CHAPTER 8: TARIFFS VERSUS QUOTAS
The main concern of this study is to determine the better option between quotas and tariff for US for importing goods from Japan. The impacts of both quota and tariff on the US economy along with the impact of all foreign imports on the domestic production in terms of industry competition is central idea of the study.
Tariff: The amount of tax or duty that is to be paid to the government on the particular class of imports and exports.
As discussed in this case the quota if imposed on the imports of television from Japan then it would impact in a shortage of supply of television. This shortage in contrast to demand of televisions will require American producers to produce domestically. The shortage of imported television will causes the increase in prices. To meet the demand of televisions American producers will also encourage producing and selling on high prices. In both cases consumer will bear an extra cost.
But if American domestic production expansion is just to fill up the gap of demand and supply of television, based on quotas, and is given to the customer at the same prices of imported television then American would not opt for the expansion. The cost of new plant would be high in producing few televisions to fill the demand and supply gap causing resistance from why producer for the expansion. If the tariff is imposed instead of quota then the amount of these imposed taxes will be in the hands of government. The government will expand that amount in the welfare of nation and these will again be reflected in prices. Hence, the tariff and quota does the same thing. They would not affect the money only change the hands of earning.
Suppose if the price of the television is $250 with the quantity of imported television sets is 20 million and the government imposed $25 tariff on each imported television set then the final price will be $275 for the consumer. On the other hand if the quota is imposed on those only 15 million sets that can be imported then the price would be the same $275 just as the price in tariff. In both the cases the television set would be priced to customer at $275 in stores. The difference is that the increased amount will go in the hands of government if the tariff is imposed which will increase the American government revenue. The money will revolve in the American economy from one American to another in all ways it will be beneficent for the American government. If the American producers will buy expensive equipments to produce few televisions then the question raises about that the production of these televisions generating profits.
The important thing mentioned is that if the quota is imposed then who will enjoy that increased $25. Process of increased prices captured by foreign suppliers if quota is implemented is discussed. It refers that quota benefit is depends on the structure of quota. In standard quota American government retains the authority to give license to the American importers to import particular goods from Japan with the quantity restrictions and the selected importers then enjoy the extra $25 amount. But since, the importers are not randomly selected by the American government is based on the process with which importers pay the best fees to government and has a good background and experience of importing. And in the voluntary quota system the foreign government decides that exporter to export the goods to America and distribute license among the exporter by charging the fees as charged by importers in getting the license. The foreign government limits the exporters for any restricted quantity by which the demand gets increased and then American importers compete with each other to get the scared imported resources. In this case the increased $25 is capturing by foreign government by increase in the demand.
The second example is related to car industry. By imposing the voluntary quota to Japanese exports in 1981 by American government resulted in the shortage in the overall quantity of domestic and international supply. This shortage increases the $400 per car in the US. The consumer paid extra $400 to suppliers of automobile and their workers in the America. After the implementation of voluntary quota system of Japanese exporters from 1982 the six Japanese automobile companies stared to develop their production plants in the US. At one end it was good for the American economy because Japanese were generating employment in the US but on other hand it was only generating in the automobile sector that feared Japanese taking control over the automobile market of America. America not only requires employing their public in the automobile sector but also in other sectors in which America can achieve the level of specialization. The level of specialization will lead America gain exporter position in that particular sector.
On the other side, the focus of study remained on following factors::
- What is the impact of foreign imported cars on the domestic production cars?
- How do they create a competition for domestic cars and how they made a better innovations and advancement in the automobile sector of America?
The answers to these were contained in given below example.
The Ford Fairlane company of America was established in 1960 and it was producing the same kind of cars with a little change throughout the 45 years till 2005. This was limiting the consumers in advancement and in luxury comfort as well and saving the cost of producer to acquire equipments for new models. With the imported luxury cars from Japan the consumer preferences diverted towards the imported cars. For example, the Honda Accord with more innovative features came in the market and gave tough competition to the Ford Fairlane with less innovative features. People gave preference to the Honda Accord instead of Ford Fairlane that forced American producer to start new innovations and advance changes in the new models.
It has been analyzed from the examples is that, in the first example or scenario, the America should impose the tariff on the imports of television sets to get the extra increased profit in the hands of government instead of imposing quota and increasing its domestic production expenses for the production of few television sets just to fill the gap between the demand and supply.
In the second example or scenario, The America should control on the imports of particular product. It should also domestically produce that product in such quantity at which the foreign supplier could not have the control over the market of that particular product. On the other hand, American producers should make specialization in some product categories to make their market stronger by exporting it in the international markets. They should not let the foreign investors to derive their economy in their desired direction (Skully, 17-21).
In the third example or scenario, the imports from foreign companies play a vital role in the advancement and innovation of American automobile producer by creating a tough competition. The consumers are benefitted with this approach as it increases competition and provides more advanced and innovative models.
CHAPTER 10: THE CASE FOR PROTECTION
The intervention of government is essential in the industry if it is approaching towards technology for the first time. There are many countries where industries are achieving its goal because of the influence from the intervention of the government. Government intervention includes policies which it makes for a particular industry. Government intervention does not produce successful industries every time depending upon the type of policies implemented.. For influencing the industry to gain its competitive advantage in the national environment, government plays an important role. National environment of a country includes its characteristics, its demand and other factors of production. There can be a negative impact as well as positive impact due to these influences depending on the various decisions of the government (Ranawat, and Tiwari).
