Economics
...ry to gaining advantage over domestic producers. The foreign industry may try to gain advantage in another domestic economy by predatory pricing, which in turn will harm domestic industries in that particular country, therefore decreasing national income. The government does not want a decrease in national income, therefore use of tariffs are used for inflammatory pricing. Another reason arguing the use of tariffs is the ‘infant industry’ argument. This argument simply argues that the small industries of the domestic economy should be protected when they are in there star-up years because it is not capable of competing with already established multi-national firms who already have lower costs than the firms which are in their early years. Therefore the government should protect them until the firms are big enough to compete competitively with other low-cost firms. HOW TARIFF’S ARE INCORPORATED There are two major protection policies available, both policies, however, cause imported goods price to rise and imported goods quantity to fall; different approaches are applied by both policies in they way these results are attained. · Policies that directly raise prices This policy approach directly raises the price of imported goods; a tariff or import duties are examples of this policy. Foreign producers, domestic producers and domestic consumers suffer the effects of tariffs. Tariffs primary effect is raising the imported goods domestic price above its world price by the amount of the tariff. Consequently, this causes the level of imported goods to fall and the counter effect of this is that the price and quantity of domestic goods rises. However, production cost of one extra unit in the domestic economy exceeds the purchase price of one unit from the world market. Domestic consumers on the other hand consume less at a higher price. · Policies that directly lower quantities These types of policies place direct restrictions on the quantity of an imported good. This is the opposite of a tariff but achieving the same objective at the end result. Common examples are Voluntary Export Restrictions (VER) and import quotas. The import quota is a means by which the importing country sets a maximum on the quantity of some product that may be imported each year. IMPACT ON PRODUCERS AND CONSUMERS · European Union Steel Producer An anti-dumping duty applied by United States of America is of significant importance as it is by far the single most important trading partner to any country. The steel producers in the European Union would encounter excess supply. The resulting surplus of steel products and also not being able to export as much would mean excess supply within the European Union, this in turn would cause the price of the steel to fall. Therefore more would be supplied at a lower price. However, suppliers would make use of the price mechanism in order to increase supply. · European Union Steel Consumers The European Union consumers would gain from this tariff being imposed by the ...