TRADE THEORY

 what nations export and import what goods

 with what other nations

 under which economic, geographic, and political circumstances,

 with what consequences.

This would allow us to predict and prescribe the content, direction, and size of multilateral

trade flows.

MERCANTILISM

1500-1800

 not a full-blown trade theory (see above); rather,

 an economic policy of governmental accumulation of wealth, in the form of gold

bouillon for:

o domestic control

o investment

o international expansion

 reflects the era of nation-building and the shifting of European political power from

feudal lords and the church to national sovereigns; also reflects and supports the

principal source of wealth -- trading

The trade-policy implication of this economic policy was the generation of a national trade

surplus, paid for by accumulation of gold reserves. Before fully developed financial systems,

there was little international credit. Therefore, a current-account surplus was not matched

by net capital outflow (net loans or investment overseas); rather, it was matched by a net

inflow of gold to pay for the excess of goods exported from the country. Some of this gold

found its way to overseas investment by the sovereign.

ABSOLUTE ADVANTAGE

1776: Adam Smith's The Wealth of Nations

Political and economic liberalism found their expression in Smith's argument that the wealth

of nations depends upon the goods and services available to their citizens, rather than the

gold reserves held by the sovereign.

Maximizing this availability depends, first, on putting all resources to use, and then, on the

ability --

 to obtain goods and services from where they are produced most cheaply (because

of “natural” or “acquired” advantages), and

 to pay for them by production of the goods and services produced most cheaply in

the country,

 with costs measured in terms of direct and "embedded" labor inputs.

This principle fit the development of capitalist economies based on production via wage

labor (rather than trading commodities for profit); reflects the manufacturing dominance of

Britain; reflects manufacturing economies of scale based on:

 development of specialized equipment;

 labor training and specialization;
 long "runs" of one product.

These are sources of acquired advantage.

The consequent trade policy is relatively free trade, so that a country should import goods

that would be produced more expensively internally, where expense is measured according

to the labor theory of value. These imports are to be paid for by the production of goods that

the country can produce with less use of labor per unit. Exports flow from the country that

can produce a product most cheaply.

COMPARATIVE ADVANTAGE

• 1817: David Ricardo's On the Principles of Political Economy and Taxation

• The possibility of system-wide gains from trade persists, even when a given country has

an absolute advantage in the production of no product.

• Specialization and trade should occur according to the relative opportunity costs of

production in each country, measured in terms of the alternative production given up to

produce a tradable good.

International Trade Theory of Absolute cost advantage

Adam Smith, the Scottish economist observed some drawbacks of existing Mercantilism

Theory of International trade and he proposed a new theory i.e. Absolute Cost Advantage

theory of International trade to remove drawbacks and to increase trade between countries.

Drawbacks of Mercantilism theory

Adam Smith observed following drawbacks of Mercantilism and Neo-mercantlism theory.

1. Mercantilism weakens a country.

2. Restriction on Free Trade decreases country’s wealth

Adam Smith’s Theory (1776)

1. This theory is based on principle of division of labour

(division of labor the separation of a work process into a number of tasks, with each task

performed by a separate person or group of persons.)

2. Free trade among countries can increase a country’s wealth.

3. Free trade enables a country to provide a variety of goods and services to its people by

specializing in the production of some goods and services and importing others.

4. Every country should specialize in producing those products at the cost less than that of

other countries and exchange these products with other products produced cheaply by other

countries.

5. When one country produces one product at less cost and another country produces

another product at less cost, both can exchange required quantity and can enjoy benefit of

absolute cost advantage.

Advantage of Skilled labour and specialization

1. ABSOLUTE COST ADVANTAGE: Reasons for Absolute Cost Advantage

A. SPECIALIZATION: Specialization of labour leads to higher productivity and less labour

cost per unit of output

B. SUITABILITY: Suitability of the skill of the labour of the country in producing certain

products

C. ECONOMIES OF SCALE: Economies of scale helps to reduce the labour cost per unit of

output.

2. NATURAL ADVANTAGE

Climatic conditions

Natural resources

Example: Indian Climate- Production of Rice, Wheat, Sweet Mangoes, Grapes, Tea,

Coconuts, Cashew nuts, Cotton etc.

