ARGENTINA’S POLICY OF ‘BUY LOCAL’

         Argentina is branded as the country with the most protectionist measures and this comes with its disadvantaged and advantages. Argentina is a country when you will find no more “made in China” goods or cheap imported goods. The supermarkets are full of local produce with a ban on gourmet food products. The government supports a policy of ‘buy local’ committing itself to a closed economy.

         There are many advantages for the domestic producer due to the restrictions on import. One of the major reasons for Argentina to propose this policy is that it will help the domestic market grow. Restrictions of imports force the consumers to buy domestic goods and in turn increase the profitability of domestic producers. It forces the domestic producers to become more efficient helping in the development of the country overall. The competition provided by the international market will be a great incentive for the domestic producers to be more efficient and innovative. This is very important if Argentina wants to achieve a better economy in the long term. Import substitution also helps improve the balance of payments as a restriction means that there are more exports than imports. This would result in the demand for Argentina’s currency, improving the currency of the country. The aim of the country is not to protect itself by these measures, but to increase domestic consumption so that the government revenue through taxes increases and it is able to function more efficiently and able to pay off debts.

         There are a lot of disadvantages that come with this decision for Argentina. The consumers are at a loss as Argentina has imposed a 15% tax on the use of credit cards in foreign countries making it very difficult for its citizens to import products, forcing them to buy domestic products only. The middle and upper class of Argentina suffer the most from this policy of prohibition of foreign exchange. Also, many companies that require technology machinery that can only be imported have started shutting down due to lack of availability. The most harmful effect of this policy is the price increase all over Argentina due to lack of credit sources. Argentina’s annual inflation rate exceeds 25%. This type of policy also results in protection of many inefficient firms. The companies know that they are going to be protected under that policy so it serves as a lack of incentive to work. These policies promote capital intensive work but what the country fails to realize is that small companies have to stick to labor intensive work due to lack of credit sources. Although these policies will help Argentina boost its economy in the short run, in the long run it will stop growing, as the domestic producers will be inefficient compared to the international producers. And high government intervention, there are always chances of corruption, with companies bribing the government for their own benefit.

            In conclusion, Argentina should follow this policy only for a short term to promote the domestic industry and increase exports to gain more revenue. In the long run it can be harmful due to misallocation of resources and the consumers will not be happy due to lack of choice. This policy will prove to be helpful in boosting Argentina’s economy, but only in the short term.

Analyze and evaluate the impact of any major protectionist measure undertaken by the country allocated to you. (Bangladesh)

Analyze and evaluate the impact of any major protectionist measure undertaken by the country allocated to you.

Divy Dangi

Bangladesh

Trade Protectionism is a policy imposed by the government to reduce the quantity or value of imports entering a country or increasing the exports of a country. There are three basic forms of protectionism: Tariff, Quotas and Subsidies. These policies restrict the foreign imports and encourage domestic production. This in turn creates a favorable balance of payments, prevents trade imbalance, corrects the exchange rate of an economy’s currency and much more. However, these policies are not always beneficial. Recently, Bangladesh has used one such protectionism policy.

Recently, on August 30^th 2015, Bangladesh imposed protectionist measures on Sugar imports. Bangladesh raised custom duties, i.e. tariffs, on raw and refined sugar.[1] Tariffs are indirect taxes imposed upon imported goods and services. The cost of raw sugar imports increased from 2000 taka to 7000 taka and the cost of refined sugar increased from 4500 taka to 10500 taka.[2] There has been an increase in the cost of raw and refined sugar by 250% and 133% respectively. This increase in costs in the domestic market had many consequences.

The first reason the tariff was imposed upon the imports was to protect the domestic firms. Since domestic firms are not as efficient as the foreign firms in the production of sugar, their costs are higher. These higher costs reduce their competitiveness. Hence, the increase in tariff increases the cost of imports, and this increases the competitiveness of the domestically produced goods. Hence, increasing the cost of imported sugars to 7000 and 15000 taka, made it unviable for the domestic consumers to consume imported sugars and therefore they turned to domestically produced sugars, which are cheaper. Here, the domestic firms are protected even though they are inefficient.

