benefit of trade policy with producer

Generally speaking, the free trade policy is better to the consumers, but this will bring big challenge to the native producers.. However, if the government implements protective trade p

BENEFIT OF TRADE POLICY WITH PRODUCER

Abstract:

The implementation of a trade policy will have different effects on the different interest groups The benefits of producer and consumer are often opposite In order to look out an appropriate trade policy, we should balance the benefits of producer and consumer when we formulate trade policy

The other one is the native consumers Generally speaking, the free trade policy is better to the consumers, but this will bring big challenge to the native producers

However, if the government implements protective trade policy to prohibit the foreign goods from coming into the native country, this will short down the supply of foreign goods and the consumers’ choices This kind of policy makes the consumers have

to spend more money on the import goods

Every coin has two sides, so is the foreign trade policy The enterprises’ and the consumers’ benefits are controversial, so the government should balance them, when the government sets up the foreign trade policy

1 The introduction of the problem

The foreign trade policy can’t protect the producers’ and the consumers’ benefits

at the same time, so when we set up the foreign trade policy, we should obey this principle: Maximize one’s benefit at the condition that the other one’s lest loss, in order

to get overall benefit

To an enterprise with low level of productive, it may hope to stand stable in the native market; however, to an enterprise with high level of productive, it may hope to get

a large space in the international market Therefore, the producer’s produce capability determines the producer’s benefit wanting

The consumer’s income determines their benefit wanting To a poor man, it must make sure that he can live a normal life firstly, at this moment, his benefit wanting is that

he can buy his necessities at the lowest price; to a rich man, his economy level determines he can have more wanting He may care about the price of articles of luxury,

rather than that of food So the rich one’s benefit wanting is quite different from the poor one’s

The producer’s capability of productive and the consumer’s income are relative to the a country’s development of economy, so we can get a producer’s and consumer’s benefit wanting determinates chain

When the government sets up the foreign trade policy, it firstly should make out the country’s level of economy and the producer’s level of economy and the consumer’s consumption wanting in order to find out their own benefit wanting The government then should compare the different interest group’s benefit wanting and sets up the appropriate foreign trade policy under the principle: Maximize one group’s benefit on the condition that the other one has the fewest losses, in order to get the overall benefit

2 The analysis of how to set up the foreign trade policy

2.1 Dividing the economic developmental stage

Walt Whitman Rostow was used to point out that the development of economy should be divided into six stages: Traditional society stage, Preconditions for take-off stage, Take-off stage, Drive to maturity stage, Age of High mass consumption and pursue quality stage

However, Chenery, another American economist, advised to divide the economy into three phases: Inintial stage ofeconomy, Industrialization stage and Developed economy stage

The Chinese economist, Li Yue divided the development of economy into five phases: Generation stage, the stage of development, growth stage, strong stage and mature stage As Li Yue’viewpoint was based on the Rostow’s and Chenry’s viewpoint,

so this article will take the Li Yue’s theory to divide the development of economy

2.2 Policy Suggestions at each stage

2.2.1 T he first stage Generation Stage

The agricultural sector is the main sector in the society The producers are all small farmers in the unit of family So at this stage, the producers are also consumers, and

they need lots of food However, due to the low productivity, there will be more need than supply On the other hand, due to the constriction of nature condition, the native agricultural goods are very rare So the government should take up the free trade policy in order to import some other agricultural goods

2.2.2 The second stage The Stage of Development

In this period, although the agricultural sector is still the main productive sector, the proportion of the agricultural sector in the GDP begins to decrease; some of the rural labor force are transferring to the city During this period, the industrial sector will take the place of the agricultural sector, becoming the first sector As the industry in the native country is in the early stage, it’s really very difficult for them to compete with the foreign companies, so the government has to take up protective trade policy to the industrial sector In this period, as people’s salary is still at a low level, consumers still spend lots of money on the daily necessities, only a few consumers are in need of some kinds of industrial products Therefore, the protective trade policy will not hurt the consumer’s benefit

The level of mechanization in agricultural production is still very low, and the productivity and efficiency are also very low The agricultural producer needs to be protected to resist the competition from the foreigners Compared with industrial sector, the government should give some protection to the agricultural sector in the form of subsidiary etc

2.2.3 The third stage Growth Stage

In this period, the economy in the country has have made rapid progress and the ratio of revenue to GDP declines sharply, even less than that of service industry However, with the development of industry, the level of mechanization in agricultural production has been improved obviously The agricultural production can not only

make the native people’s needs, but also have surplus So the government can implement free trade policy to the agriculture and help it export aboard

The enterprise in industry sector also gets an obvious progress and the ratio of industry sector to GDP has been further improved Some enterprises become mature in

the market, they are not in a totally passive situation when they compete with the foreign ones However, they are eager to get lots of advanced technology for both production and management from the foreign countries On the other hand, people's living standard and their quality of life are improved; consumers begin to have diversified demand on industrial products However, in this period, the native enterprises may can’t make consumers’ high needs So compared with the second stage, the trade policy can relieve some constraints on industrial products; and welcome the foreign enterprises to invest

