Chapter 18.3, Problem 1R

To determine

To discuss: About tariff, revenue tariff, protective tariff, import quota, embargo, protectionists, WTO, NAFTA, CAFTA and EU.

Explanation of Solution

Tariff: It is the tax applicable on the imported goods. This increases the price of imported goods which ultimately reduces the goods imported. There are two types of tariff i.e. revenue tariff and protective tariff.

Revenue tariff: It is the tax applicable on the imported goods. The primary purpose for this type of tariff is to increase the revenue of the government and not restricting the imports. This is because taxes are ultimately paid to the government of the country.

Protective tariff: It is the tax applicable on the imported goods. The primary purpose of this type of tariff is to increase the cost of goods imported. In such a situation, consumers prefer purchasing goods from domestic industries instead of purchasing the imported goods. This will ultimately encourage and give scope to the domestic producers.

Import quota: It is the restriction placed on the number of goods or quantity of goods that can be imported in a country. This helps in restricting excessive import and let domestic countries grow too. For example, Country A placed import quota of 10 units of good A that can be imported.

Embargo: It is a restriction applied on import or export of specific good from or to a country. For example, embargo ordered against Syria towards the support of terrorism.

Protectionist: These are the people who stand and argue for protected trade. They believe that trade restrictions shall exists so that domestic industries can be encouraged. Free trade increases the competition in a country which ultimately eliminates the domestic producers.

WTO: The full form of WTO is World Trade Organization. It has 140 countries as its members and works at eliminating trade barriers in agriculture industry.

NAFTA: The full form of NAFTA is North American Free Trade Agreement. It reduces and eliminates the trade barriers between Canada, Mexico and US. Therefore, the exports increased due to NAFTA.

CAFTA: The full form of CAFTA is Central American Free Trade Agreement. It reduces and eliminates the trade barriers between Central America and Dominican Republic for around 80% of US exports. Therefore, the exports increased due to CAFTA.

EU: The full form of EU is European Union. It encourages the trade and eliminates the trade barriers among its European country members. It will be a rival in US in terms of market size. Therefore, the exports are expected to decrease due to EU.