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How governments influence trade through taxes, limits, and international agreements.
Have you ever wondered why a smartphone costs significantly more in some countries than others, even when they are made in the same factory?
Governments often influence international trade using trade barriers. The most common is a tariff, which is a tax placed on imported goods. When a government adds a tariff, the cost of the product increases for the consumer. Another tool is a quota, which sets a physical limit on the quantity of a specific good that can be imported during a set time. While tariffs generate tax revenue for the government, quotas simply restrict supply. Both methods aim to make foreign goods less attractive compared to locally-made products.
Imagine a local shop imports bicycles from overseas. 1. The base price of one bicycle is . 2. The government imposes a tariff on imported bikes. 3. The tariff amount is calculated as: . 4. The new price for the consumer becomes: 230$.
Quick Check
If a government wants to earn tax money while slowing down imports, should they use a tariff or a quota?
Answer
A tariff, because it is a tax that generates revenue, whereas a quota only limits the number of items.
When a country uses tariffs and quotas, they are practicing protectionism. The goal is to 'protect' domestic industries and workers from foreign competition. If foreign shoes are made more expensive by a tariff, people are more likely to buy shoes made in their own country. This helps keep local factories open and saves jobs. However, protectionism has a downside: it often leads to higher prices for consumers and can cause trade wars, where other countries retaliate by taxing your exports in return.
Consider a country that produces steel. 1. Foreign steel is cheaper, threatening local steel mills. 2. The government imposes a high tariff on foreign steel to save local jobs. 3. Result A: Local steel workers keep their jobs. 4. Result B: Local car manufacturers, who need steel, now have higher costs. They must raise the price of cars for everyone.
Quick Check
Who is most likely to be unhappy about a new tariff on imported electronics: a local electronics factory worker or a local college student buying a laptop?
Answer
The college student, because the tariff will increase the price of the laptop.
The opposite of protectionism is free trade, where goods flow across borders with little to no taxes or limits. To achieve this, countries form trade blocs. These are groups of nations that sign agreements to eliminate tariffs among themselves. Major examples include the USMCA (United States-Mexico-Canada Agreement) and the European Union (EU). By joining a bloc, countries gain access to larger markets and cheaper goods, though they may lose some control over their own domestic industries.
Let's analyze a shift from protectionism to a trade bloc: 1. Country A and Country B both have tariffs on each other's fruit. 2. They sign a Free Trade Agreement (FTA), reducing the tariff to . 3. Consumers in both countries see fruit prices drop by nearly . 4. However, a small apple farmer in Country A might go out of business if Country B can produce apples much more cheaply due to a warmer climate.
Which trade barrier specifically limits the number of items that can be imported?
What is a common result of a 'trade war'?
Free trade agreements usually lead to higher prices for consumers.
Review Tomorrow
In 24 hours, try to explain the difference between a tariff and a quota to a friend without looking at your notes.
Practice Activity
Check the labels on five items in your house (clothes, electronics, food). Research if your country has a trade agreement with the countries where those items were made.