Sri Lanka: Production of Tea, Rubber

USA: Production of Wheat

3. ACQUIRED ADVANTAGE

Technology

Skill development

Implications (Significance) of Absolute Advantage Theory

1. More quantity of both products

2. Increased standards of living of both countries

3. Increased production efficiency

4. Increase in global efficiency and effectiveness

5. Maximization of Global productivity and other resources productivity

Criticism

No absolute advantages for many countries

Country size varies

Country by country differences in specialization

Deals with labour only and neglects other factors (Variety of resources)

Neglected Transport cost (It plays significant role)

Scale economies (Large scale economies reduces the cost of production and forms a part of

absolute advantages, this theory neglects it)

Absolute advantage for many products

COMPARATIVE COST THEORY

This theory is developed by a classical economist David Ricardo. According to this theory,

the international trade between two countries is possible only if each of them has absolute or

comparative cost advantage in the production of at least one commodity. This theory is

based upon following assumption

 There are only two countries and two commodities

 There is no governmental intervention in export and import

 Only labor is factor of production. Quantity of labor used gives cost of production

 There is perfect mobility of labor within the country but not between the countries

 There is no cost of transportation between the countries

 The law of constant returns to scale operates in production.

 The units of labor is homogeneous

 The units of each commodity in both countries are homogeneous

According to comparative cost advantage theory of international trade, each country exports

the commodity in which it has cost advantage and imports the commodity in which it has

cost disadvantage. This theory can be explained as following:

CRITICISM

(1) Unrealistic Assumption of Labour Cost:

The most severe criticism of the comparative advantage doctrine is that it is based on the

labour theory of value. In calculating production costs, it takes only labour costs and

neglects non-labour costs involved in the production of commodities. This is highly

unrealistic be- cause it is money costs and not labour costs that are the basis of national and

international transactions of goods.

Further, the labour cost theory is based on the assumption of homogeneous labour. This is

again unrealistic because labour is heterogeneous—of different kinds and grades, some

specific or specialised, and other non-specific or general.

(2) No Similar Tastes:

The assumption of similar tastes is unrealistic because tastes differ with different income

brackets in a country. Moreover, they also change with the growth of an economy and with

the development of its trade relations with other countries.

(3) Static Assumption of Fixed Proportions:

The theory of comparative costs is based on the assumption that labour is used in the same

fixed proportions in the production of all commodities. This is essentially a static analysis

and hence unrealistic.

(4) Unrealistic Assumption of Constant Costs:

The theory is based on another weak assumption that an increase of output due to

international specialisation is followed by constant costs.

(5) Ignores Transport Costs:

Ricardo ignores transport costs in determining comparative advantage in trade. This is

highly unrealistic because transport costs play an important role in determining the pattern

of world trade. Like economies of scale, it is an independent factor of production. For

instance, high transport costs may nullify the comparative advantage and the gain from

international trade.

(6) Factors not fully Mobile Internally:

The doctrine assumes that factors of production are perfectly mobile internally and wholly

immobile internationally. This is not realistic because even within a country factors do not

move freely from one industry to another or from one region to another.. The greater the

degree of specialisation in an industry, the less is the factor mobility from one industry to

another. Thus factor mobility influences costs and hence the pattern of international trade.

(7) Two-Country Two-Commodity Model is Unrealistic:

The Ricardian model is related to trade between two countries on the basis of two

commodities. This is again unrealistic because, in actuality, international trade is among

countries trading many commodities.

(8) Unrealistic Assumption of Free Trade:

Another serious weakness of the doctrine is that it assumes perfect and free world trade.

But, in reality, world trade is not free. Every country applies restrictions on the free

movement of goods to and from other countries. Thus tariffs and other trade restrictions

affect world imports and exports. Moreover, products are not homogeneous but

differentiated. By neglecting these aspects, the Ricardian theory becomes unrealistic.

(9) Unrealistic Assumption of Full Employment:

Like all classical theories, the theory of comparative advantage is based on the assumption of

full employment. This assumption also makes the theory static.

(10) Self-Interest Hinders its Operation:

The doctrine does not operate if a country having a comparative disadvantage does not wish

to import a commodity from the other country due to strategic, military or development

considerations. Thus often self-interest stands in the operation of the theory of comparative

costs.

(11) Neglects the Role of Technology:

(12) One-Sided Theory:

In the words of Professor Ohlin, “It is, indeed, nothing more than an abbreviated account of

the conditions of supply.”