The second reason the government increases the tariff is to increase the government revenue. For a country like Bangladesh that has a budget deficit of 0.36% of the GDP, as an average from 1994-2014, the government requires funds[3]. A major source of the government income is tariff. Thus the government increased the tariff on sugars to increase their revenue and reduce their budget deficit.

An increase in the tariff on sugars has different consequences on the different stakeholders. The increases tariff on sugar resulted in a decrease in imports from Brazil, India and Thailand, due to their reduced competitiveness. Additionally, this has increased the quantity supplied by the domestic producers in Bangladesh. This will help companies like the Bangladesh Sugar and Food Industries Corp to reduce their excess supply. Their stockpiles of excess sugars will reduce and hence the producer’s costs will reduce.

Next, increased tariffs are harmful to the domestic consumers in Bangladesh. In a country where the GDP per capita is only $958, increase in cost of sugars will be detrimental[4]. Sugar is something that is used in ones every day life. Now the consumers will have to pay higher prices for a lower quantity of the sugar. This will have a negative effect on the consumers’ disposable income.

On the other hand, the domestic producers are benefitted. Since the imports have reduced, competitiveness of the domestically produced goods increased. Also, they can increase their prices, due to the increase in cost of imported goods. Thus, they get a higher revenue. Since the domestic supply increase, the domestic employment also booms. This reduces unemployment in the country and increases the standard of living of the domestic workers in Bangladesh.

Additionally, the government also gains from the increased tariffs. The increase in the price of the sugars is a result of the tariff the foreign producers have to pay to the government for their imports. This tariff is added to the government as revenue. Thus, tariffs positively effect the government budget.

However, even though the domestic producers and the government benefit, the income equality in Bangladesh will worsen. Since the tariff is a fixed value on sugars, the tariff is a regressive tax. This means that the tax has a greater burden on the consumers with a lower income than consumers with a higher income. Hence, the income equality, in a developing country like Bangladesh, worsens.  

Also, the increased tariffs promote inefficient production of goods by domestic producers. It leads to x-inefficiency in the Bangladeshi producers. Since, the competition has reduced, the domestic producers have resorted to inefficient production methods. They do not try to increase their efficiency as the government protects their goods and services.

In summary, using the graph above, we can see that the domestic production has increased from Q₁ to Q₂. The imports have reduced drastically from Q₁Q₄ to Q₂Q₃. We see that the domestic supply has increased. This has benefitted the domestic producers and employees. However, the cost of the products have increased from P_w to P_w+t. This is harmful for the consumers. Also the government benefits as revenue is created using tariffs. Lastly the society as a whole loses as there is welfare loss and global misallocation of resources.

Bangladesh, due to increased protection, will benefit in the short run. Protectionism has protected its domestic firms that are integral to its economy. It has reduced imports and protected its balance of payments. Also reduced imports have helped the correction of the Bangladeshi taka. However, in the long run, the inefficient production of the domestic firms will create a lot of welfare loss for society. Also countries like India, Brazil and Thailand may retaliate. Tariffs also result in a global misallocation of resources, thus creating welfare loss.

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[1] http://en.prothom-alo.com/economy/news/77181/Bangladesh-raises-duty-on-sugar-imports

[2] http://en.prothom-alo.com/economy/news/77181/Bangladesh-raises-duty-on-sugar-imports

[3] http://www.tradingeconomics.com/bangladesh/government-budget

[4]https://www.google.co.in/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_pcap_cd&idim=country:BGD:IND:PAK&hl=en&dl=en

Tariff Imposed on Gold in India- Sumer Lulla

Analyse and evaluate the impact of any major protectionist measure undertaken by the country allocated to you. (India)

Tariffs, also known as custom duties, are taxes on imported goods and are the most common form of trade protectionism. Tariffs are imposed to help protect domestic industries from foreign competition as well as to raise government revenue.[1]

The government of India imposes tariffs on various luxury goods like gold and the value of tariff imposed on this good is revised every fortnight based on the global prices for these goods. The government determined import tariff value is the customs duty charged on imported goods to protect domestic producers from foreign competition.

