Question

International Economics- Extra Credit Producers in a country which is capital-abundant are complaining that a labor-abundant country has lower wages and so has an unfair advantage. Producers in the capital-abundant country are seeking protection through import tariffs. Explain why an econom ist would not view this situation as "unfair."

Answer 1

An economist would not consider this as unfair because lower wages in labor abundant countries would mean lower cost of production of goods and services. The country might even substitute capital for labor in order to reduce production cost of capital-intensive goods, thereby pulling down costs as well as market prices of capital intensive as well as labor intensive goods.

A fall in prices of these goods would pose a threat to the capital abundant country, as its domestic producers would not be able to compete with foreign competition and foreign imported goods, thereby leading to a loss for domestic prodcuers as well as industries.

As a result of protecting their domestic producers, an import tariff would be valid and not be considered unfair.