benefit of trade policy with producer

BENEFIT OF TRADE POLICY WITH PRODUCER
Abstract:
The implementation of a trade policy will have different effects on the different
interest groups. The benefits of producer and consumer are often opposite. In order to
look out an appropriate trade policy, we should balance the benefits of producer and
consumer when we formulate trade policy.
The other one is the native consumers. Generally speaking, the free trade policy is
better to the consumers, but this will bring big challenge to the native producers.
However, if the government implements protective trade policy to prohibit the
foreign goods from coming into the native country, this will short down the supply of
foreign goods and the consumers’ choices. This kind of policy makes the consumers have
to spend more money on the import goods.
Every coin has two sides, so is the foreign trade policy. The enterprises’ and the
consumers’ benefits are controversial, so the government should balance them, when the
government sets up the foreign trade policy.
1. The introduction of the problem
The foreign trade policy can’t protect the producers’ and the consumers’ benefits at
the same time, so when we set up the foreign trade policy, we should obey this principle:
Maximize one’s benefit at the condition that the other one’s lest loss, in order to get
overall benefit.
To an enterprise with low level of productive, it may hope to stand stable in the
native market; however, to an enterprise with high level of productive, it may hope to get
a large space in the international market. Therefore, the producer’s produce capability
determines the producer’s benefit wanting.
The consumer’s income determines their benefit wanting. To a poor man, it must
make sure that he can live a normal life firstly, at this moment, his benefit wanting is that
he can buy his necessities at the lowest price; to a rich man, his economy level
determines he can have more wanting. He may care about the price of articles of luxury,
rather than that of food. So the rich one’s benefit wanting is quite different from the poor
one’s.
The producer’s capability of productive and the consumer’s income are relative to

the a country’s development of economy, so we can get a producer’s and consumer’s
benefit wanting determinates chain.
When the government sets up the foreign trade policy, it firstly should make out
the country’s level of economy and the producer’s level of economy and the consumer’s
consumption wanting in order to find out their own benefit wanting. The government
then should compare the different interest group’s benefit wanting and sets up the
appropriate foreign trade policy under the principle: Maximize one group’s benefit on
the condition that the other one has the fewest losses, in order to get the overall benefit.
2. The analysis of how to set up the foreign trade policy
2.1 Dividing the economic developmental stage
Walt Whitman Rostow was used to point out that the development of economy
should be divided into six stages: Traditional society stage, Preconditions for take-off
stage, Take-off stage, Drive to maturity stage, Age of High mass consumption and pursue
quality stage.
However, Chenery, another American economist, advised to divide the economy
into three phases: Inintial stage ofeconomy, Industrialization stage and Developed
economy stage.
The Chinese economist, Li Yue divided the development of economy into five
phases: Generation stage, the stage of development, growth stage, strong stage and
mature stage. As Li Yue’viewpoint was based on the Rostow’s and Chenry’s viewpoint,
so this article will take the Li Yue’s theory to divide the development of economy.
2.2 Policy Suggestions at each stage
2.2.1 T he first stage Generation Stage
The agricultural sector is the main sector in the society. The producers are all small
farmers in the unit of family. So at this stage, the producers are also consumers, and they
need lots of food. However, due to the low productivity, there will be more need than
supply. On the other hand, due to the constriction of nature condition, the native
agricultural goods are very rare. So the government should take up the free trade policy in
order to import some other agricultural goods.
2.2.2 The second stage The Stage of Development

In this period, although the agricultural sector is still the main productive sector,
the proportion of the agricultural sector in the GDP begins to decrease; some of the rural
labor force are transferring to the city. During this period, the industrial sector will take
the place of the agricultural sector, becoming the first sector. As the industry in the native
country is in the early stage, it’s really very difficult for them to compete with the foreign
companies, so the government has to take up protective trade policy to the industrial
sector. In this period, as people’s salary is still at a low level, consumers still spend lots of
money on the daily necessities, only a few consumers are in need of some
kinds of industrial products. Therefore, the protective trade policy will not hurt the
consumer’s benefit.
The level of mechanization in agricultural production is still very low, and the
productivity and efficiency are also very low. The agricultural producer needs to be
protected to resist the competition from the foreigners. Compared with industrial sector,
the government should give some protection to the agricultural sector in the form of
subsidiary etc.
2.2.3 The third stage Growth Stage
In this period, the economy in the country has have made rapid progress and the
ratio of revenue to GDP declines sharply, even less than that of service industry.
However, with the development of industry, the level of mechanization in agricultural
production has been improved obviously. The agricultural production can not only
make the native people’s needs, but also have surplus. So the government can implement
free trade policy to the agriculture and help it export aboard.
The enterprise in industry sector also gets an obvious progress and the ratio of
industry sector to GDP has been further improved. Some enterprises become mature in
the market, they are not in a totally passive situation when they compete with the foreign
ones. However, they are eager to get lots of advanced technology for both production
and management from the foreign countries. On the other hand, people's living standard
and their quality of life are improved; consumers begin to have diversified demand on
industrial products. However, in this period, the native enterprises may can’t make
consumers’ high needs. So compared with the second stage, the trade policy can relieve

