Suppose a nation is considering two alternative policies to protect a domestic industry from world trade. The two policies are an import quota of X units and a per- unit tariff that would reduce imports to Xunits. Though either policy would result in only X imported units of this good, there is a fundamental difference in the outcome. Explain this difference.
Tariffs are taxes on imports. They really raise the costs of those imports, providing an edge to domestic companies in the same markets. State-run administrations usually force tariffs to help domestic companies, or now and again to punish foreign competitors for unfair trading practices. Nonetheless, tariffs can also have harmful ramifications for domestic companies, especially ones in related industries, as well as purchasers.
If a nation forces import tariffs other nations may follow with their own import tariffs. These foreign import tariffs will reduce the exports of the nation that originally forced the import tariffs. If foreign firms dump their items on the U.S. market they are actively selling them for underneath cost. This gives the customers in the U.S. a bargain because they can purchase the goods at an underneath cost. The fact that foreign firms will lose 'cash' by dumping makes it difficult to sustain this practice for extensive stretches of time.
If domestic firms need to contend with imports this may lead to quality enhancements in domestic goods to differentiate themselves from the imports and may result in cost decreases in the U.S. as firms attempt to contend on the expense side of the record (allows the firm to bring down cost).
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