Impacts of Tariffs Removal
The chosen company is Valero Energy. Firms face numerous effects in the event that a government removes tariffs. Firstly, the elimination of tariffs may imply that foreign companies will have the incentive to enter the oil and gas industry due to reduced barriers to entry (Mankiw & Taylor, 2007). The entry of foreign firms in the industry increases the levels of competition existing in the US oil industry. Increased competition, therefore, means that Valero Energy will face unfair competition from solidly established foreign corporations, which may ultimately affect its profits and production levels (Mankiw & Taylor, 2007).
Moreover, Valero Energy may end up improving its efficiency to sustain its competitive levels in the industry since they have the incentive of cutting costs. Improved efficiency means that the firm will lower its costs of production, thereby increasing their profit margins. Additionally, the improvement in efficiency may imply that Valero Energy may ultimately benefit from the economies of scale (Mankiw & Taylor, 2007).
Production Obstacles in another Country
Communication barriers can act as a barrier for a firm to undertake production in another nation. A foreign company can face cultural misunderstandings due to the effect of miscommunication (Jianlian, 2008). The challenges of human resources may also create obstacles while producing in a foreign country. Nations have different structures of authority that affect the level of subordinate delegation (Jianlian, 2008). For instance, US firms face structural authority challenges in China. It happens because employers use hierarchical structures rather than flexible authorities. Additionally, a firm faces challenges of business culture while producing in a foreign country. The social environment is another obstacle for firms producing in foreign markets (Jianlian, 2008).
The argument for Free Trade
Free trade is quite significant to countries engaging in international trade because it offers numerous benefits. It enables nations to specialize in the production of goods in which they have a comparative advantage (Mankiw & Taylor, 2007). All countries involved in the trade benefit from an improvement in economic welfare because each nation produces goods with a lower opportunity cost. Furthermore, free trade leads to trade creation because of consumption shifts from high to low-cost producers (Mankiw & Taylor, 2007). Moreover, free trade leads to increased exports since companies exporting commodities where their country has comparative advantage leads to improved economic welfare (Sally, 2008).
Additionally, it leads to economies of scale, which benefits consumers because of the lowered prices. It is through specialization in particular commodities that countries attain the benefits of economies of scale (Sally, 2008). Besides, increased trade leads to greater competition from foreign firms, which increases the incentive for domestic companies to raise efficiency by cutting costs. The competition also deters the charging of high prices by domestic monopolies.
Moreover, free trade acts as an engine of economic growth due to the improvement in world trade (Mankiw & Taylor, 2007). Free trade enables countries to utilize surplus materials that would otherwise have gone to waste, thereby generating income and other benefits. Furthermore, the protection of domestic industries through tariffs may encourage inefficiencies because firms may not have the incentives to cut costs (Sally, 2008).
Preferred Policy
I support the free trade policy due to its overall benefits to the countries involved in international trade.
Advantages
- Improves production levels and efficiency
- Increases the consumption basket of households
- Leads to increased GDP of nations
- Increases innovation and competition
- Nations involved in the trade enjoy mutual benefits (Sally, 2008).
Disadvantages
- Can endanger the economic and political freedom of underdeveloped nations
- Its practices require perfect competition in the marketplace, which is not practical in most cases (Sally, 2008).
- It makes it possible for the exportation of harmful and illegal products
- It creates monopolies (Sally, 2008).
References
Jianlian, W. (2008). An analysis of business challenges faced by foreign multinationals operating in the Chinese market. International Journal of Business and Management, 3 (12), 169-174. Web.
Mankiw, N. G., & Taylor, M. P. (2007). Microeconomics. London: Thomson. Web.
Sally, R. (2008). New frontiers in free trade: Globalization’s Future and Asia’s rising role. Washington, D.C: Cato Institute. Web.