some constraints on industrial products; and welcome the foreign enterprises to invest.
Service industry and tertiary industry have made great progress, but compared
with the ones in developed countries, they still l lack competitiveness. However, at this
time, the need of industrial products is still much more than that of service, so the
government can implement protective trade policy on tertiary industry. This policy will
not bring lots of losses to the consumers and will protect the native enterprises.
2.2.4 The fourth Stage Strong Stage
Actually, lots of medium-level developed countries are at this stage nowadays.
Each industry in native country become mature, but still doesn’t have absolute advantage
in the world. The industrial enterprises are possible to withstand the competition of the
foreign enterprises and their biggest difficulty is how to get a larger market space in the
international market. Tertiary industry also makes a progress, most of the businesses are
getting mature and some of them have the ability to compete with the foreign
competitors.
During this period, the consumers have a higher level of income; they have more
need in the service industry. So the government can take up free trade policy in the
industrial sector, and try to help the native companies to go aboard.
The government can further increases liberalization of services, in order to meet
the consumers’ multifarious needs in the service industry.
2.2.5 The fifth stage Mature Stage
During this period, the service industry has become the economic backbone of the
country. Enterprises begin to take the world as their objective market. The consumers
don’t care about the prices of goods, as they have a high level of income. Therefore, the
government should advocate the free trade policy.
We have analyzed the consumers’ and producers’ main feature in the former
content and given lots of suggestion on the trade policy in each stage. However, we still
believe that there isn’t a common trade policy theory to all the countries. The foreign
trade policy should be changed according to the real situation of the country. Generally
speaking, at the beginning of the development of economy and at the developed stage, the
government can take up free trade policy. However, during the process of the economy,

the government should try to use protective trade policy on each industry.
Who Really Benefits from Protectionism?
When protectionist policies are enacted, certain domestic industries are protected
at the expense of others. So in the end, it comes down to which industries can exert the
most influence over domestic politics.
Each argument for protectionism has merits: protectionism does save jobs in
protected industries, can sometimes save those industries from financial catastrophe, and
can be useful sometimes when it comes to negotiating trade agreements with other
countries.
But in each argument, the government is placed in the role of making arbitrary
decisions between which industries deserve protection, and which must inadvertently
bear the costs of protection. The alternative is a government that does not pick winners
but instead stands by principles and treats each industry the same, regardless of its
political clout or well – connectedness.
The important thing to remember is that economic costs are unavoidable. The
question is not whether an economy can avoid a cost, but who will bear it. Some believe
the government is capable of deciding this question, and some believe that free
individuals should decide it by their actions in the marketplace.
Protectionism basically refers to all those policies that try to impose suchpractices that
protect local firms so that they have some advantage over the foreign firms. Some
advantages of the trade protectionism are:
• If a country’s local industry is not very strong, imposing trade barriers would make
foreign goods expensive and this will provide a chance to the local firms to
compete on the basis of price.
• The increased duties result in tax revenue for the government
The main disadvantages of protectionism are:
• The local firms are being protected and they are competing on price not the quality
• The artificial protection can work well for the products inside the country while it
is of new use when the products will be exported; it’s a false sense of security.
• The consumers will be denied an easy access to high quality products.

