competing industries from foreign competi- tion, are known as trade protection or simply as protection. Let’s look at the two most common protectionist policies, tariffs and import quo- tas, then turn to the reasons governments follow these policies. An economy has free trade when the government does not attempt either to reduce or to increase the levels of exports and imports that occur naturally as a result of supply and demand. Policies that limit imports are known as trade protection or simply as protection .
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2 C H A P T E R 1 8 S E C T I O N 3 : T H E E F F E C T S O F T R A D E P R OT E C T I O N The Effects of a Tariff A tariff is a form of excise tax, one that is levied only on sales of imported goods. For exam- ple, the U.S. government could declare that anyone bringing in roses from Colombia must pay a tariff of $2 per rose, or $200 per box of 100 roses. In the distant past, tariffs were an important source of government revenue because they were relatively easy to collect. But in the modern world, tariffs are usually intended to discourage imports and protect import- competing domestic producers rather than as a source of government revenue. The effect of a tariff is to raise both the price received by domestic producers and the price paid by domestic consumers. Suppose, for example, that our country imports roses, and a box of 100 roses is available on the world market at $400. As we saw earlier, under free trade the domestic price would also be $400. But if a tariff of $200 per box is imposed,
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