Student Question

How can two countries both be better off as a result of trade? How can tariffs protect U.S. jobs? Do tariffs lead to a net increase in jobs? Explain. Who are the winners and losers from trade restrictions? Given that trade restrictions impose losses on an economy, why are trade restrictions so common?

Expert Answers

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Trade restrictions (also called trade barriers) are relatively popular among governments because the costs that they impose are relatively invisible while the benefits they provide are much more noticeable to the populace of a country.

Trade barriers typically hurt an economy by raising prices on goods.  This is also how they protect domestic jobs.  Let us imagine, then, that a tariff is imposed on cars that are imported from foreign countries.  The prices of those cars will, of course, increase because the manufacturer now has to pay a tariff and will want to pass the cost of the tariff on to the customer.  American consumers are hurt by this tariff because they will now have to pay higher prices than before.

When the price of the imported cars goes up, American jobs are protected.  This is because American cars become cheaper relative to the imports.  That should mean that people will buy more American cars.  When they do, there will be more jobs for American autoworkers.

Trade restrictions are common because the costs they impose are relatively invisible.  The price of cars does go up, but the public may not perceive that this has happened.  Even if they do realize it, they may not blame it on the tariff.  At the same time, the benefits are obvious.  Politicians can point to auto factories that have added shifts or to new factories.  These things are much easier for the general public to understand and appreciate.  This means that imposing trade barriers is something that “plays” well politically.  Therefore, politicians will be likely to impose such restrictions.

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