• It is against the principle of free markets.
TARIFF: a system of government-imposed duties levied on imported or exported goods;
a list of such duties, or the duties themselves.
Tariffs are simply taxes imposed by the government of one nation on imports from
other nations. They work like any other taxes. A tariff is added to the price of the imported
good. The resulting price of the import is thus higher, which tends to decrease the quantity
purchased. And if fewer imports are purchased, then more domestic production is sold. Of
course, while domestic producers benefit from tariffs, domestic consumers tend to suffer.
They pay higher prices for both imports and domestic production.
• If the world price is lower than the domestic price in the absence of trade, the
country becomes an importer for the good. This will hurt domestic producers of that
good.
• Domestic producers can seek protection by having the government
implementtariffs, which are taxes on imported goods that will raise their price
domestically.
• As price increases, domestic demand falls and domestic supply increases. Sellers
are better off, domestic buyers are worse off, and the government raises revenue by the
amount of imports times the tariff.
Countries in which the domestic price of a good is lower than the world price will import
the good. As discussed above, this situation hurts domestic businesses, workers, and
entrpreneurs in the affected industries. Often governments and voters employ policies
such as tariffs and quotas to soften the effects of free trade on these groups. In this
section, the effects of a tariff on a specific good are examined.
Tariff Defined
A tariff is a tax on imported goods. The major effects of a tariff are that, like most
taxes, it will raise the equilibrium price and reduce the equlibrium quantity of any good
affected by it. It will also reduce the quantity of goods imported in the affected industry
and increase domestic production of the good. Although people and their governments
may enact a tariff because they believe that the benefits of the tariff outweigh its costs,
economic analysis predicts that a tariff will reduce society's overall welfare.

Benefits:
Except in all but the rarest of instances, tariffs hurt the country that imposes them,
as their costs outweigh their benefits. Tariffs are a boon to domestic producers who now
face reduced competition in their home market. The reduced competition causes prices to
rise. The sales of domestic producers should also rise, all else being equal. The increased
production and price causes domestic producers to hire more workers which causes
consumer spending to rise. The tariffs also increase government revenues that can be
used to the benefit of the economy.
There are costs to tariffs, however. Now the price of the good with the tariff has
increased, the consumer is forced to either buy less of this good or less of some other
good. The price increase can be thought of as a reduction in consumer income.
Generally the benefit caused by the increased domestic production in the tariff
protected industry plus the increased government revenues does not offset the losses the
increased prices cause consumers and the costs of imposing and collecting the tariff.
SUBSIDIES:
A subsidy is a form of financial or in kind support extended to an economic sector
(or institution, business, or individual) generally with the aim of promoting beneficial
economic and social outcomes. Although commonly extended from Government, the
term subsidy can relate to any type of support. Subsidies have a long track record and
today come in various forms including: direct (cash grants, interest-free loans), indirect
(tax breaks, insurance, low – Interest loans, depreciation write-offs, rent
rebates). Furthermore, they can be broad or narrow, legal or illegal, ethical or unethical.
The most common forms of subsidies are those to the producer or the consumer.
Producer/Production subsidies ensure producers are better off by either supplying market
price support, direct support, or payments to factors of production.
Consumer/Consumption subsidies commonly reduce the price of goods and services to
the consumer, for example in the US at one time it was cheaper to buy petrol than bottled
water.
Subsidies can be hugely damaging or beneficial because they create distortions.
They are designed to overcome deficiencies in themarket, support disadvantaged parts of

society, and positively distort activities such as pushes towards renewable
energy, recyclingand agricultural set-asides. Simply put they represent an attempt by
Governments to control the behaviour of individuals, businesses and larger groups by
offering or exacting economic benefits/taxes. Other benefits may spin off, primarily as
subsidies may act as a form of protectionism or trade barrier to foreign imports thus
protecting domestic goods and services.
Effect:
Subsidies create spillover effects in other economic sectors and industries. A
subsidized product sold in the world market lowers the price of the good in other
countries. Since subsidies result in lower revenues for producers of foreign countries,
they are a source of tension between the United States, Europe and poorer developing
countries.
While subsidies may provide immediate benefits to an industry, in the long-run
they may prove to have unethical, negative effects. Subsidies are intended to support
public interest, however, they can violate ethical or legal principles if they lead to higher
consumer prices or discriminate against some producers to benefit others.
For example, domestic subsidies granted by individual US states may be
unconstitutional if they discriminate against out-of-state producers, violating the
Privileges and Immunities Clause or the Dormant Commerce Clause of the United States
Constitution. Depending on their nature, subsidies are discouraged by international trade
agreements such as the World Trade Organization (WTO).
IMPORT QUOTA: Quantity restrictions imposed by the government of one nation on
imports from other nations. The primary goal of import quotas is to reduce imports and
increase domestic production. Because the quantity of imports is restricted, the price of
imports increases, which thus encourages domestic consumers to buy more domestic
production. Import quotas are one of three common foreign trade policies designed to
discourage imports and/or encourage exports. The other two are tariffs and export
subsidies.
Import quotas are foreign trade policies undertaken by domestic government s that
are intended to "protect" domestic production by restricting foreign competition. In

