Market Failure and Transactions Cost

Micro and macro-economic support perfect competitive market where demand and supply determine the costs of products. In the event of government interventions, economists may differ on the extent the government intervention. Most economists argue that limited government intervention is vital in enhancing the law of demand and supply to determine the market whereas a few scholars argue that government intervention is fundamental in regulating the market. In the article, "Trump's trade wars and Brexit are making us all poorer,” (Frankel, 2018). Jeffrey Frankel depicts that tariffs and other trade barriers created by different governments hinder the global economic growth and development.

The world international trade is on the verge of demise as governments intentionally impose tariffs and protective duties on imports to protect the domestic firms. Frankel (2018) argues that the conflict between the U.S. and China that led to the U.S. impose tariffs from 10% to 25% on Chinese imports will have the greatest adverse effects on the economy (Frankel, 2018). The article depicted that Trump’s government cited that the bilateral imbalance, the growing trade deficit, and the need to protect domestic firms as the key issues that led to the government’s decision (Frankel, 2018). However, the Chinese are likely to retaliate by imposing similar or higher tariffs on U.S. products, which would reduce the aggregate supply and choices in both countries.

According to Frankel (2018), the Brexit is the other major indication on the government interventions intended to boost domestic production and consumption at the expense of the global economic well-being. Statistics depict that on the short-run, the U.K. would benefit due to the late-cycle fiscal stimulus but contraction and trade deficits will increase eventually (Frankel, 2018). Frankel is adamant that the projected economic growth slowed since the trade-wars began from 2.9% to 2.1% from 2018 to 2020 (Frankel, 2018). The respective governments intervene through fiscal and monetary policies to enhance domestic production but limiting international trade does not diminish the trade deficit because other countries are unlikely to import from the country. Therefore, there is no winner in trade-wars because trade wars cause a decline in supply and increase the prices of the products. Even in the increased protectionism by the U.S., it is evident that the policies are hurting the U.S. for instance, as of September 2018 the U.S. deficit reach $54 billion, which is the highest in recent history.

According to McConnel, Brue, & Flynn (2018), the use of fiscal and monetary policies to enhance the productivity of domestic firms result in spending more resources for fewer or low-quality products. Hence, the need for international trade, which enables countries that enjoy competitive advantage and economies of scale to produce a given product and sell to those that do not have the same low production, costs (McConnell, Brue, & Flynn, 2018). The importing country is able to focus on a product that it is able to produce at a lower cost and export to other countries (McConnell, Brue, & Flynn, 2018). The dependence creates a relatively high supply that regulates the prices of goods due to the increased competition. McConnel, Brue, & Flynn (2018) confirm Frankel’s arguments that protectionism has more adverse impacts than benefits because it not only hinder trade but also affects the earning per capita. The low capital diminishes the consumer purchasing behaviors, which may negatively influence the demand of domestic and foreign products (McConnell, Brue, & Flynn, 2018). However, the most likely scenario of the impacts of trade wars is the decline in supply as depicted in the graph below.

Based on the graph above it is evident that in a perfect competition market result in high supply and demand because countries that have competitive advantage can produce many products. Demand is high because the price is low as depicted by the interception between series 1 and series 4. When the government intervenes, low tariffs result in series 2 whereas protectionism leads to series 3. It is evident that the more the government intervenes or inhibit free trade, the higher the prices of goods and the lower the quantity demanded.

References

Frankel, J. (2018, November 27). Trump's trade wars and Brexit are making us all poorer. The Guardian . Retrieved January 29, 2019, from https://www.theguardian.com/business/2018/nov/27/trump-trade-war-monetary-policy-central-banks

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2018). Economics: Principles, problems, and policies. New York, NY: McGraw-Hill Education.