Have a beautiful Tuesday.

I would like to begin with a question before continuing further? Have you understood the concept of a trade war? And if not, don´t blame us. We have not explained certain terms, which probably may be new for all of you who have not studied business, commerce, and economics. For those who already know these terms, it is also refreshing to re-read them again.

“Tequila”, an original painting from Eleonora Escalante, 2018. On watercolor paper Guarro-Canson-350GSM. This canvas has been sold and it is currently adorning a house in San Francisco, California.

As usual, agaín I would like to embellish this article with one of my aquarelles. Some of my paintings are simple past exercises (I used them to practice my hand movements and boost my painting capabilities). I do not sell art that is not 100% mine. I am aware of the notion of “copyright”, and whenever I share a painting that is based on a third-party picture, it is only a painting training workout.  Nowadays,  I am only painting “ouvres d´art” 100% original mine (from the inspiration photo, drawing, painting, to the finishing touches). Only my original art is on sale. If you are interested, do not hesitate to contact me (through my inbox). With my future art revenues, I hope to sponsor this blog, Meanwhile, I continue praying for benefactor supporters to help me to grow with my plans, and cover Eleonora Escalante Strategy operational expenses. 

Let´s do a basic paint wash of some concepts I have not defined for you previously. The source for these notions is the book Global Business from Charles W.L. Hill.

1. Retaliation in economic wars: This concept has been used for many centuries by governments. Retaliation is a commerce and political argument strategy used by states as a bargaining tool to help open foreign markets and force trading partners to play by the rules. Nevertheless, retaliation is also used as a punitive measure or as a disciplinary move to harm one country´s weak economy that is not doing things correctly in other areas.   The USA is an expert country in retaliation strategies. Several American governments (republicans and democrats) have successfully utilized this tool, to negotiate trading issues in different industries.  The USA utilizes retaliation as a “get tough” approach, kind of a threat of punitive trade sanctions to get something in return with other nations. Nevertheless, when the other country feels no obligation to negotiate, there is a high risk to create a commerce mess. If the other country doesn´t back down, and instead starts to raise its own trade barriers, then both countries end up hurting themselves (everyone losses when retaliation happens).
2. Government intervention in trade: When a government intervenes, they often do so by restricting imports of goods and services into their nation, while adopting policies that trigger or augment exports. Why do governments intervene? They often follow a motive: protectionism. To protect domestic or local producers and jobs from foreign competition. In addition, governments expect to increase the foreign market for the products of domestic producers (who wish to export them). How do governments intervene? They use some tools. Or various instruments called Instruments of Trade Policy.
3. Instruments of Trade Policy: There are 7 traditional instruments of trade policy, tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, anti-dumping policies, and administrative policies. Each of these instruments has a specific purpose. In order to understand the Anglo-Irish Economic War, we will explore the definitions of 3 of these trade policies: tariffs, subsidies and import quotas.
4. Tariffs: A tariff is a tax levied on imports. These can be specific tariffs (as a fixed charge for each unit of a good imported); and ad valorem tariffs (as a proportion of the value of the imported good). A tariff raises the cost of imported products relative to domestic products. While the principal objective of tariffs is to protect the local domestic producer and keep the domestic jobs (keep employees against foreign competition), they also raise revenues (taxes) for the government.
   • Who gains with the tariffs? The government and domestic producers.
   • Who suffers from the tariffs? The consumers (they must pay more for imports)

In consequence, first, tariffs are un-ambiguosly pro-domestic producers and anti-consumers. Second, tariffs also reduce the overall efficiency of the world economy. A protective tariff encourages the local domestic firms to manufacture products at home that, could be cheaper and produced efficiently abroad. As a result, if the local producers do not become productive and efficient,  there is an inefficient utilization of resources.

5. Subsidies: This is a government payment to a domestic or local producer. Subsidies take many forms, including cash grants, low-interest loans, tax breaks and government equity participation in private domestic firms. Subsidies take shape because governments wish to lower the final price of certain goods and services to the population. By providing endowments to the domestic producer, the government is lowering the costs to the consumers. Subsidies aid domestic producers in two ways: they help them to compete against low-cost foreign imports, and they help them gain export markets.
   • Who pays for the subsidies? The governments. And they pay by taxing individuals. At the end of the day, the consumers pay the subsidies too. Therefore, in practice, many subsidies are not that successful for the country. What you pay as a tax, is the resource for the subsidy of other domestic producers, that usually do not increase their international competitiveness. Though your taxes are protecting inefficient industries, which can´t compete on a global scale without those same subsidies that you pay.
6. Import Quotas: An import quota is a direct restriction on the quantity (a maximum limit) of some goods that may be imported into a country. This restriction is normally enforced by issuing import licenses to a group of individuals or firms.  Import quotas are common in industries as sugar and textiles.

Now we are all on the same page. We are ready. We will continue with the analysis of the Anglo-Irish Trade War. This event is extremely fascinating because it is one of these tales in which a debtor nation (or at least a piece of Ireland, the Irish Free State) benefited the most when the economic war ended by 1938. Why do you think this occurred? The Irish Free State by defaulting its obligations to Britain was able to gain a retaliation war. Why?. Despite the retaliation strategies used by both nations.  In my next publication, we will dig deeper into this case.

Thank you and see you again before the end of the week. Enjoy your coffee!

Sources utilized to write this article:

https://www.mheducation.com/highered/product/global-business-today-hill-hult/M9781260088373.html

Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY.  Nevertheless, the majority of the pictures, images or videos shown on this blog are not mine.  I do not own any of the lovely photos or images posted unless otherwise stated.

Published by eleonoraescalantestrategy

Corporate Strategy Artist, San Salvador, El Salvador View all posts by eleonoraescalantestrategy