benefit of trade policy with producer

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. SUBSIDIES: 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 domestic government s 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 induce an increase in the output of existing firms (and perhaps the addition of new firms), an increase in employment, and an increase in profit, payments, or both to fixed costs. VER effects on the importing country. The aggregate welfare effect for the country is found by summing the gains and losses to consumers and producers. The net effect consists of three components: a negative terms of trade effect, a negative consumption distortion, and a negative production distortion. Since all three components are negative, the VER must result in a reduction in national welfare for the importing country. However, it is important to note that a redistribution of income occurs—that is, some groups gain while others lose. This is especially important because VERs are often suggested by the importing country. This occurs because the importing country’s government is pressured by the import-competing producers to provide protection in the form of an import tariff or quota. Government reluctance to use these policies often leads the importer to negotiate VERs with the exporting country. Although the importing country’s national welfare is reduced, the import-competing producers gain nonetheless. VER effects on world welfare. The effect on world welfare is found by summing the national welfare effects on the importing and exporting countries. By noting that the terms of trade gain to the importer is equal to the terms of trade loss to the exporter, the world welfare effect reduces to four components: the importer’s negative production distortion, the importer’s negative consumption distortion, the exporter’s negative consumption distortion, and the exporter’s negative production distortion. Since each of these is negative, the world welfare effect of the VER is negative. The sum of the losses [...]... POLICIES: A standard technical definition of dumping is the act of charging a lower price for the like goods in a foreign market than one charges for the same good in a domestic market for consumption in the home market of the exporter This is often referred to as selling at less than "normal value" on the same level of trade in the ordinary course of trade Under the World Trade Organization (WTO) Agreement,... domestic inputs.Eitherway, since domestic content requirements raise the relative production costs of foreign firms, they benefit domestic producers of final goods by increasing domestic firm sales or profits In addition, they may reduce competition in the final goods market if they reduce the volume of goods sold by the foreign firm in the domestic market Whether they are imposed by the domestic country... connotation, as advocates of competitive markets see "dumping" as a form of protectionism Furthermore, advocates for workers and laborers believe that safeguarding businesses against predatory practices, such as dumping, help alleviate some of the harsher consequences of such practices between economies at different stages of development (see protectionism) Effect: Consumers are clearly worse off because they... of duty Imports become more expensive Furthermore, there is no guarantee that the domestic producers will keep their prices at the initial levels Depending on price elasticity, they can obtain higher profits by setting a new price higher than before but lower than those of dumped products Things become worse when dumped imports are intermediate goods The imposition of antidumping measure seems to benefit. .. goods The imposition of antidumping measure seems to benefit no one but the domestic producers whose foreign rivals face an antidumping action To evaluate if antidumping is an appropriate policy or not, we need to know whether the increase in profits of the domestic firms is large enough to offset the decrease in welfare of all others in the country As antidumping is selective, while the dumping firms... case of foreign investment, the desire to foster greater domestic activity may be subverted by domestic content regulations First, since foreign firms are placed at a disadvantage, they may place fewer of their activities in the local market In addition, when the scale of their operations is reduced, the overall productivity of the foreign operation may suffer froma failure to achieve full economies of. .. the sum of the gains In other words, we can say that a VER results in a reduction in world production and consumption efficiency LOCAL CONTENT REQUIREMENTS: Local content requirements (LCRs) are policy measures that typically require a certain percentage of intermediate goods used in the production processes to be sourced from domestic manufacturers Local content requirements in renewable energy policy. .. limits on the use of foreign inputs will reduce competition and allow the domestic input supplier to exploit its market power In this case, domestic content requirements may even reduce domestic output of the final good, as the domestic input supplier reduces its production and consequent sales to take advantage of its market power Second, if it is possible for firms to change the scale of their production... between the usage of labor and intermediate inputs, the imposition of a domestic content requirement based on value added may cause the volume of imported intermediate inputs to rise or fall In addition, the composition of intermediate input imports may change In particular, if there are many imported intermediate inputs, and the relative price of foreign inputs differs across inputs, a value-added requirement... have no effect on the sourcing choices of domestic firms The best response for a cost-minimizing foreign firm is to exactly meet, though not exceed, the purchase criteria of the domestic content requirement Alternatively, the foreign firm may decide to pay the tariff penalty that is associated with noncompliance if the tariff cost is less than the extra cost of purchasingmore domestic inputs.Eitherway, . 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. 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. 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,