International Trade and Protectionism: Question 9

Worked solution

Part (a): Benefits to consumers of removing the tariffs

Lower prices: a tariff raises the price consumers pay for imported food above the world price. Removing it means rice and wheat imports are no longer taxed, so their price to domestic consumers falls towards the world price. Consumers can buy the same food more cheaply, leaving them with more income left over to spend on other goods and services, a rise in their real income.

Greater choice and efficiency gains: with tariffs removed, consumers gain access to a wider range of food produced by different foreign suppliers, and the country’s food supply comes increasingly from wherever it can be produced at the lowest opportunity cost (comparative advantage). Both a wider choice of products and food produced more efficiently raise consumer welfare compared with relying mainly on more expensive, tariff-protected domestic output.

Part (b): Discussing the overall benefit to the economy

Potential benefits: removing the tariffs lets consumers buy food at lower, world-market prices, freeing up their income for other spending and effectively raising their living standards. It also allows resources (land, labour and capital currently used in less efficient parts of domestic farming) to be gradually reallocated towards industries in which the country has a genuine comparative advantage, which can raise the economy’s total output in the long run.

Potential costs: domestic farmers who cannot compete with cheaper imported food are likely to see their incomes fall, and some farms may become unprofitable and close, causing unemployment in farming and in related rural industries. This can be especially disruptive if displaced farm workers and land cannot easily move into other productive uses in the short run. The country would also become more dependent on imported food, which could be a concern for food security. If world food prices rose sharply, or if trade with these partners were disrupted in future, the country would be more exposed than if it had maintained some level of domestic food production.

Judgement: whether removing the tariffs benefits the economy as a whole depends on the balance between these effects. If domestic farmers are only moderately less efficient than foreign producers, and displaced resources can be reasonably easily redeployed into other sectors, the efficiency and consumer-welfare gains are likely to outweigh the costs to farmers. However, if domestic farming is a major source of rural employment with few alternative uses for the land and labour involved, or if the country places a high value on maintaining its own food security, the costs to farmers and the loss of self-sufficiency may be judged to outweigh the benefits to consumers, at least until support is available to help farmers and farm workers adjust.

Final answers

• (a) Consumers gain from lower food prices and from greater choice and efficiency as food is increasingly sourced according to comparative advantage.
• (b) Consumers and the wider economy gain from lower prices and more efficient resource use, but domestic farmers lose income and possibly jobs, and food self-sufficiency falls; the overall benefit depends on the competitiveness of domestic farmers, how easily displaced resources can be reallocated, and how much weight is placed on food security.