general, a quota is simply a quantity restriction placed on a good, service, or activity.
Import quotas are then merely legal restrictions on the quantities of imports from
the foreign sector that are imposed by the domestic government.
The goal of import quotas is to increase the limit the availability of imports in the
domestic economy and thus encourage domestic consumers to purchase domestic
production.
VOLUNTARY EXPORT RESTRAINS:
Effect:
VER effects on the exporting country. The aggregate welfare effect for the country
is found by summing the gains and losses to consumers, producers, and the recipients of
the quota rents. The net effect consists of three components: a positive terms of trade
effect, a negative production distortion, and a negative consumption distortion.
Because there are both positive and negative elements, the net national welfare
effect can be either positive or negative. The interesting result, however, is that it can be
positive. This means that a VER implemented by a large exporting country may raise
national welfare.
Generally speaking, the following are true:
- Whenever a large country implements a small restriction on exports, it will
raise national welfare.
- If the VER is too restrictive, national welfare will fall.
- There will be a positive quota level that will maximize national welfare.
However, it is also important to note that not everyone’s welfare rises when there
is an increase in national welfare. Instead, there is a redistribution of income. Consumers
of the product and recipients of the quota rents will benefit, but producers may lose. A
national welfare increase, then, means that the sum of the gains exceeds the sum of the
losses across all individuals in the economy. Economists generally argue that, in this case,
compensation from winners to losers can potentially alleviate the redistribution problem.
VER effects on the importing country’s consumers. Consumers of the product in
the importing country suffer a reduction in well-being as a result of the VER. The
increase in the domestic price of both imported goods and the domestic substitutes

reduces the amount of consumer surplus in the market.
VER effects on the importing country’s producers. Producers in the importing
country experience an increase in well-being as a result of the VER. The increase in the
price of their product increases producer surplus in the industry. The price increases also
induce an increase in the output of existing firms (and perhaps the addition of new firms),
an increase in employment, and an increase in profit, payments, or both to fixed costs.
VER effects on the importing country. The aggregate welfare effect for the country
is found by summing the gains and losses to consumers and producers. The net effect
consists of three components: a negative terms of trade effect, a negative consumption
distortion, and a negative production distortion.
Since all three components are negative, the VER must result in a reduction in
national welfare for the importing country. However, it is important to note that a
redistribution of income occurs—that is, some groups gain while others lose. This is
especially important because VERs are often suggested by the importing country. This
occurs because the importing country’s government is pressured by the import-competing
producers to provide protection in the form of an import tariff or quota. Government
reluctance to use these policies often leads the importer to negotiate VERs with the
exporting country. Although the importing country’s national welfare is reduced, the
import-competing producers gain nonetheless.
VER effects on world welfare. The effect on world welfare is found by summing
the national welfare effects on the importing and exporting countries. By noting that the
terms of trade gain to the importer is equal to the terms of trade loss to the exporter, the
world welfare effect reduces to four components: the importer’s negative production
distortion, the importer’s negative consumption distortion, the exporter’s negative
consumption distortion, and the exporter’s negative production distortion. Since each of
these is negative, the world welfare effect of the VER is negative. The sum of the losses
in the world exceeds the sum of the gains. In other words, we can say that a VER results
in a reduction in world production and consumption efficiency.
LOCAL CONTENT REQUIREMENTS: Local content requirements (LCRs) are
policy measures that typically require a certain percentage of intermediate goods used in

