Suppose a country announces that it is moving toward free trade by reducing its tariffs on intermediate inputs used by its production sector, while at the same time maintaining its tariffs on final goods. Does this policy change really move the country toward "freer trade"? Explain why or why not.
Please explain what you mean by "intermediate inputs."
I am not sure, but I think it means goods and services used as inputs into the production process. Does that help?
Yes.
http://stats.oecd.org/glossary/detail.asp?ID=1395
I don't think this country is moving toward freer trade because it still imposes tariffs on final goods.
What does your text say?
To analyze whether this policy change moves the country toward "freer trade," we need to understand the concept of free trade and how tariffs affect it.
Free trade refers to the absence of barriers, such as tariffs or quotas, that restrict the flow of goods and services between countries. It promotes the efficient allocation of resources, fosters economic growth, and allows countries to specialize in producing goods and services they are best suited for.
Tariffs are taxes imposed on imported goods, increasing their price compared to domestically produced goods. When a country reduces tariffs on intermediate inputs used in production but maintains tariffs on final goods, it creates a situation called a tariff inversion.
In this case, reducing tariffs on intermediate inputs can be seen as a positive step towards freer trade. By making these inputs cheaper, domestic producers can reduce their production costs, making them more competitive in the international market. It promotes efficiency and can encourage innovation and productivity gains in the domestic production sector.
However, maintaining tariffs on final goods means that imported finished products will still face higher prices compared to domestically produced goods. This protects domestic industries that produce these final goods from foreign competition. It can distort comparative advantages and hinder the overall benefits of free trade.
Therefore, while reducing tariffs on intermediate inputs is a step towards freer trade, maintaining tariffs on final goods limits the extent to which the country can genuinely embrace free trade principles. It creates a partial opening towards free trade by promoting domestic production, but it still restricts the importation of final goods.