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What are tariffs and quotas? What is Most Favored Nation status?
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International trade happens because people in one country want to buy goods — bicycles, for instance — made in another country. However, sometimes a country's government, companies or the workers who make bicycles in the first country may not want people buying bicycles from another country. They may ask their government to “protect” the local bicycle industry from cheaper foreign imports. And that, in a nutshell, is why countries regulate trade.
Advocates of “protectionism” believe that governments must regulate trade to protect the domestic economy. They argue that local industries should be protected against industries in other countries that pay lower wages or receive government subsidies, and thus can make goods more cheaply. They also argue that new or “infant” industries should be protected to give them time to grow and become strong enough to compete internationally. On the other side, those who favor free trade believe that trade with few regulations or government involvement is best. Which of these beliefs do you think would be better for the city where you live? Why?
All governments regulate trade to some extent. But how do they do that?
Well, there are a variety of ways:
- Tariffs. A tariff is a tax on an import. A tariff increases the price of an import, thus making domestic goods more competitive. If tennis shoes made in the U.S. cost $60, and tennis shoes made in a foreign country cost $40, what percent tariff would the U.S. have to put on imported tennis shoes to make the prices the same?
- Import quotas. Sometimes, governments limit the amount of an import they will allow. That limit is called an import quota. The number of foreign cars sold in the U.S. is often set by import quotas.
- Subsidy. Sometimes instead of limiting or taxing imports, a government helps its local industries compete against imported goods by giving them tax breaks or low-cost loans, or by buying the goods they can't sell. That kind of assistance is called a subsidy.
- Most-Favored-Nation status. The United States offers most-favored-nation (MFN) status to many of its trading partners. MFN status assures a country that no other country will get lower tariffs when exporting to the United States. Do you know why MFN status can be controversial?
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