Question

Suppose Germany, a large country, imposes a tariff on tuna imports. Before the tariff, all the countries in the world are engaged in free trade in tuna. Explain why.
(1). The German consumers pay a higher price for tuna.
(2). The German producers receive a higher price for tuna.
(3). The world price of tuna increases.
(4). The tariff makes Vietnam, a tuna exporting country, worse off.
(5). Vietnamese tuna consumers suffer because of the tariff.

Answer 1

Answer:

1. This is true.

The Germans will pay a higher price for tuna because the tariff will increase the price of imported tuna and the reduction in completion with the local producers will lead to higher prices as the local producers take up their price.

2. This is true.

German producers no longer have to compete as much with imported tuna which was cheaper. They will therefore be able to raise their prices.

3. This statement is false.

The world price of Tuna DOES NOT increase because the tariff is only applicable in Germany. Other parts of the world will trade tuna as before. This is what is assumed.

4. This statement is true.

If Vietnam was exporting tuna to Germany, they will become worse off because they will see a decline in demand for their tuna on account of the tariffs making the tuna more expensive.

5. This is false.

Vietnamese tuna consumers will still pay the same price to get tuna because Vietnam produces the tuna. It is Vietnam's producers that will suffer not the consumers.