(13) Impossibility of Complete Specialisation:

(14) A Clumsy and Dangerous Tool:

(15) Incomplete Theory:

It is an incomplete theory. It simply explains how two countries gain from international

trade. But it fails to show how the gains from trade are distributed between the two

countries.

OPPORTUNITY COST THEORY

Gottfried von Haberler (German: [ˈhaːbɐlɐ]; July 20, 1900 – May 6, 1995) was an Austrian-

American economist. He worked in particular on international trade. One of his major

contributions was reformulating the Ricardian idea of comparative advantage in

a neoclassical framework, replacing the outdated labor theory of value with the

modern opportunity cost concept.

What is Opportunity Cost?

In the context of production, the opportunity cost of producing commodity, say X, is the

quantity of another commodity, say Y, that must be sacrificed to release resources just

sufficient to produce one unit of X.

In his opportunity cost theory of international trade, Haberler discards Ricardo's restrictive

premise of labour theory of value in favour of a more general framework without otherwise

changing Ricardo's basic argument. 'The opportunity 'cost theory of trade postulates that

relative prices of different commodities are determined by the overall cost differentials.

Here, the term 'cost' does not refer to the amount of labour required to produce a

commodity, but to the alternative production that has to be forgone to produce the

commodity in question. In other words, the value of each commodity is taken to be equal to

its opportunity cost.

Haberler's theory of trade base on opportunity cost is re resented by production possibility

curves. A production possibility curve represents the production frontiers (of generally two

goods) that can be reached by using all the available factors of production. In simple words,

the production possibility curve shows the various combinations of two goods that can be

produced given the 'factor endowments of a country-factor endowments include all the

factors of production available to a country. In this sense, Haberler deviates from the

classical assumption of only one factor and introduces, in his model, all the factors of

production.

Factor endowment theory

In economics a country's factor endowment is commonly understood as the amount

of land, labor, capital, and entrepreneurship that a country possesses and can exploit

for manufacturing. Countries with a large endowment of resourcestend to be more

prosperous than those with a small endowment, all other things being equal. The

development of sound institutions to access and equitably distribute these resources,

however, is necessary in order for a country to obtain the greatest benefit from its factor

endowment.

Nonetheless, the New World economies inherited attractive endowments such conducive

soils, ideal weather conditions, and suitable size and sparse populations that eventually

came under the control of institutionalizing European colonists who had a marginal

economic interest to exploit and benefit from these new discoveries. Colonists were driven to

yield high profits and power by reproducing such economies’ vulnerable legal and political

framework, which ultimately led them towards the paths of economic developments with

various degrees of inequality in human capital, wealth, and political power.

Complimentary trade theories – stopler – Samuelson theorem

The Stolper–Samuelson theorem is a basic theorem in Heckscher–Ohlin trade theory. It

describes the relationship between relative prices of output and relative factor rewards—

specifically, real wages and real returns to capital.

The theorem states that—under specific economic assumptions (constant returns, perfect

competition, equality of the number of factors to the number of products)—a rise in

the relative price of a good will lead to a rise in the return to that factor which is used most

intensively in the production of the good, and conversely, to a fall in the return to the other

factor.

Considering a two-good economy that produces only wheat and cloth, with labour and land

being the only factors of production, wheat a land-intensive industry and cloth a labour-

intensive one, and assuming that the price of each product equals its marginal cost, the

theorem can be derived.

The price of cloth should be:

(1)

with P(C) standing for the price of cloth, r standing for rent paid to landowners, w for

wage levels and a and b respectively standing for the amount of land and labour used.

Similarly, the price of wheat would be:

(2)
with P(W) standing for the price of wheat, r and w for rent and wages, and c and d for the

respective amount of land and labour used.

If, then, cloth experiences a rise in its price, at least one of its factors must also become more

expensive, for equation 1 to hold true, since the relative amounts of labour and land are not

affected by changing prices. It can be assumed that it would be labour—the factor that is

intensively used in the production of cloth—that would rise.

When wages rise, rent must fall, in order for equation 2 to hold true. But a fall in rent also

affects equation 1. For it to still hold true, then, the rise in wages must be more than

proportional to the rise in cloth prices.

A rise in the price of a product, then, will more than proportionally raise the return to the

most intensively used factor, and a fall on the return to the less intensively used factor.

