To protect U.S. jobs in the agricultural equipment industry, Congress could impo

Question

To protect U.S. jobs in the agricultural equipment industry, Congress could impose a specific tariff or persuade foreign producers of agricultural equipment to agree to a voluntary export restraint agreement.

Which of these two policies is likely to be less damaging to the U.S.? Explain.

Which of these two policies is likely to be less damaging to the world as a whole? Explain.

What happens to the following under each of the two policies:

The U.S. price of agricultural equipment

The quantity of imported agricultural equipment

The quality of imported agricultural equipment

Explanation / Answer

Effects of the two policies on U S and the world.

The congress can restrict the import of agriculture equipments from other countries either by imposing a tariff or compelling the other countries for an export restraining agreement. Both have its own consequences in US economy and the rest of the world.

Let us discuss first the effect of imposition of specific tariff on import of agricultural equipments. On the side of revenue aspects tariff improves revenue position of the government. The imposition of tariff enlarges the treasure in the US exchequer.

The increased price due to the imposition of tariff improves the profit of the U. S domestic producers only. But the consumer’s after the tariff will not be well off a they have to pay a high price. Under the free trade as it ensures competition the consumers get the product at a low cost. But the imposition of tariff mitigates the competition and damage the possibility of availing the product at better quality product with low price. Here the producer’s welfare and the welfare gain on the government sector are at the cost of consumer’s welfare. This will cause the redistribution of wealth from the consumers to the producers. The import may not decreased even after the imposition of tariff as the foreign exporter being still competent due to his comparative advantage. In such situation imposition of tariff has no use. Again the labors in the U S market have to compete with the high skilled but low waged labors from foreign market even after the imposition if tariff fails to obtain the object of reduction in import due to the comparative advantage in other countries. Thus an import tariff has no use and it is more damaging the U.S

The voluntary export restraining agreement reduces the export from other countries to U. S. This is less damaging the U S economy because it prevents the flow of cheap exported item to the U.S without distorting the domestic economy.    It will protect the U. S domestic industries from international competition. So the best policy for U S is to persuade the foreign countries to an export restraining agreement. If the export from other countries (import by U S) decreases with an agreement, the export sector will grow and it will create more domestic employment opportunities. Thus the producers need not to compete with imported cheap products and the domestic labors need not to compete with the cheap labors from foreign countries. Only the government loss revue in the form of tariff.

By comparing the effects imposition of specific tariff and persuaded voluntary export restraining agreement policy on other countries, the best policy which damage less the U S economy is the persuaded voluntary export restraining agreement.

The export is the main source of nation’s revenue. A tariff by another country will not affect the export revenue and quantity of export if the price after the imposition of tariff is lower than the price in exporting country. A tariff will not be no matter to the exporting country if it has a larger comparative advantage of cost of production than the tariff imposing country. The purpose of the imposition of tariff is to protect the high cost domestic industry by making parity between the high domestic price and low import price. Sometime certain exporting countries may have comparative advantage due to the availability of natural and human resource. In such situation the comparative advantage in production enable such countries to export more even after the imposition of tariff without revenue loss.

The gain from international trade is determined by the volume of trade and pattern of trade. If the quantity of export from one country decreases due to the export restraining agreement the volume of trade of such countries will substantial decrease which will cause adverse balance of payment. When the U S imposes an export restraining policy on the rest of the world they will be unable to find market for their product. This will cause wide repercussion around the world. So the best policy which less damage the world economy is the imposition of specific tariff by U.S

Thus in conclusion we can say that export restraining method is less damaging the US while it more damaging the word countries.

Policy implications.

As far as the price of agricultural equipment is concerned both tariff and restricted export reduce the availability of agricultural equipment in the U.S market. This will rise the price of agricultural equipment in the U.S. If the tariff reduces the competitive position of the foreign producers they will not export more to the U.S. Again the imposition of export restrain also reduces the availability of foreign equipments in the U.S market. Both will substantially increase in the price of agricultural equipments. In the absence of competition the domestic producers will have less incentive to cost reduction methods.

The imposition of tariff and export restraining methods reduce the flow of agricultural equipments from the other countries to U.S. This reduces the volume of agricultural equipments available in the U.S domestic market.

U. S can get the advantages of modern invention, innovations and technical advancement only when it open its way to other countries. If the foreigners are prevented from entering to the U S market, U S will not get high quality product. Thus the best policy to U.S is say no to tariff and export restraining agreement.

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