Elasticity: How Tariffs Work In International Trade

Name Institutional Affiliation Professor’s Name Course Name and Code Date Elasticity In recent months, the term ‘tariffs’ has been in the airwaves most of the times, especially since the U.S. President Donald Trump took office in January 2017. Notably, the issue of tariffs has become prominent in the news because of the importance of international trade in the stability of individual countries, regions, and the world as a whole. Moreover, tariffs are useful tools in regulating trade between trade partners. As such, there are times when they are imposed while at other times they are negotiated. This paper will highlight how tariffs work in international trade and explain the link between tariffs and elasticity. Most of the times, tariffs are instituted by governments to protect the domestic economy from cheaper imports that could disrupt the stability of domestic industries that produce similar products and/or services. However, tariffs can also be removed or negotiated by the trading partners to facilitate free trade as was the case when the North American Free Trade Agreement (NAFTA) was formed. On the concept of elasticity, this term is used to denote the degree of sensitivity of a variable such as demand/supply to a change in another related variable such as price. For example, if a cup of coffee is priced $0.30 higher than the current price across the local restaurants, the demand for this beverage would probably decrease because many consumers would choose to drink tea, which is priced lower but still contains some caffeine. However, not all products or services are this sensitive to price changes. A good example is insulin that is needed by people with diabetes to maintain healthy blood sugar levels daily. For diabetics, an increase in the price of insulin would have little or no effect on the demand for this essential product because it has no substitute and they need it to remain healthy. Therefore, those products or services that are highly sensitive to price changes (as seen from the quantity demanded and quantity supplied) are said to be elastic and their elasticity value is generally taken to be greater than 1. Conversely, products/services whose demand/supply is hardly affected by price changes are said to be inelastic and their elasticity value is less than 1. This brings the discussion to the element of price as one of the most powerful factors that influence the products and services that companies choose to trade. For example, companies that trade in products with high elasticity such as furniture, pharmaceuticals, and automobiles are likely to be greatly affected by tariffs compared to companies that specialize in inelastic goods/services such as gas and water. Taking an example of a company in the U.S. that specializes in pharmaceuticals and medical devices, the removal of tariffs for these products by ...