Comparative advantages and Trump’s protection policies
Comparative advantage is the capacity to produce a product in a minimum opportunity cost than other producer using available resources. The law of comparative advantages defines that a free trade where a fewer good for which they have a comparative advantage. Whereas, absolute advantage is the ability of the individual to produce more goods or services than other producers using the same amount of resources.
Absolute advantage and comparative advantage are widely used terms in international trade. Where absolute advantage is a condition in which a country can produce particular goods at a lower cost in comparison to another country. On the other hand, comparative advantage is a condition in which a country produces particular goods at a lower opportunity cost in comparison to other countries. Protectionism is trying to use restrictions such as tariffs in other to boost their country’s industry so that they could protect it from foreign competition. A tariff imposed on any goods and services is an extra tax that raises its sale price equivalently to making it less attractive to buyers than the domestically made product.
The theory of comparative advantage explains that the trade protectionism does not work in the long run because it allows to the waste of country’s resources toward unsuccessful industries. They cannot compete with their competitors as well as the consumer are forced to pay higher prices to buy domestic goods. The protectionist approach escalated more recently. The President of United States Donald Trump has imposed 25% tariff on steel and 10% tariff on aluminum imported from all countries except Canada and Mexico. The U.S. imposed a 25% duty on $34 billion of Chinese imports, while China immediately responded with 25% tariffs on U.S. agriculture products and cars. The U.S is currently reviewing tariffs on another $16 billion worth of Chinse goods, and Trump last week has indicated that he may expand tariffs to nearly all Chinese imported goods. It seems the trade war is now full-on and accelerating quickly between the world’s two largest economies. There is both a positive and negative impact on the Australian economy from protectionist policies. Overall, in aggregate, it looks as though the impact of a Trump administration will be the highest net negative for Australia, mainly via the channel of reduced global trade.
Mr Trump stated that the US is losing something due to running trade deficits that have been thoroughly controverted by modern economics. Despite, Australia will have a small impact on its economy from the tariffs imposed on steel and aluminum as Australia is not a large exporter of steel and aluminum. Modern economics shows that trade and current account deficits are not problematic. This is because there are inflows of capital that can lead to increasement of domestic investment. In other hand running a trade or current account, deficits can actually assist economic growth, just as it has for Australia by enabling lower long-term interest rate and higher capital accumulation than otherwise. There are various impact of protectionist policies which are explained below:
Firstly, Australia could stand to benefit from the trade war between the U.S. and China. The initial list from China targets US agriculture products, including soybeans, wines, and meats. Australia is well placed to provide the substitute for the demand.
The second positive impact is that Donald Trump has promised a new wave of infrastructure spending in the U.S. This could see demand for raw commodities lift, raising prices. As Australia is a significant exporter of hard commodities, including coal and iron ore, so there could be significant benefits here for Australia.
Besides the advantages there are disadvantages too. The first negative impact is that Australia is unlikely to be targeted by the U.S. anytime soon as the U.S. actually has a trade surplus with Australia. Moreover, the largest amount of goods exported to the U.S. are covered by the Australia-United States Free Trade Agreement.
Another disadvantage of Trump’s trade policy on Australian Businesses is more uncertain as it all depends on whether the current protectionism policy is used as a negative tool on trade. In other words, if Trump administration intends to implement it in a long run, it will eventually hit the economy of both sides economics and slow down the global economic growth. This results in uncertainty and results in the reduction in investment. For Australia, this concludes in lower demand and price for its commodity exports.
However, the U.S. government tried to save the domestic industry but it is very likely that the U.S. will burn down the current international trade system. But it does not protect the industries but instead of that consumers pay more price for the product. Therefore, tariff harms the economy.
Second, there is a risk of a trade war will start to weight on the strong performing U.S. economy, which will have a negative impact on the upcoming mid-term election.
Third, Deutsche bank stated that the U.S. actually has a trade surplus of $1.4 trillion dollars when both direct trade and the sales of multinational companies are taken into account. It is, in fact, benefiting from globalization. Therefore, it is difficult to image the U.S. will adopt a full-scale protectionism approach over the long run. It is more likely that Trump is using tariffs to negotiate a better deal on trade and other things. If this is the case, the impact on Australian businesses is limited.
Furthermore, I have got videos from youtube in which there are some more views from different persons about the global impact of Trump’s decision.
In conclusion, we can say that the decision of trump’s about tariff to protect the domestic industries may impact the whole global if it runs for a long term. Australian economy also will not be benefited from protectionist policies of President Trump as Australia may also be targeted as soon in future because the U.S. has a trade surplus with Australia. Not only that, U.S. decided to implement it for a long run which slows down the economic growth that results in the reduction in the investment, that concludes the lower demand for the Australian product in a foreign market. Not only for Australia, but there is also a lot more negative impact on the economy of the whole global. This makes the slowed down the growth rate of the economy in the whole global and also may have the risk of the trade war. And also even for the U.S. consumer have to suffer from the high price of the product which results in the inflation. President Trump’s promised to lift domestic spending while also cutting taxes inevitably means bigger budget deficits, more debt, higher inflation and, most likely, higher interest rates financial markets already have reflected this. Therefore, it is not beneficial for Australia and other countries even for the whole global.
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Comparative advantage is the capacity to produce a product in a minimum opportunity cost than other producer using available resources. The law of comparative advantages defines that a free trade […]