On September 1^st 2015, the government raised the import tariff value on gold to $369 per 10 grams based on trends of prices for gold in the global market.[2] Gold is the second largest import for India and to protect the domestic gold producers from foreign producers, the government has raised the tariff duty on gold. Also the increase in tariff duty on gold will lead to an increase in government revenue as the government will be earning a higher import duty per good imported into the country.

Previously, in the second fortnight of August the import tariff value on gold was $363 per 10 grams whereas the price of gold was $1134.40 an ounce. However, on the 1^st of September, the global prices of gold rose by 0.75% to $1142.90 an ounce and the import tariff value rose to $369 per 10 grams. Meanwhile, in the domestic market, gold was priced at Rs 27,060 per 10 grams or $1517.40 per ounce.[3]

                                  Graph 1 showing Impact of tariff on imports of goods.[4]

The world price for gold is $1142.90 whereas the tariffs being levied on gold by the Indian government is $369. The domestic price being charged for gold is $1517.40 which is higher than the world price as well as the World price plus the tariff being imposed on gold. In the graph above, at the world price, quantity Q₁ is being produced by domestic producers whereas quantity Q₄ is the demand by the domestic consumers. Thus, at the world price, the imports of gold are Q₄-Q₁. After the imposition of the tariff, the domestic supply rises to Q₂ and the domestic demand falls to Q_3­. The amount of gold imported falls to Q₃-Q₂. Also, there is a dead weight loss to society of parts labelled 'd' and 'f' in the graph above.

The domestic producers benefit as they produce more gold and receive a higher price for their gold. Domestic consumers suffer as there is less gold available in the market and thus they are forced to pay a higher price than the world price for the gold. The government of India benefits as it receives a tariff revenue equal to ‘e’ in the graph. Also, there is an increase in domestic employment as the domestic sellers are now producing a larger quantity of gold. However, there is a negative effect on the income distribution in the country and income distribution worsens as tariffs are regressive taxes. A regressive tax burdens people on lower incomes proportionately more than people on higher incomes.[5] Furthermore, productive inefficiency increases as tariffs help protect relatively inefficient producers in the country. Meanwhile, foreign producers of gold are worse off as their quantity of exports decrease and thus their revenues decrease.

Due to the high tariffs being charged on Gold by the Indian government, there is a global misallocation of resources and society as a whole is worse off. Domestic producers are better off as they sell more quantities of gold at higher prices whereas consumers are worse off as less gold is available and at higher prices. The fluctuation in the prices of gold help set the tariff charged on gold and in this way the government helps protect the domestic producers of gold as well as increase its own revenue.

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[1] Economics for the IB Diploma Second Edition- Ellie Tragakes

[2] http://economictimes.indiatimes.com/news/economy/foreign-trade/government-raises-import-tariff-on-gold-to-369-per-10-grams/articleshow/48759199.cms

[3] http://economictimes.indiatimes.com/news/economy/foreign-trade/government-raises-import-tariff-on-gold-to-369-per-10-grams/articleshow/48759199.cms

[4] Economics for the IB Diploma Second Edition- Ellie Tragakes

[5] Economics for the IB Diploma Second Edition- Ellie Tragakes

Analyze and evaluate the impact of any major protectionist measure undertaken by the country allocated to you.  (Japan)

Trade protectionist measures are the deliberate attempt to limit imports or promote exports by putting up barriers to trade. There are 3 types of barriers, quotas, subsidies and tariffs. Quotas refer to setting a limit on the amount of imports on a certain good. Tariffs refer to charging a higher price on imported goods. Subsidies refer to the money the government gives the domestic producer in order for them to keep prices low. These measures are taken by governments of countries to protect their domestic producers so they can provide competitive prices to the international producers. This is also done because an increase in the domestic production will lead to an increase in the GDP. 

Japan as decided to provide a 70,000 ton tariff free import quota and will maintain high tariffs for the other importers. Japan is willing to do so in return for a reduction of tariffs in the automotive industry in U.S. This will greatly affect all the stakeholders of both the countries.

