The paper "Cause and Effect of the US Steel Tariffs" is an outstanding example of a business case study. Comparative advantage is a theory used to justify the necessity for trade, as opposed to self-sufficiency. By stating that different countries have different absolute and comparative advantages in their products, the theory explains how it is possible for countries with varying characteristics to trade for mutual benefit. However, governments often intervene in international trade to protect what they consider to be national interests, such as the tariffs against steel imports imposed by the US in 2002.
This study discusses the impact of this intervention, and whether it has helped or hindered the industry it was supposed to protect. Definition and Characteristics of Comparative Advantage The comparative advantage theory was developed by David Ricardo in 1817 (O’ Sullivan & Sheffrin 2003). Using the example of wine and cloth, he explained that trade in both goods between England and Portugal would increase their overall production, even though Portugal could produce more of both goods than England could. However, all costs are opportunity costs (Lee 1999). This means that although Portugal could be self-sufficient in both commodities, the opportunity cost of producing cloth in Portugal, in terms of the amount of wine which Portugal would have to sacrifice, was greater than the opportunity cost of making cloth in England.
Similarly, the opportunity cost of producing wine in England was greater than the opportunity cost of producing cloth in Portugal. Therefore Portugal had a comparative advantage in producing wine while England had a comparative advantage in producing cloth (O’ Sullivan & Sheffrin 2003). The production of wine and cloth could be boosted by both countries specializing in producing the goods in which each country had a comparative advantage, and then trading the surplus with each other, which would lead to increased overall production of wine and cloth among both countries (Linder 1961). According to Deardorff (1997), comparative advantage is the low cost of a good compared to the cost of the same good in other countries.
Therefore, it makes sense for a country to export a commodity if it has a comparative advantage over other counties in the production of that commodity (Deardorff 1980).
Ideally, such a system would operate smoothly without the need for government intervention. However, governments do intervene in international trade, (Fletcher 2010), believing that a nation requires an absolute advantage in the production of all kinds of goods. However, this is impossible, since absolute advantage (or absolute disadvantage) in everything would eliminate the need for trade (Deardorff 1997). Nevertheless, governments are not always aware of the differences between absolute advantage and comparative advantage, and thus they try to influence world trade. This is referred to as protectionism (Keesing 1966).
Most protectionist policies are implemented with the aim of boosting a country’ s trade situation, but they often complicate the processes of world trade. Some protectionism can be attributed to revenue collection by governments (Deardorff 1997). One of the characteristics of comparative advantage is that some parties will benefit, and others will lose out, but that the benefits of trade are greater than the costs of trade (Lett & Bannister 2009). This is referred to as the Normative Law of Comparative Advantage. However, when the government of a nation feels that it is at the losing end of international trade, it adopts protectionist policies.
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