Monday, March 20, 2017

Tariffs and Free Trade

Here is an excellent article titled, America Is Hardly a Bastion of Free Trade, as this is a key excerpt: "Rhetoric has recently trumped reality. It has become a misconceived bit of common “knowledge” that the United States of America is a bastion of free trade. Little could be further from the truth."

The author makes some good points, from an economic analysis standpoint. Tariffs, properly implemented and enforced, have an adverse effect on the market. It displaces scarce resources, and both markets(nations) suffer adversely. Of course, the incentive is in the favor of the domestic producers of the product to rent seek the local Government for the implementation of tariffs.

From a supply and demand analysis, tariffs shrink the supply, yet if demand is constant, the prices of the good rise. Another effect of tariffs: It reduces the number of firms in the marketplace. Since the cost of entry into that said marketplace includes the tariffs, potential firms will seek out other means that require their capital.

Tariffs acts similar to a tax, as the producers, or firms, pay the economic cost for the tax As previously mentioned, it raises the price of the good, but consumers price elasticity may push them to buy substitutes for that good. Once this happens, the substitutes will rise in demand, and the original good would drop in price.

If tariffs did not exist, then more firms would enter the marketplace, providing more options for the consumers. The more options that exist, the prices will fall accordingly. And, substitutes would appear on the marketplace for those consumers that prefer alternatives.

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