Criticism

The validity of the Heckscher–Ohlin model has been questioned since the classical Leontief

paradox. Indeed, Feenstra (2004) called the Heckscher–Ohlin model "hopelessly inadequate

as an explanation for historical and modern trade patterns". [3] As for the Stolper–Samuelson

theorem itself, Davis and Mishra (2006) recently stated, "It is time to declare Stolper–

Samuelson dead".[4] They argue that the Stolper–Samuelson theorem is "dead" because

following trade liberalization in some developing countries (particularly in Latin America),

wage inequality rose, and, under the assumption that these countries are labor-abundant,

the SS theorem predicts that wage inequality should have fallen. Aside from the declining

trend in wage inequality in Latin America that has followed trade liberalization in the longer

run (see Lopez-Calva and Lustig (2010)), an alternative view would be to recognize that

technically the SS theorem predicts a relationship between output prices and relative wages.

Three Stages of the International Product Life Cycle Theory

Product life cycle theory divides the marketing of a product into four stages: introduction,

growth, maturity and decline. When product life cycle is based on sales volume,

introduction and growth often become one stage. For internationally available products,

these three remaining stages include the effects of outsourcing and foreign production.

When a product grows rapidly in a home market, it experiences saturation when low-wage

countries imitate it and flood the international markets. Afterward, a product declines as

new, better products or products with new features repeat the cycle.

General Theory

When a product is first introduced in a particular country, it sees rapid growth in sales

volume because market demand is unsatisfied. As more people who want the product buy

it, demand and sales level off. When demand has been satisfied, product sales decline to the

level required for product replacement. In international markets, the product life cycle

accelerates due to the presence of "follower" economies that rarely introduce new

innovations but quickly imitate the successes of others. They introduce low-cost versions of

the new product and precipitate a faster market saturation and decline.
  Growth

 An effectively marketed product meets a need in its target market. The supplier of

the product has conducted market surveys and has established estimates for market

size and composition. He introduces the product, and the identified need creates

immediate demand that the supplier is ready to satisfy. Competition is low. Sales

volume grows rapidly. This initial stage of the product life cycle is characterized by

high prices, high profits and wide promotion of the product. International followers

have not had time to develop imitations. The supplier of the product may export it,

even into follower economies.

 Maturity

 In the maturity phase of the product life cycle, demand levels off and sales volume

increases at a slower rate. Imitations appear in foreign markets and export sales

decline. The original supplier may reduce prices to maintain market share and

support sales. Profit margins decrease, but the business remains attractive because

volume is high and costs, such as those related to development and promotion, are

also lower.

 Decline

 In the final phase of the product life cycle, sales volume decreases and many such

products are eventually phased out and discontinued. The follower economies have

developed imitations as good as the original product and are able to export them to

the original supplier's home market, further depressing sales and prices. The original

supplier can no longer produce the product competitively but can generate some

return by cleaning out inventory and selling the remaining products at discontinued-

items prices.

Market imperfection theory (Stephen Hymer, 1976 & Charles P. Kindleberger, 1969

& Richard E. Caves, 1971)

In economics, a market failure is a situation wherein the allocation of production or use

of goods and services by the free market is not efficient. Market failures can be viewed as

scenarios where individuals' pursuit of pure self-interest leads to results that can be
improved upon from the societal point of view. The first known use of the term by

economists was in 1958, but the concept has been traced back to the Victorian

philosopher Henry Sidgwick.

Market imperfection can be defined as anything that interferes with trade. This includes two

dimensions of imperfections.First, imperfections cause a rational market participant to

deviate from holding the market portfolio. Second, imperfections cause a rational market

participant to deviate from his preferred risk level. Market imperfections generate costs

which interfere with trades that rational individuals make (or would make in the absence of

the imperfection).

The idea that multinational corporations (MNEs) owe their existence to market

imperfections was first put forward by Stephen Hymer, Charles P. Kindleberger and

Caves.The market imperfections they had in mind were, however, structuralimperfections in

markets for final products.

According to Hymer, market imperfections are structural, arising from structural deviations

from perfect competition in the final product market due to exclusive and permanent control

of proprietary technology, privileged access to inputs, scale economies, control of

distribution systems, and product differentiation, but in their absence markets are perfectly

efficient.

