Trade policies like Import Tariffs and their role in the Canadian Aerospace Industry.
Pisat 1Let’s assume that Canada’s Aerospace Industry receives special support from theCanadian government in the form of import tariffs on competing products,requirements to buy only from Canadian companies (content requirements), anddirect subsidies from the government to Canadian aerospace companies.This special government support could be based on several arguments:1Notes to reader: The statements have been analyzed on a standalone basis with anassumption that trade is restricted for the industry due to import tariffs. I have usedmy understanding derived from research and logic to answer these.1. Canada’s aerospace industry is important for maintaining Canada’s nationalsecurity and military.1There are various areas where a country may choose to voluntarily not achieveeconomic efficiency. In other words a country doesn’t want to be economically betteroff in that particular area due to their self adopted restrictive trade practices. Such astance is usually taken in Canada on topics related to “national pride, nationaldefense & income distribution”2. In case of Canada’s Aerospace Industry (CAI);national defense is at stake. Sometimes; it is better for the country to make itselfleast worse off by choosing a balance between free trade and restrictive trade. Incase of Canada or any country; national security is of prime importance over most ofthe other topics. Hence making ones economy self reliant in national security is animportant factor in global politics.If Canada goes to war; the chances of procuring imported competing goods mayreduce depending on the social; political & geographic situation of existing imports.The choice in a no war situation becomes for Canada to encourage their domesticproduction and to rely less on imports by putting a tariff in place. This idea can alsobe further applied to Canadian content requirement in the imports to make sure that
Pisat 2reliance on home produce is more than on imports for defense. Hence I agree thatAerospace tariffs on competing goods are valid.2. Canada’s aerospace industry provides high paying, high skill jobs to workers.1This is not a valid argument to restrict trade in aerospace sector by means oftariffs. In case of Canada; they may be better off with equal competition fromcompeting products hence paying high wages doesn’t substantiate a cause to imposetariffs. According to the Factor Price Equalization Theorem2; opening up trade willeventually establish a common price in both trading countries for the product and thefactors that are used to produce it. In this case; Canada can also reduce the alreadyhigh wages by invoking free trade.Here a direct subsidy would be a more relevant type of aid from thegovernment. This will help producers cover up for the high wages that are paid tohigh skill workers while free trade reduces high prices of the factors currently in use.3. Many aerospace companies in Canada are relatively new, and need specialprotection so that they can develop their manufacturing capabilities and competeagainst larger companies in foreign countries.1This is a valid argument for supporting an import tariff on competing goods.The new aerospace companies in Canada (Infant Industry2) have not been around sincelong and are in desperate need of building a stable learning curve. With efficienciesand expertise coming in due to better learning’s over time; the companies will beable to produce higher quantities at a lower rate. This will benefit Canada by creation
Pisat 3of a strong industry in the long run that may become capable of having handsomeexports at competitive world prices.Optimistically speaking; this calls for an investment2of accumulatingdeadweight3losses for the period taken by industry to stabilize. The long run effectdepending on the level of success may be positive enough to wipe out dead weightlosses with a retrospective effect.4. There are spill-over benefits to other companies and sectors of the Canadianeconomy from the Canadian aerospace industryThis is a valid argument for supporting an import tariff on competing goods.The spillover effects of a developing industry are always visible on the patterns of theindustry of the suppliers & others involved. E.g. Raw Materials (Metal); IT (Technologyused for Aerospace Engineering); precision equipments used etc will also experiencean upscale in their businesses due to the import tariffs on competing products inAerospace.In a nutshell; import tariffs for the industry may help the Canadian economy tobecome a leader in Aerospace a few years down the line due to the above explainedpoints.
Pisat 4Bibliography / End Notes:1. Questions on Canadian Aerospace & Import Tariffs.2. My inferences & learning’s from the textbook on International Economics (15thEdition) by Thomas A. Pugel.3. Deadweight Loss: Can be referred to as a loss arising to a party without anycorresponding gain to any party in the economy out of reduced consumption ofa particular good. Usually happening due to increase in price as a result ofrestriction of imports.