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Internation Trade

How do international sanctions, tariffs, quotas, and trade restrictions affect international trade and costs of production?
A lack of free trade reduces overall international trade. Domestic consumers reduce their consumption of goods as prices increase due to tariffs, quotas, etc. Thus, restrictive trade policies will either directly or indirectly cause imports to fall (Wallenius). However, restrictive commercial policies may actually decrease costs of production (Wallenius). Higher prices make it profitable for domestic producers of the protected product to increase their output. As this happens, resources are attracted into the protected industry away from other sectors of the economy.

How do tariffs and sanctions on the import of auto engines into the U.S. affect production and costs at Acme?

Due to NAFTA, there are no tariffs or sanctions for importing auto parts from Mexico into the U.S. Thus, Acme can take advantage of cheaper labor rates available in Mexico to make auto engines there and then ship them into the U.S. to make a greater profit because it has lowered its production costs. Conversely trade restrictions, had they existed, would have increase the cost of the product and Acme would have passed this cost on to the consumer.

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