By contrast, the insight of transaction costs theories of the MNEs, simultaneously and

independently developed in the 1970s by McManus (1972), Buckley and Casson (1976),

Brown (1976) and Hennart (1977, 1982), is that market imperfections are inherent attributes of

markets, and MNEs are institutions to bypass these imperfections. Markets experience

natural imperfections, i.e. imperfections that are because the implicit neoclassical

assumptions of perfect knowledge and perfect enforcement are not realized.

New Trade Theory

New Trade Theory (NTT) is the economic critique of international free trade from the

perspective of increasing returns to scaleand the network effect. Some economists have

asked whether it might be effective for a nation to shelter infant industries until they had

grown to a sufficient size large enough to compete internationally.

New Trade theorists challenge the assumption of diminishing returns to scale, and some

argue that using protectionist measures to build up a huge industrial base in certain

industries will then allow those sectors to dominate the world market (via a network effect).

INTERNATIONALISATION THEORY

Internalization theory focuses on imperfections in intermediate product markets. [2] Two

main kinds of intermediate product are distinguished: knowledge flows

linking research and development (R&D) to production, and flows of components

and raw materials from an upstream production facility to a downstream one. Most

applications of the theory focus on knowledge flow.Proprietary knowledge is easier

to appropriate when intellectual property rights such as patents and trademarks are

weak. Even with strong protections firms protect their knowledge through secrecy.

Instead of licensing their knowledge to independent local producers, firms exploit it

themselves in their own production facilities. In effect, they internalise the market in

knowledge within the firm. The theory claims the internalization leads to larger,

more multinational enterprises, because knowledge is a public good. Development

of a new technology is concentrated within the firm and the knowledge then

transferred to other facilities.

Location theory

Location theory is concerned with the geographic location of economic activity; it has

become an integral part of economic geography, regional science, and spatial economics.

Location theory addresses the questions of what economic activities are located where and

why. Location theory rests — like microeconomic theory generally — on the assumption

that agents act in their own self-interest. Thus firms choose locations that maximize their

profits and individuals choose locations, that maximize their utility.

Eclectic paradigm (John H. Dunning)

The eclectic paradigm is a theory in economics and is also known as the OLI-Model. It is a

further development of the theory of internalization and published by John H. Dunning in

1993. The theory of internalization itself is based on the transaction cost theory. This theory

says that transactions are made within an institution if the transaction costs on the free

market are higher than the internal costs. This process is called internalization.
For Dunning, not only the structure of organization is important. He added three additional

factors to the theory:

 Ownership advantages (trademark, production technique, entrepreneurial skills,

returns to scale)

 Locational advantages (existence of raw materials, low wages, special taxes or tariffs)
[17]

 Internalisation advantages (advantages by producing through a partnership

arrangement such as licensing or a joint venture)

FURTHER THEORIES

Diffusion of innovations (Rogers, 1962)

Diffusion of innovation is a theory of how, why, and at what rate new ideas

and technology spread through cultures. Everett Rogers introduced it in his 1962

book, Diffusion of Innovations, writing that "Diffusion is the process by which an innovation is

communicated through certain channels over time among the members of a social system."

Diamond model (Michael Porter)

The diamond model is an economical model developed byMichael Porter in his book The

Competitive Advantage of Nations, where he published his theory of why particular industries

become competitive in particular locations.

The diamond model consists of six factors:

 Factor conditions

 Demand conditions

 Related and supporting industries

 Firm strategy, structure and rivalry

 Government

 Chance
The Porter thesis is that these factors interact with each other to create conditions where

innovation and improve

INSTRUMENTS OF TRADE POLICY

TARIFFS

In simplest terms, a tariff is a tax. It adds to the cost of imported goods and is one of several

trade policies that a country can enact.

Tariffs are often created to protect infant industries and developing economies, but are also

used by more advanced economies with developed industries. Here are five of the top

reasons tariffs are used:

1. Protecting Domestic Employment

The levying of tariffs is often highly politicized. The possibility of increased competition

from imported goods can threaten domestic industries. These domestic companies may

fire workers or shift production abroad to cut costs, which means

higher unemployment and a less happy electorate. The unemployment argument often

shifts to domestic industries complaining about cheap foreign labor, and how poor

working conditions and lack of regulation allow foreign companies to produce goods

more cheaply. In economics, however, countries will continue to produce goods until
 they no longer have a comparative advantage (not to be confused with an absolute

advantage).

