The Cost of Trading

The Cost of Trading

The Cost of Trading

Globalization is important in more than one way. It helps countries supply their societies with goods and services needed to function properly. Some countries solely depend on imports, but what’s the cost? Could it help a countries economy or really damage it? Aaron C. Brown says, “If you want to understand financial markets, and their effects on the economy, you have to understand the trading game. Many short-term price movements are neither random nor caused by economic fundamentals. They’re caused by investors buying and selling.”

There was a time when there was such a thing as free trading international. Free trading allowed countries to import and export goods without costs to do so. For example, China manufactures clothing. The type of production China has for supplying clothing is cheap. They have cheap labor and they have cheap materials. With free trading, the cost of China exporting clothing to, let’s say, the United States is relatively low. This means any clothes made in the United States now has to compete with the clothing market of China’s cheap clothing. Consumers will opt more to buying the cheaper of the products, and this makes for an unfair competitive market. How is this situation managed?

GATT, General Agreement on Tariffs and Trade, was a short-lived organization of world leaders to help govern global trade. During their existence, GATT helped establish tariffs which are a tax imposed on imports from other countries into the United States. Tariffs were created to help protect markets like those in clothing industry. China will always be able to product cheap clothing, but tariffs really help out in other sectors of the economy like those in the sugar industry.

The sugar industry is highly protected in the United States, and having a tariff set on importing sugars from other countries allows there to be a reasonable competitive market. Taxing sugar imports does not benefit the outside country to benefit much from importing their sugar to the United States. This also means that consumers would be more likely to buy locally produced sugar over imported sugar since the cost difference isn’t much. In fact, sometimes imports from other countries exceed the cost of locally made products, and this is mostly because of the cost of importing the product through tariffs. Not all countries are as large as the United States and China, so how are smaller nations affected by tariffs over larger nations?

Tariffs are set in place in order to help keep markets for consumers reasonably competitive, but they are not always beneficial for all countries. Puerto Rico is a much smaller nation than that of the United States. They can only produce so many goods, and they are more dependent on importing goods than they are at producing them. One the products that Puerto Rico can manufacture is coffee due to their climate and environment. If the United States were to set a tariff on Puerto Rico to import coffee, Puerto Rico would suffer in more than one way.

One way would be that Puerto Rico would have to produce more coffee in their small nation in order to keep up with the demand of coffee, and be able to afford the import tax imposed on their good. Another way they may suffer is importing their own tariff on American made products to their country in order to gain financial stability with the new taxes they are paying. This wouldn’t benefit the country at all since they are dependent on imported goods more than a larger nation. This also means the cost of overall living would go up in Puerto Rico, and this would be the beginning of inflation for the society of Puerto Rico. This one tariff would really make this small nation suffer financially more than a larger nation that has more goods and services to offer. A larger nation also has resources to produce other goods and services, and one tariff would not mean the life or death of the nation.

Quotas differ from tariffs by being imposed by numerical limits on imported goods opposed to being taxed on any quantity like those with just tariffs. There are three factors that help differentiate tariffs and quotas: revenue effects, administrative costs, and the protective effect the policy has on the competition of imports. With tariffs, tariff revenue is automatically produced. The cost of the good will automatically go up with the product when it hits consumer markets. For quotas, it’s a hit or miss. They don’t always produce revenue due to how it’s imported, and this is one reason tariffs are preferred over quotas.

Administrative costs between tariffs and quotas are similar in a lot of ways, but do differ in the details. Both will help have product identification, but it’s the way the products are imported that differ the most. With tariffs, the product is identified, then collected and processed for fees. With quotas, the product will also be identified, but only some tracking of the product will happen depending on the disbursement of quota tickets sold at auctions. Tariffs are preferred due to the systematic way the products are tracked from the beginning of importation and the collection of revenue.