3.

12 TRADE RESTRICTIONS AND FREE-TRADE AGREEMENTS

ASSESSMENT

Think Critically

1. Why do many fruit farmers in the United States think tariffs should be placed on fruit
imported from South America and China? Whom would such tariffs benefit, and
whom would they harm?

―The United States will pressure countries like South America and China because they are
the exporters thus tariffs and quotas are strict in the US. The tariff reduces the number of
imports. With fewer imports, the supply of goods to the US market declines, so the price will
go up. As a result, the US will get the most benefits because US producers could sell their
products in the US market for more than the world price. But it harms the US consumers, in
that case, they ought to pay a much higher price. Aside from that, it disadvantages the
foreign producers because of the tariff that is imposed on imports.

Principle:

The tariff reduces the number of imports supplied. With fewer imports, the supply of goods to
the market declines, so the price goes up. As a result, producers get to sell their products in
the market for more than the world price.

A tariff on imports benefits makers of the products. However, it harms the consumers who
must pay the higher price.

Terms Used:

Tariff - It is a tax imposed by one country on the goods and services imported from another
country.

World Price - The price at which a good is traded internationally, determined by the world by
the world supply and world demand for goods.

2. If a quota was placed on the number of automobiles that could be imported in the
Philippines, how would Philippine consumers be affected?

― In this situation, the Philippine consumers will be the ones who will get affected and
influenced negatively. If a quota was placed, the quantity of the imported automobiles will get
limited which will prompt a higher price within the market.

Principle:

‘By limiting imports, a quota reduces the supply in the Philippine market, which raises the
Philippine price above the world price.’ With that being said, this helps Philippine producers
but harms the Philippine consumers. Foreign producers who get to sell their goods for the
higher Philippine price also benefit.

Producers support quotas, coupled with a lack of opposition from the consumers.

Terms Used:

Quota- a legal limit on the quantity of a particular product that can be imported.

3. Many nations require imported car models to be crash-tested before they can be
marketed to consumers. They refuse to accept the results of crash tests performed in
other countries. This process is expensive for firms involved in the trade. How is such
a requirement a barrier to trade? How are consumers in these nations affected by
such laws?

― To be certified for sale, every new model sold must be crash-tested internally to ensure
minimum federal safety standards, health, and technical standards are met. But a publicly
available rating isn’t required. Most of the cars that are being crash-tested were luxury cars.
Technical barriers to trade include sanitary regulations, measurement and labeling
standards, and ingredient standards. To see a genuine shift towards safety, both the
government and car manufacturers have to work together to change the mindset of the
consumer and promote vehicle safety as an equally important factor in purchase decisions

Principle:

Problems with Trade

First - the other countries often respond with trade restrictions on their own, thus shrinking
gains.
Second - protecting one production that may harm the others.
Third - the cost of protection becomes social waste
Lastly - high transaction costs of quotas and tariffs.

Graphing Exercise

4. Nations are most likely to impose either tariffs or quotas on trade for products for
which they do not have a comparative advantage. Study the data in the table., and
use it to construct a double bar graph that shows the value of U.S. imports and
exports for these classifications of goods. In which types of products would there
have been the greatest pressure from U.S. businesses and labor organizations for
the imposition of either tariffs or quotas? Explain your answer.

U.S. EXPORTS AND IMPORTS

OD SELECTED COMMODITY GROUPS, 2010
 Commodity Group Exports (millions of Imports (millions of
dollars) dollars)

1. Soybeans $18,589 $220

2. Fruits and Vegetables 15,712 20,015

3. Clothing 3,197 78,518

4. Footwear 728 20,907

5. TVs, VCRs, etc. 21,511 137,305

Answer:

― The types of products that have the greatest pressure from U.S. businesses and labor
organizations for the imposition of either tariffs or quotas are the footwear. As we can see
from the graph, the amount of export of footwear in the US is very low, which explains the
high price of their footwear in the other countries such as the brands like Nike, Adidas, etc.
Exports of fruits, vegetables, clothing, TVs, VCRs, etc. are also low in exports. The U.S. will
impose tariffs and quotas on these products to raise revenue for the government, to restrict
imports and protect domestic producers from foreign competition, and to reach reciprocity
agreements that reduce trade barriers.
Academic Connections

5. Government: The creation of free-trade organizations requires a formal treaty.

Approval of such treaties often involves political issues that go beyond economic
considerations. The treaty that created the European Union, for example, was
debated by governments in Europe for many years. Some nations, such as Norway
and Switzerland, chose not to join the organization. What reasons could these
nations have had for their choice? Why might they change their decision in the
future?

Answer:

― Norway and Switzerland reason why they did not choose to be a member of the
European Union due to its lack of economic benefits and these both countries’ governments
have been largely stable for the last fifty years. . But even though they are not part of the
European Union, they are both members of EFTA (the European Free Trade Association),
and Norway is a member of the EEA (European Economic Area). There is no foreseen
reason why Norway and Switzerland will change their decision in the future, but maybe
because of the increasing advantages of the European Union right now such as the freedom
of movement and better protection.