Import Tax: Why Free Trade does not work in eRep
Unlike real life, free trade does not work in eRep.
Let me first run through how import tax and free trade works in eRep and then show the difference as to why this rl ideal is not applicable to eRep economy.
Countries that have low import tax made a mistake of assuming high prices of products in their country is damaging to their economy as consumers faces higher prices of goods without competition from abroad.
The most important thing though is not to judge the absolute level of prices and make assumptions as to what is consider too high or too low a price. The most important thing here is to figure out how import tax affects the general wealth of the economy.
The difference in eRep economy and real life economy is that in eRep:
1. All industries are in a perfectly competitive model. Company owners do not have market power due to no barriers to entry. Consquently most company owners make slim profit margins because if there were any excessive profits new companies would come into the market.
2. All industries are the same in every country. Unlike real life, where there are some products. say Manga films can only be made in Japan, in eRep all manufacturing industries can be supplied by the home market.
So what is the difference in terms of import tax to the wealth of a country?
Because of reason one, company owners never make more than the total wage bill of the workers. In fact, most company owners should make very slim profit. the amount should be equivalent to how much the general player find worth the time and effort to run a company.
Company owner profit < Wages of workers
To see how wealth is affected by import tax - follow the money .
With import tax set at 99%, goods sold translate to mainly higher wages of workers and some to home company owners.
Without import tax, prices translate to mainly higher wages for foreign workers and some to foreign company owners.
Without import tax, wealth is transferred out of the economy to foreign companies. As workers are the main beneficiary of goods sold, even if the foreign company owers are home based citizens, wealth is transferred from home citizens to foreign citizens.
With import tax set at 99%, majority of wealth stays in
the economy in terms of higher wages by home citizens/workers and if most of the owners are foreign based, it is still beneficial to close off the market since company owners profit < total wage bill of workers.
The key here is to realise that the consumers are also the workers. Any 'high' prices will translate back to the consumers in terms of higher wages and company owners margins should stay the same.
A good example here is to look at UK's economy where the markets are closed off and UK produces some of the cheapest goods in the world. Even without cheap imports coming into the market, UK companies are extremely competitive since there are no barriers to entry.
There should be no reason why foreign company owners can run a company more efficiently than a company run in home country. Since all industries are the same in eRep and across countries there are absolutely no benefit to free trade.
In rl free trade works because some companies can be more efficiently run in other countries or goods that are exclusively produced by foreign companies can be enjoyed by home consumers.
Case for Low Import Tax
The only reason to have low import tax is if the country is so small certain goods are not produce as the economy cannot support the industry. In this case, it is more preferable for government to either run state own companies to supply the market or to run schemes to purchase these goods to sell for their citizen rather than lower import taxes.
Import Tax on Population
Another reason as to why import tax should be raised to 99% on all manufacturing goods is because of how it affects population. one of the key to the health of a nation.
Without import tax, prices of goods are depressed and put downward pressure on wages. Wages is one of the main factor that will affect population flows within eRep. When import tax are lowered wealth is transferred out of the economy and it will translate to higher wages for foreign workers and lower wages for home workers. This will damage the home country in terms of greater outflow of workers due to lower wages at home and higher wages abroad.
For the reason of population flow and transferred of wealth, import tax on industries on manufacturing and land companies that the country have a high region in should all be set at 99%