2. Protecting Consumers

A government may levy a tariff on products that it feels could endanger its population.

For example, South Korea may place a tariff on imported beef from the United States if it

thinks that the goods could be tainted with disease.

3. Infant Industries

The use of tariffs to protect infant industries can be seen by the Import Substitution

Industrialization (ISI) strategy employed by many developing nations. The government of a

developing economy will levy tariffs on imported goods in industries in which it wants to

foster growth. This increases the prices of imported goods and creates a domestic market for

domestically produced goods, while protecting those industries from being forced out by

more competitive pricing. It decreases unemployment and allows developing countries to

shift from agricultural products to finished goods.

Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the

development of infant industries. If an industry develops without competition, it could wind

up producing lower quality goods, and the subsidies required to keep the state-backed

industry afloat could sap economic growth.

4. National Security

Barriers are also employed by developed countries to protect certain industries that are

deemed strategically important, such as those supporting national security. Defense

industries are often viewed as vital to state interests, and often enjoy significant levels of

protection. For example, while both Western Europe and the United States are

industrialized, both are very protective of defense-oriented companies.

5. Retaliation
 Countries may also set tariffs as a retaliation technique if they think that a trading

partner has not played by the rules. For example, if France believes that the United States

has allowed its wine producers to call its domestically produced sparkling wines

"Champagne" (a name specific to the Champagne region of France) for too long, it may

levy a tariff on imported meat from the United States. If the U.S. agrees to crack down on

the improper labeling, France is likely to stop its retaliation. Retaliation can also be

employed if a trading partner goes against the government's foreign policy objectives.

Types of Tariffs and Trade Barriers

There are several types of tariffs and barriers that a government can employ:

 Specific tariffs

 Ad valorem tariffs

 Licenses

 Import quotas

 Voluntary export restraints

 Local content requirements

Specific Tariffs

A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff

can vary according to the type of good imported. For example, a country could levy a $15

tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported.

Ad Valorem Tariffs

The phrase ad valorem is Latin for "according to value", and this type of tariff is levied on a

good based on a percentage of that good's value. An example of an ad valorem tariff would

be a 15% tariff levied by Japan on U.S. automobiles. The 15% is a price increase on the value

of the automobile, so a $10,000 vehicle now costs $11,500 to Japanese consumers. This price
increase protects domestic producers from being undercut, but also keeps prices artificially

high for Japanese car shoppers.

Non-tariff barriers to trade include:

Licenses

A license is granted to a business by the government, and allows the business to import a

certain type of good into the country. For example, there could be a restriction on imported

cheese, and licenses would be granted to certain companies allowing them to act

as importers. This creates a restriction on competition, and increases prices faced by

consumers.

Import Quotas

An import quota is a restriction placed on the amount of a particular good that can be

imported. This sort of barrier is often associated with the issuance of licenses. For example, a

country may place a quota on the volume of imported citrus fruit that is allowed.

Voluntary Export Restraints (VER)

This type of trade barrier is "voluntary" in that it is created by the exporting country rather

than the importing one. A voluntary export restraint is usually levied at the behest of the

importing country, and could be accompanied by a reciprocal VER. For example, Brazil

could place a VER on the exportation of sugar to Canada, based on a request by Canada.

Canada could then place a VER on the exportation of coal to Brazil. This increases the price

of both coal and sugar, but protects the domestic industries.

Local Content Requirement

Instead of placing a quota on the number of goods that can be imported, the government can

require that a certain percentage of a good be made domestically. The restriction can be a
percentage of the good itself, or a percentage of the value of the good. For example, a

restriction on the import of computers might say that 25% of the pieces used to make the

computer are made domestically, or can say that 15% of the value of the good must come

from domestically produced components.

In the final section we'll examine who benefits from tariffs and how they affect the price of

goods.

Who Benefits from all this?

The benefits of tariffs are uneven. Because a tariff is a tax, the government will see

increased revenue as imports enter the domestic market. Domestic industries also benefit

from a reduction in competition, since import prices are artificially inflated. Unfortunately

for consumers - both individual consumers and businesses - higher import prices mean

higher prices for goods. If the price of steel is inflated due to tariffs, individual consumers

pay more for products using steel, and businesses pay more for steel that they use to make

goods. In short, tariffs and trade barriers tend to be pro-producer and anti-consumer.