by  idea |
IB.ECONOMICS
collection of Internal Assessment works for Economics in
International Baccalaureate programme
| US stell tariffs | |
|
|
|||||||||||||
|
|||||||||||||
Commentary number 4. The importance of steel industry in many states is comparable to that of ship building companies or coal mines. All of these require great financial capital and numerous labour, labour which is specialised in narrow range of skills making the human capital1 nearly totally immobile. As a result the whole industry could not swiftly adjust to the change in demand. Taking into account the number of labour employed in this industry it is obvious that here the influences of government are significant and in some situations necessary. Due to the large immobility of capital (especially concerning human capital and equipment) the costs of limiting the production and then, when the boom return, increasing it again are too high for the industry. Thus government support during the recession could bring profits in long run. Such government intervention must be justified with strong economical reasons. Not always this is the case. Often the political reasons are the basic ones2. When US steel was endangered by the imported steel, President Bush decided to help domestic industry by introduction of tariffs3. This decision in short-run provides the additional source of funds to the budget and secure the US steel industry. Considering the whole United States market for steel and all the producers (also from abroad) as a suppliers, the rising of tariffs shifted the supply curve upward (diagram 1), since it can be considered as a rising of costs. The new equilibrium was found with the higher price. This price indicates the average revenue for the US steel company (diagram 2). Until the tariffs were introduced the revenue was below costs what meant that the company brought loses. When the new higher price was set the loses were smaller or even some profit could be suspected, because average revenue rose and costs remained the same (contrary to other firms, for whom the costs rose). Such solution restrained the industry from the decline and arising of structural unemployment4. Additionally it provided the extra profit to the budget, but also rose the price of steel in United states increasing the costs of production of other goods and hence rose their prices. Finally the idea of introduction of tariffs worsened the relations with other economies and could cause the limitation of trade.  Beside this, the decision taken, if not faced the reaction of WTO, could lead to the other negative side-effects. Free trade base on the assumption that one country gain from its export and does not restrict gains of other countries from its import (those countries export). Thus if president Bush limited the import by imposing the tariffs this could cause retaliation - other countries could limit their import from United States (United States export) lowering the income of its domestic producers. Moreover also the limitation of import could have the negative effects on economy, since it provides the differentiation of goods on the market and higher competition generating higher efficiency of economy (the rising of competition involve the higher quality of goods and their lower price). Finally the tariff war5 which could appear would lead to the limitation of trade and the lack of the other advantages associated with it like making the production more effective by specialising in production of some goods (advantages of economy of scale6) and the comparative advantage for the countries7. The World Trade Organisation was established to prevent such scenario. As the independent and objective body it could decide whether the limitations imposed by some country could be economically justified. Its declaration that US tariffs on imported steel were illegal allowed other countries to react for the benefit of global economy. The sanctions proposed by European Union are to force United States to return to the free trade, which in long run is profitable for both sides. In the case United States refuse, consequences of tariff war indicated above could negatively affect both economies. Hence, in my opinion, president Bush should withdraw tariffs and consider whether the support of the steel industry is a real necessity. If it is, the other, more moderate means could be employed. Probably the subsidies are not the perfect solution since they require the funds from budget and does not improve the efficiency of the industry lowering its costs only artificially. Instead of it government could propose some programme of training for labour which enable them to work in other sectors. Also some funds could be proposed for the modernisation of industry, what would bring profits in the future. 1 Human capital – human capital refers to the number of people, their skills and abilities which could be employed in the economy. 2 the number of potential voters who if lost their jobs would blame the ruling party which exerts a pressure on politicians. 3 Tariffs – the tax imposed on imported goods and services; the use of tariffs is usually considered as a method of restricting trade. 4 structural unemployment - the unemployment caused by the inaccurate adjusting of the structure of the supply to the structure of the demand in the labour market; often it result from the fact that people who lose their jobs in one sector of economy (e.g. as a consequence of technological changes) are not able to quickly posses new skills which would enable them to find jobs in other sectors. 5 Tariff war – the conflict between the countries characterising by the rising of tariffs used to limit the import of goods from the rival country |
|||||||||||||
To jest stopka |