Service industry and tertiary industry have made great progress, but compared with the ones in developed countries, they still l lack competitiveness However, at this time, the need of industrial products is still much more than that of service, so the government can implement protective trade policy on tertiary industry This policy will not bring lots of losses to the consumers and will protect the native enterprises

2.2.4 The fourth Stage Strong Stage

Actually, lots of medium-level developed countries are at this stage nowadays Each industry in native country become mature, but still doesn’t have absolute advantage

in the world The industrial enterprises are possible to withstand the competition of the foreign enterprises and their biggest difficulty is how to get a larger market space in the international market Tertiary industry also makes a progress, most of the businesses are getting mature and some of them have the ability to compete with the foreign competitors

During this period, the consumers have a higher level of income; they have more need in the service industry So the government can take up free trade policy in the industrial sector, and try to help the native companies to go aboard

The government can further increases liberalization of services, in order to meet the consumers’ multifarious needs in the service industry

2.2.5 The fifth stage Mature Stage

During this period, the service industry has become the economic backbone of the country Enterprises begin to take the world as their objective market The consumers

don’t care about the prices of goods, as they have a high level of income Therefore, the government should advocate the free trade policy

We have analyzed the consumers’ and producers’ main feature in the former content and given lots of suggestion on the trade policy in each stage However, we still believe that there isn’t a common trade policy theory to all the countries The foreign trade policy should be changed according to the real situation of the country Generally speaking, at the beginning of the development of economy and at the developed stage, the government can take up free trade policy However, during the process of the economy, the government should try to use protective trade policy on each industry

Who Really Benefits from Protectionism?

When protectionist policies are enacted, certain domestic industries are protected

at the expense of others So in the end, it comes down to which industries can exert the most influence over domestic politics

Each argument for protectionism has merits: protectionism does save jobs in protected industries, can sometimes save those industries from financial catastrophe, and can be useful sometimes when it comes to negotiating trade agreements with other countries

But in each argument, the government is placed in the role of making arbitrary decisions between which industries deserve protection, and which must inadvertently bear the costs of protection The alternative is a government that does not pick winners but instead stands by principles and treats each industry the same, regardless of its political clout or well – connectedness

The important thing to remember is that economic costs are unavoidable The question is not whether an economy can avoid a cost, but who will bear it Some believe the government is capable of deciding this question, and some believe that free individuals should decide it by their actions in the marketplace

Protectionism basically refers to all those policies that try to impose suchpractices that protect local firms so that they have some advantage over the foreign firms Some advantages of the trade protectionism are:

 If a country’s local industry is not very strong, imposing trade barriers would make foreign goods expensive and this will provide a chance to the local firms to compete on the basis of price

 The increased duties result in tax revenue for the government

The main disadvantages of protectionism are:

 The local firms are being protected and they are competing on price not the quality

 The artificial protection can work well for the products inside the country while it

is of new use when the products will be exported; it’s a false sense of security

 The consumers will be denied an easy access to high quality products

 It is against the principle of free markets

TARIFF: a system of government-imposed duties levied on imported or exported goods;

a list of such duties, or the duties themselves

Tariffs are simply taxes imposed by the government of one nation on imports from other nations They work like any other taxes A tariff is added to the price of the imported good The resulting price of the import is thus higher, which tends to decrease the quantity purchased And if fewer imports are purchased, then more domestic production is sold Of course, while domestic producers benefit from tariffs, domestic consumers tend to suffer They pay higher prices for both imports and domestic production.

 If the world price is lower than the domestic price in the absence of trade, the country becomes an importer for the good This will hurt domestic producers of that good

 Domestic producers can seek protection by having the government implementtariffs, which are taxes on imported goods that will raise their price domestically

 As price increases, domestic demand falls and domestic supply increases Sellers are better off, domestic buyers are worse off, and the government raises revenue by the amount of imports times the tariff

Countries in which the domestic price of a good is lower than the world price will import the good As discussed above, this situation hurts domestic businesses, workers, and entrpreneurs in the affected industries Often governments and voters employ policies such as tariffs and quotas to soften the effects of free trade on these groups In this section, the effects of a tariff on a specific good are examined

Tariff Defined

A tariff is a tax on imported goods The major effects of a tariff are that, like most taxes, it will raise the equilibrium price and reduce the equlibrium quantity of any good affected by it It will also reduce the quantity of goods imported in the affected industry and increase domestic production of the good Although people and their governments may enact a tariff because they believe that the benefits of the tariff outweigh its costs, economic analysis predicts that a tariff will reduce society's overall welfare

Benefits:

Except in all but the rarest of instances, tariffs hurt the country that imposes them,

as their costs outweigh their benefits Tariffs are a boon to domestic producers who now face reduced competition in their home market The reduced competition causes prices to rise The sales of domestic producers should also rise, all else being equal The increased production and price causes domestic producers to hire more workers which causes consumer spending to rise The tariffs also increase government revenues that can be used to the benefit of the economy

There are costs to tariffs, however Now the price of the good with the tariff has increased, the consumer is forced to either buy less of this good or less of some other good The price increase can be thought of as a reduction in consumer income

Generally the benefit caused by the increased domestic production in the tariff protected industry plus the increased government revenues does not offset the losses the increased prices cause consumers and the costs of imposing and collecting the tariff

A subsidy is a form of financial or in kind support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting beneficial economic and social outcomes Although commonly extended from Government, the term subsidy can relate to any type of support Subsidies have a long track record and today come in various forms including: direct (cash grants, interest-free loans), indirect (tax breaks, insurance, low – Interest loans, depreciation write-offs, rent rebates) Furthermore, they can be broad or narrow, legal or illegal, ethical or unethical

The most common forms of subsidies are those to the producer or the consumer Producer/Production subsidies ensure producers are better off by either supplying market price support, direct support, or payments to factors of production Consumer/Consumption subsidies commonly reduce the price of goods and services to the consumer, for example in the US at one time it was cheaper to buy petrol than bottled water

Subsidies can be hugely damaging or beneficial because they create distortions They are designed to overcome deficiencies in themarket, support disadvantaged parts of society, and positively distort activities such as pushes towards renewable energy, recyclingand agricultural set-asides Simply put they represent an attempt by Governments to control the behaviour of individuals, businesses and larger groups by offering or exacting economic benefits/taxes Other benefits may spin off, primarily as subsidies may act as a form of protectionism or trade barrier to foreign imports thus protecting domestic goods and services

Effect:

Subsidies create spillover effects in other economic sectors and industries A subsidized product sold in the world market lowers the price of the good in other countries Since subsidies result in lower revenues for producers of foreign countries, they are a source of tension between the United States, Europe and poorer developing countries

While subsidies may provide immediate benefits to an industry, in the long-run they may prove to have unethical, negative effects Subsidies are intended to support public interest, however, they can violate ethical or legal principles if they lead to higher consumer prices or discriminate against some producers to benefit others

For example, domestic subsidies granted by individual US states may be unconstitutional if they discriminate against out-of-state producers, violating the Privileges and Immunities Clause or the Dormant Commerce Clause of the United States Constitution Depending on their nature, subsidies are discouraged by international trade agreements such as the World Trade Organization (WTO)

IMPORT QUOTA: Quantity restrictions imposed by the government of one nation on

imports from other nations The primary goal of import quotas is to reduce imports and increase domestic production Because the quantity of imports is restricted, the price of imports increases, which thus encourages domestic consumers to buy more domestic production Import quotas are one of three common foreign trade policies designed to discourage imports and/or encourage exports The other two are tariffs and export subsidies

Import quotas are foreign trade policies undertaken by domesticgovernments that are intended to "protect" domestic production by restricting foreign competition In general, a quota is simply a quantity restriction placed on a good, service, or activity

Import quotas are then merely legal restrictions on the quantities of imports from the foreign sector that are imposed by the domestic government

The goal of import quotas is to increase the limit the availability of imports in the domestic economy and thus encourage domestic consumers to purchase domestic production

VOLUNTARY EXPORT RESTRAINS:

Effect:

VER effects on the exporting country The aggregate welfare effect for the country

is found by summing the gains and losses to consumers, producers, and the recipients of the quota rents The net effect consists of three components: a positive terms of trade effect, a negative production distortion, and a negative consumption distortion

Because there are both positive and negative elements, the net national welfare effect can be either positive or negative The interesting result, however, is that it can be positive This means that a VER implemented by a large exporting country may raise national welfare

Generally speaking, the following are true:

- Whenever a large country implements a small restriction on exports, it will raise national welfare

- If the VER is too restrictive, national welfare will fall

- There will be a positive quota level that will maximize national welfare

However, it is also important to note that not everyone’s welfare rises when there

is an increase in national welfare Instead, there is a redistribution of income Consumers

of the product and recipients of the quota rents will benefit, but producers may lose A national welfare increase, then, means that the sum of the gains exceeds the sum of the losses across all individuals in the economy Economists generally argue that, in this case, compensation from winners to losers can potentially alleviate the redistribution problem

VER effects on the importing country’s consumers Consumers of the product in the importing country suffer a reduction in well-being as a result of the VER The increase in the domestic price of both imported goods and the domestic substitutes reduces the amount of consumer surplus in the market

VER effects on the importing country’s producers Producers in the importing country experience an increase in well-being as a result of the VER The increase in the price of their product increases producer surplus in the industry The price increases also