In Japan, the rice producers will be worse off because they will receive more competition since the U.S. exporters will not have to pay tariffs. The consumers will be better off because they will not have to pay tariffs on the U.S. imported rice. The Japanese government will be worse off because they will not be receiving the income from tariffs. The U.S. government will benefit because they will have an increase in exports which will lead to credits in their balance of payments. 

Alternately, the Japanese automobile producers will benefit since they can compete in the U.S. and and also, the Japanese exports will increase to add credits to their balance of payments. The U.S. producers will be worse off because they will have to face more competition. Also, the customers in the U.S. will have to pay lower prices for the Japanese cars and hence they will benefit.

In this case, for Japan allowing this quota will affect them in the following ways.

The infant industries will not be able to provide competitive process but it will also make them more competitive and they will become more efficient. This is because the international producers will be selling at low prices which the Japanese producers will not be able to compete with. Also, to fight this competition, the Japanese producers will become more efficient and they will have more incentive.

This can lead to dumping because if there is no tariff, the U.S. producers can sell their goods at cheaper prices than they do in their own country and will increase their exports. This will harm the Japanese economy.

This will be worse for the Japanese government because they will lose the revenue collected by tariffs.

There will also be unemployment because the domestic firms will not produce as much as they did before since the quota has increased.

The automobile industry in Japan will grow and also,they will be able to dump their goods in the U.S. and will eliminate competition.

The Japanese exports will increase since their automobiles will be sold at competitive lower prices.

After considering the above points, it can be concluded that the trade protectionism policy has its pros and cons and it may help the domestic producers, but a government has to also increase its exports and by protecting their domestic producers, the other countries will also produce theirs in retaliation. Hence, these policies have to be well negotiated and it may help both the countries. In this case, the Japanese rice market is worse off but the automobile industry will benefit a lot since they are being able to export to U.S at more competitive prices than the automobile producers in the rest of the world. Hence, I would like to conclude that this protectionist policy of Japan will be beneficial for the country as a whole since they are having a constant growth in imports and exports which maintains the balance of payments but also, it helps the country be at better terms with other countries, in this case, the U.S. Hence, trade protection measures are beneficial to the economy of a country.

Raj Ranka

Protectionism vs Free Trade - Brazil

Protectionism vs. Free Trade - Arjun Goyal

Q: Analyze and evaluate the impact of any major protectionist measure undertaken by the country allocated to you (Brazil).

            In a complex interconnected world, where globalization induced trade clashes with domestic production policies, protectionism has become a policy whose benefits have become debatable. Protectionism can be defined as an activity designed to protect domestic industry from the competition of foreign producers, and it can be implemented using protectionist measures. Protectionist measures are those measures that limit competition from foreign producers in the domestic market by either limiting their market share, or helping domestic producers. Protectionist measures can be implemented and undertaken in 3 principle ways: tariffs, quotas and subsidies. Tariffs are taxes imposed on imported goods, which limits their supply by increasing their price with respect to domestic goods. Quotas are legal limits of the quantity of goods that can be imported into the country. Subsidies are non-commercial grants given to domestic producers so that their goods can compete with the cheaper imported goods. Brazil has employed many of these protectionist measures in its economic policies, primarily because it is still a developing country with a huge potential of domestic growth. Natural resources and labor have acted as catalysts in promoting domestic production and growth. President Dilma Rousseff has accelerated protectionist policies in the country, in the attempt to put domestic production into overdrive, develop new technologies in the country and protect local and infant industries from foreign goods. While these measures may seem foolproof, they have led to positive and negative consequences for other stakeholders involved.

            For a explanation into this claim, we can take the example of tariffs imposed on imported goods in Brazil. Out of all the protectionist measures, tariffs imposed on imported goods are probably the most substantial of the protectionist measures. Recently, Brazil upped its protectionism, leading to an imposition of a tariff on more than a hundred different goods. Much to the dismay of other international producers of goods, existing tariffs have also increased on most goods, worsening the state of foreign exporters to Brazil. The effect of a tariff is shown in Diagram 1 below:

Diagram 1: The effect of the imposition of a tariff on the quantity traded and price.