the production processes to be sourced from domestic manufacturers. Local content
requirements in renewable energy policy serve as either a precondition to receive
government support or an eligibility requirement for government procurement in
renewable energy projects.
Impact of Content Requirements
When domestic inputs are of similar quality and lower price than foreign inputs,
firms will willingly meet or exceed the domestic content requirement and the requirement
will have no effect on firm decisions. Since domestic content requirements are set in a
political environment, however, they generally force foreign firms to purchase a larger
fraction of their inputs from domestic sources than they would if they were
unconstrained, while domestic content requirements usually have no effect on the
sourcing choices of domestic firms. The best response for a cost-minimizing foreign firm
is to exactly meet, though not exceed, the purchase criteria of the domestic content
requirement. Alternatively, the foreign firm may decide to pay the tariff penalty that is
associated with noncompliance if the tariff cost is less than the extra cost of
purchasingmore domestic inputs.Eitherway, since domestic content requirements raise the
relative production costs of foreign firms, they benefit domestic producers of final goods
by increasing domestic firm sales or profits. In addition, they may reduce competition in
the final goods market if they reduce the volume of goods sold by the foreign firm in the
domestic market.
Whether they are imposed by the domestic country or by an importing developed
country that is administering its GSP tariff preferences, domestic content
requirementsprotectdomestic intermediates producers. Since these policies increase
production costs, domestic content regulations harm domestic customers, who face higher
prices for the goods they buy. In addition, programs such as the GSP have an ambiguous
effect on developing country welfare, as the increased demand for imports of the final
good from the developing country will be offset, and possibly even reversed, by the cost
increases that are associated with the content requirement.
Domestic content requirements take many different forms. For this reason, the
form of the requirement has great influence on its economic effects. For example,

domestic expenditure on capital is often excluded, while domestic labor is generally
counted toward the domestic content requirement. When this is the case, firms respond to
the relative cost incentive by investing in more labor than they would if the treatment of
labor and capital were uniform. Other common variations in implementation relate to the
domestic content benchmark, and whether it is defined as a percentage of physical inputs,
sales, costs, or value added.
The effects of domestic content regulations are also determined by firm responses.
To begin, it is commonly understood that imports may impose market discipline. If the
market that implements domestic content regulations is served by a monopoly input
supplier, limits on the use of foreign inputs will reduce competition and allow the
domestic input supplier to exploit its market power. In this case, domestic content
requirements may even reduce domestic output of the final good, as the domestic input
supplier reduces its production and consequent sales to take advantage of its market
power. Second, if it is possible for firms to change the scale of their production at low
cost, domestic content regulations may fail to shift consumption toward domestic
varieties. Finally, if the domestic content requirement is at a level that is too high, foreign
firms may reevaluate their decision to supply the domestic market.
The effects of domestic content requirements are also shaped by the nature of the
production process. For example, when a content standard is based on value added,
whether final good output increases or decreases depends in part on the relationship
between labor and the intermediate inputs in production, and whether they are
complements or substitutes. Similarly, depending on the relationship between the usage
of labor and intermediate inputs, the imposition of a domestic content requirement based
on value added may cause the volume of imported intermediate inputs to rise or fall. In
addition, the composition of intermediate input imports may change. In particular, if there
are many imported intermediate inputs, and the relative price of foreign inputs differs
across inputs, a value-added requirement will shift purchases toward foreign inputs
whose relative foreign price is the lowest.
In the case of foreign investment, the desire to foster greater domestic activity may
be subverted by domestic content regulations. First, since foreign firms are placed at a

disadvantage, they may place fewer of their activities in the local market. In addition,
when the scale of their operations is reduced, the overall productivity of the foreign
operation may suffer froma failure to achieve full economies of scale in production.
ANTIDUMPING POLICIES: A standard technical definition of dumping is the act of
charging a lower price for the like goods in a foreign market than one charges for the
same good in a domestic market for consumption in the home market of the exporter.
This is often referred to as selling at less than "normal value" on the same level of
trade in the ordinary course of trade. Under the World Trade Organization (WTO)
Agreement, dumping is condemned (but is not prohibited) if it causes or threatens to
cause material injury to a domestic industry in the importing country.
The term has a negative connotation, as advocates of competitive markets see
"dumping" as a form of protectionism. Furthermore, advocates for workers and laborers
believe that safeguarding businesses against predatory practices, such as dumping, help
alleviate some of the harsher consequences of such practices between economies at
different stages of development (see protectionism).
Effect:
Consumers are clearly worse off because they have to bear the cost of duty.
Imports become more expensive. Furthermore, there is no guarantee that the domestic
producers will keep their prices at the initial levels. Depending on price elasticity, they
can obtain higher profits by setting a new price higher than before but lower than those of
dumped products. Things become worse when dumped imports are intermediate goods.
The imposition of antidumping measure seems to benefit no one but the domestic
producers whose foreign rivals face an antidumping action. To evaluate if antidumping is
an appropriate policy or not, we need to know whether the increase in profits of the
domestic firms is large enough to offset the decrease in welfare of all others in the
country.
As antidumping is selective, while the dumping firms sell less in the domestic
country, exporters from other countries may find an opportunity to compete in the market
more aggressively.