Model predictions of tariff acceptability
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1. You are an advisor to the government of Argentina. Argentina is considering placing a tariff on imports of cotton. Please prepare a report for the president that evaluates this proposal base on the criteria listed below. you may assume for the purpose of this exercise that the import tariff has an effect equivalent to closing off trade in cotton.
A) why would Argentina want to limit imports of cotton? What does this suggest about the natural free trade pattern of specialization in Argentina? i.e. would we expect that it would be a net importer or exporter? Is Argentina likely to have a comparative advantage in the production of cotton?
B) Which group(s) within Argentina will likely support this tariff? which will oppose it ? Please justify you answer by citing specific models learned in class.
C) Will the country as a whole be better or worse off with the tariff? Please comment on what each of the 5 models we've learned in class would say about the issue.
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Solution Summary
Use of the Ricardian Model, Specific Factors Model, Heckscher-Ohlin-Samuelson Model, Stolper Samuelson Theorem, Standard Trade Model, and Imperfect Competition Model to determine tariff opposition by different groups are used and discussed in this solution.
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Tariffs force price disparities between two countries. If Argentina places a tariff on cotton, the tariff is reflected in the price passed on to consumers in Argentina. Argentina is a net importer of cotton, and does not have a comparative advantage. If it did, it would not wish to close off trade of cotton. It would be able to produce cotton more cheaply than other countries, and would be a net exporter. Argentina may wish to limit imports in order to protect an infant cotton industry, needs cotton for national defense, or because its cotton importers are being negatively impacted by lower world prices. In general cotton growers would support the tariff, while Argentinian consumers would oppose it. In some cases the workers will also oppose it, depending on the model.
The Ricardian framework predicts that countries will fully specialize instead of producing a broad array ...
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