As shown by diagram 1, the tariff causes a rise in world prices from P_w to P_w+t. The initial domestic production is Q₁, but after the imposition of the tariff, it rises to Q₂ and also occupies the production between Q₃ and Q₄. The imports reduce from the previous Q₄-Q₂ to the new Q₃-Q₂. This means that the tariff imposed transferred some part of the imported supply to the domestic supply, thus protecting the domestic firms from foreign competition. The increased prices also mean that the domestic firms get larger revenue without paying for the tariffs. The effect of tariffs has an effect on not only the producers, but also all stakeholders involved in the process.

The domestic producers are obviously better off, since the whole point of the imposition of the tariff is to benefit the domestic producers. The domestic producers have an increased quantity supplied as well as a higher price, leading to much higher revenues for the domestic producers. This higher revenue not only increases their future supply, but can also provide for funds required in research of new technology and more efficient methods of production.

As the enforcer, the government benefits greatly by the imposition of the tariffs. Not only do they succeed at their goal of protecting domestic firms, but also receive revenue through the tariffs. The diagram shows the revenue of the government in shaded green. This revenue can be invested into production of other merit goods, which can ultimately help the society.

Contrastingly, the imposition of the tariff makes Brazilian consumers worse off since the consumers have to pay for a higher price than the world price. The increase in prices translates to increased consumer expenditure, which is not good for the consumers. This is a direct effect of the imposition of the tariff.

The foreign producers are the worst affected. The foreign producers might have higher prices, but also have to pay the tariff on the goods. Furthermore, they lose quantity supplied to the domestic producers due to the imposition of the tariff. This causes a large loss of revenue for the foreign producers. This is the reason why most countries are rebelling against Brazilian protectionism.

            The society is affected in both positively and negatively. While the society may benefit from the possible gains of the increased government revenue, it also gains by the increased domestic employment due to the increased domestic production. However, the regressive nature of the tax makes the income distribution status of the country worse, acting negatively for the society. This means that the tariffs cause a larger disparity between the rich and poor, resulting in formation dual economies. The protection to the domestic firms also prevents weeding out of inefficient domestic firms from the market, protecting them and inhibiting more efficient production overseas. Consequently, this leads to global misallocation of resources, resulting in a welfare loss. The welfare loss can be seen in green in diagram 2 below:

Diagram 2: The welfare loss shown in green due to the imposition of the tariff.\

            While the imposition of Rousseff’s tariff policy may seem to benefit the country, Brazil is undergoing losses in various other sectors due to the imposition of this tariff. The pros of the operation may be that domestic production, employment and government revenue increases, but the numerous cons like higher prices for consumers, disparity in income distribution, and general inefficiency in production elicit concern. Apart from this, the imposition of tariffs may also lead to trade wars, where other countries employ protectionist measures against Brazil as a sign of rebellion against Brazilian protectionist measures, destroying economic stability and affecting Brazil’s exports and balance of payments. In this way, the aim of increased domestic production and growth is riddled with problems in the spheres of the other stakeholders. Rousseff’s government may plead with infant industry argument or the diversification of developing country argument, but the negative consequences of the imposition of the tariffs are sufficiently glaring to say that other stakeholders are paying a price.

            The imposition of tariffs as a protectionist measure in Brazil is helping the country build up its domestic production capabilities, and might allow them to be major exporters in the near future. However, the heavy tariffs on majority of imported goods are causing problems in other spheres and dissatisfaction among major trade partners with Brazil. A good balance between protectionism and free trade may be the solution and may be able to inhibit the negative consequences of tariffs, and still be able to protect vital industries that suffer due to international competition. One also has to remember that tariffs are not the only protectionist measure employed by the Brazilian government; quotas and subsidies have also found their way into Brazilian protectionist policy, meaning that while domestic industries are sufficiently protected, other stakeholders may lose out more. The impact of protectionism may help Rousseff’s government in the present, but its overuse may lead to damaging consequences for the other stakeholders.