The study is about the protection of domestic industries by government bodies from the foreign competition. The two authors argued upon the need of taxes which can play an important role of protection for those industries who have just begun. Many examples and cases were discussed regarding whether the protection for the companies are essential or not. Various cases included the prosperity and downfall of companies because of efficient and inefficient strategies of the government/investors respectively. First author had the belief that an industry could be outdone by the foreign industries if those industries tend to lower their prices. However, the other person had other thing in mind as he thought that while making investment one should not think of early losses but one should think of long-term investment and returns. I If the money which is earned after the losses is not good enough then there is no use of protection for the investment. It has also been explained that the fact that foreign competitors cannot afford to lose their demand which they have by lowering their prices to make a domestic industry down and out. For lowering prices foreign industry cannot lower its costs so easily, which can transform into a loss in the long run and in such a situation foreign industries would not think of too much other than shutting down their business. Agreed with the point which the author made, firms while lowering their prices have to think about many things which can give them a setback.
The influence of tax on goods was discussed and the example taken was for television sets. If America had a large market as far as the television demands are concerned then the demand with the implementation of tax on television if reduces then it would have a significant effect on the worldwide demand. Being a large market in the world, sellers of television sets would not go somewhere else. Having a large demand worldwide, America can control the prices of television. Once the prices are controlled by Americans, then they would have the advantage of controlling the suppliers to reduce their prices . It is the phenomenon of economics that demand controls the prices because the demand in a particular region covers the large part of the world. Revenues can be generated in this way by implementing taxes and making the suppliers lower their prices. Suppliers would also be interested in selling televisions in United States because of larger demand in the country. Hence it is understood that being a country with very high demand, the actions taken would have a significant effect worldwide but taxes plays an important role and it is the responsibility of government to make the correct estimates that how much tax should be beneficial for the country and its citizens.
Tax if estimated correctly then it can generate revenues for the country which the government can invest in its citizens and it would ultimately result in improving the wellbeing of the society (Avi-Yonah). The author commented that taxes should be justified correctly in terms of the country and also its citizens. The author has explained this statement with an example that too much taxes can make the government earn more money and look profitable however it would not particularly result in improving the well being of the society. There was another argument upon protection that the industry should be protected and helped if the companies are stepping for the first time especially if the companies are operating in the field of information technology. Government should finance its domestic firm and should not allow foreign firms to dominate them. So, it would not only keep a balance between the domestic and foreign firms but it would also result in improving the efficiency of the industry. Also by facilitating local or domestic firms, the government can make sure that the foreign firms do not dominate.
There was an example of Concorde, a super plane that took flight from New York to London in just three hours. This project was the joint contribution from the British and French governments. Concorde did not last for too much period of time because of its high cost. The revenues from the project were not good enough to cover the costs of the plane. However, there was a large contribution of the governments of both British and French particularly in improving the technology. They were the first in the market with such a project. Other reason of the downfall of the Concorde was that the investors were the taxpayers and they targeted small amount of the market. Travelers who used that plane belonged to the upper classes, while tax payers belonged to the middle classes. Thus the costs were not recovered from the prices it charged. The conclusion of this example was that the government acted poorly on this project. The estimated costs and expected revenues were not correct and therefore it did not allow the government to make profits from the investment. In the creation of new airbus, European countries helped effectively and as a result of it, Mc Donnell Douglas got vanished and occupied by Boeing, this shows that because of help from the European countries this project was successful. This is one of the main reasons why Japan has been so successful i.e. the government of Japan is so active in supporting its industries and improving the technologies. But not every time a company’s success is the reason of the government intervention, like talking about the American Intel company, it faced a threat from the Japanese technologies . The government of United States thought that the company might overcome this threat and there is no need for the intervention of government. The government of America played a little role in that case, an institute of research was developed in America for the purpose of chips, later on that institute allowed the foreign members also to join, being no more an American tool. The American company was again dominant in the industry, however the government did not help the company too much. Private research and development programs contributed more to the company as compared to the government.
For the industry progress the government should first make early investments by providing capital, any subsidies or help them with protection and factors such as infrastructure and base of technology should be created. As the industry becomes mature then the industry itself becomes capable enough to progress, to innovate and live up to the challenge of competitors. Indirect role should be intervened by the government after the maturity of industry, they should let the industry to innovate (Ranawat, and Tiwari)
Avi-Yonah, Reuven. Corporations, society and the state: A defense of the corporate tax, 2004. 11. Jun. 2013. <https://www.law.umich.edu/centersandprograms/lawandeconomics/abstracts/2004/Documents/avi-yonah04-006.pdf>
Ranawat, Mahipat and Rajnish Tiwari. Influence of Government Policies on Industry Development: The Case of India’s Automotive Industry. Hamburg University of Technology, Mar. 2009. 11. Jun. 2013. <http://www.tuhh.de/tim/downloads/arbeitspapiere/Working_Paper_57.pdf>
Skully, David W. Auctioning tariff quotas for US sugar imports. Sugar and Sweetener 1998: 17-21. Print.