Page 88 - Introduction to Business

62 PART 1 The Nature of Contemporary Business

purchased, is the domestic consumer. Despite the fact that protection reduces con-
sumer welfare, politically powerful business groups (e.g., steel, textile, sugar, and
auto producers in the United States and farmers in the U.S. and especially in the
European Union) are able to influence their governments to impose trade restric-
tions. The bad thing about protection is the detrimental impact it has on the more
efficient overseas producers who are invariably located in developing countries. For
example, catfish farmers in Vietnam, sugar cane producers in the Philippines, steel
mill owners in Brazil, and textile manufacturers in Bangladesh, China, India, and Pak-
istan are forced to curtail their competitive exports to the United States. Protectionist
policies in developed countries have severe negative effects on developing countries’
production, employment, and economic growth. In a nutshell, protection penalizes
consumers in the importing country and producers in the exporting country.
There are five major types of trade barriers—tariffs, quotas, voluntary restraints,
counter trade, and embargoes—that we will briefly discuss in this section to give
you an appreciation for what trade barriers are, who benefits, and at what cost to
society.

tariffs Taxes on imports Tariffs. Tariffs are taxes on imports. Generally, it is the domestic producers who
seek government help in the form of tariff protection to enable them to continue with
their high-cost (and uncompetitive) operation or to restructure their firms and stay
in business. Take, for example, the U.S. steel industry in 2002. Several executives of
U.S. steel companies sought government protection, claiming that competition from
foreign steel companies was literally driving them out of business. They said that
overseas steel companies were competing unfairly. However, a major structural prob-
lem with some U.S. steel manufacturers was their uncompetitive cost structure and
high-cost pension program liabilities. The U.S. government (International Trade
Commission) conducted a study and decided to impose a temporary (for three years)
import tariff of some 10 to 30 percent on different types of imported steel to allow the
U.S. steel companies to restructure and operate in the competitive international
environment. Steel exporters in Asia, Brazil, and Europe were not very happy (since
they had to curtail their exports to the United States) with that decision, and some
countries retaliated by imposing tariffs on certain U.S. agricultural exports. When the
U.S. government imposes a 30 percent tariff on imported steel, imported steel will
cost 30 percent more in the United States. This in turn will enable domestic (U.S.)
steel producers to raise their domestic prices to match those of the higher-cost
imported steel. When the price of steel rises, the U.S. automobile industry, for exam-
ple, will also raise car prices to offset the increased cost of steel input. Ultimately, it is
the consumer who will bear the cost of tariffs, and the beneficiary is the domestic
steel industry (both the efficient as well as the less efficient producers). The other
group that loses is the foreign steel producers whose exports to the United States will
be reduced.

quantitative restrictions (QRs) Quotas Quotas. Also called quantitative restrictions (QRs), quotas are one of the worst
that limit the amount of imports that can forms of trade barriers. While a tariff, which is basically a tax on imports, makes
come into a country
imports more expensive by the amount of the tariff, quotas limit the amount of
imports that can come into a country. Thus, depending on the domestic demand for
the imported product, its price could literally go through the roof. Let’s assume, for
example, that in order to protect the domestic sports car industry, the U.S. govern-
ment limits the import of German (e.g., Porsche) sports cars to the United States to
1,000 units a year. Let’s further assume that there are some 5000 Americans who want
to buy Porsches each year. What do you think will happen? Well, since U.S. demand
for Porsches far exceeds the restricted supply of imports, the price of Porsches will

Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.