Consider this statement, “The interventionist trade policies of the United State
ID: 1105007 • Letter: C
Question
Consider this statement, “The interventionist trade policies of the United States Government in the 1980s, most especially quotas and high tariffs of Japanese manufactured automobiles, significantly contributed to the decline of the US domestic automobile industry in the late 1990s and early part of the 21st century.”
Indicate whether you agree or disagree with the above statement, and present a cogent and professional argument of your stance. Consider the following questions in your argument:
What is your interpretation of words like “interventionist” and “significantly”? (Hint: Another word for “interventionist” is “protectionist”. Research how these policies “protected” the domestic automobile industry at the time and the state of the industry today.)
How do quotas and tariffs work? (Hint: think of this in relation to economic theory of supply and demand and free market price equilibrium.)
Who benefits from the aforementioned trade policies? (ie consumers, domestic manufacturers, foreign competitors, etc.)
What other market conditions have also played a role in the auto industry decline? Decide whether these conditions are more or less contributory than trade policies to the current situation.
Briefly discuss your opinion on free trade agreements (for example, NAFTA) and whether these agreements stimulate or strangle the American economy.
Explanation / Answer
Answer:
I agree with the given statement that “The interventionist trade policies of the United States Government in the 1980s, most especially quotas and high tariffs of Japanese manufactured automobiles, significantly contributed to the decline of the US domestic automobile industry in the late 1990s and early part of the 21st century.”
Protectionist / Interventionist trade policies are those which provide some degree of protection from foreign competition.
Imports into the United States of foreign automobiles, mainly from Japan, have been restricted since 1980s by a "voluntary restraint agreement." The quotas were imposed in response to pleas by the U.S. auto industry that it needed time to grow strong enough to compete with the imports on the free market. But the reality is these quotas and tariffs have not come cheap for the American consumers, it is estimated that Americans paid an extra $5 billion because of the import limits. At the expiry of the quota policy the Big Automobile companies requested for a renewal allowing them to become competitive. But did they actually become competitive is a myth because for being competitive there is a primary requirement and it is competition which itself was under threat as there were only three big players in the market having significant market share. Were the quotas be removed, the winner would be the U.S. consumer winning too would be the U.S. auto industry, which would become more competitive.
These protectionist measures were a boom for American auto dealers because they discovered that they could raise prices too as long as they stayed under Japanese prices as with tariffs Japanese imports became expensive. The competition that comes with trade means choices for society as well as consumers. The cost of saving thousands of American jobs (as they are argued for) may be fewer choices and higher prices for millions of American consumers.
Quotas are restriction on the maximum quantity of imports. In terms of supply in a free market after the imposition of quota will decrease and lead to a higher equilibrium price than it was before quota. With quotas the foreign firms supplying goods (i.e. Japan in this case) will earn more as the increase in price due to limited quantity will automatically adjust the equilibrium price at a level where the foreign firm will earn substantial profits as quota is a ban on quantity and not value.
In Tariffs a tax is imposed on imports. It can be either specific amount or a percentage of the price of the good. Considering a free market equilibrium price of P and quantity of Q with the imposition of a tariff on a good the supply curve will shift upwards, this will lead to increase in price from P to P1 for the domestic consumers, but the production and domestic supply of Q will increase to Q1 which means higher economic activity for the domestic firms.
Undoubtedly the Interventionist measures of trade policies distort market forces and prevent the consumer from gaining the benefits of a free market. It is the sometimes the Domestic Firm (tariffs), the Government (revenue from tariffs) and sometimes the foreign firm (higher export prices with quotas) that enjoy the benefits.
Free Trade Agreements:
When two or more nations collectively agree on their terms of trade or a rate for the exchange of goods between them it is the first stage in economic integration.
With the implementation of such agreements there is greater comparative advantage amongst the members with more specialisation and high resource mobility.
The largest multilateral agreement which is a type of FTA is NAFTA- North American Free Trade Agreement - between the United States, Canada and Mexico. Their combined economic output is $20 trillion.
It has its own advantages and disadvantages:
Listing the advantages:
Disadvantages:
These measures come with their own plus and minus but the best solution is to benefit from the advantages and seek protectionism from the disadvantages.