The Pros and Cons of Tariffs

The Pros and Cons of Tariffs

Introduction

A tariff is a type of tax or duty that a government imposes on services and goods that get imported from other nations. The primary purpose of the imposition of tariffs is usually to make imported products more expensive, thus less desirable making domestic products more popular in the market. Tariffs exist in different classifications and subgroups. However, the most common types are specific and ad valorem tariffs, which get classified according to their imposition criterion. Ad valorem is the type of duty that gets levied as a fixed percentage of the value of the product. On the other hand, specific tariffs entail settled amounts of money imposed on the physical unit or according to the measurement and weight of the imported commodity. Just like most business decisions, the imposition of tariffs does come with several advantages and disadvantages, as discussed in this essay.

Pros

One significant advantage that comes with the imposition of tariffs is facilitating the growth of budding industries or businesses. The taxes levied on imported goods automatically result in the high price of foreign goods. When the products seem too costly, the locally manufactured products become more affordable for the consumer, thus granting the small industries the opportunity to root themselves in the competitive markets (Nunn & Trefler 2010). This principle also applies to the stability of the already established domestic sectors. The minimization of the volume of imported goods which occurs after tariffs get imposed leaves blanks in the market hence the creation of an increase in demand for the domestic products. Generally, tariffs can be said to be a protectionist strategy for both growing and the already established local industries. When small companies have the opportunity to grow without any unfair competition, they eventually create opportunities for more jobs in the country, which leads to a reduction in unemployment rates in the country. In instances where the established industries are assured of some form of stability through tariffs, on the other hand, the already working population can have their job positions protected hence a reduction in the rate of job losses in a country. Besides, a combination of all these results of imposing tariffs on imported goods, therefore, has an undeniable potential to strengthen a country’s economy.

Another notable benefit of tariffs is the provision of more revenue from the increased taxing on imported products. The revenue is important to the boosting of other sectors in a country. The increased revenue enables the government to make improvements in the healthcare sector, education, transportation, and a boost in the security sector, among other essentials of a well-functioning nation. Tariffs also ensure a reduction of deficits in the economy. The impositions prevent the infiltration of goods and services that are foreign to the local market. When the market has more locally produced products than foreign ones, a reduction in the deficit in the economy occurs (Nunn & Trefler, 2010). The decline in deficit accompanied by job creation, increased manufacturing, and the protection of the existing job positions eventually results in the expansion of the economy..

In economics, dumping is the process of sending products that get rejected by other countries into a different country. The imposition of tariffs has the potential to ensure the prevention of dumping, thus protecting the local market from purchasing any products that got rejected in other nations. The levying of high duty or taxes reduces or totally discourages the unethical business activity. Besides the prevention of dumping, tariffs put a restriction on the importation of undesirable goods. Ensuring fair play in international trading is also a significant benefit that is associated with tariffs. Slowing down the rate of imports or minimizing the volume of imported products through tariffs gives a country the chance to build its industries and reach or surpass the production levels that are present in other countries.

Cons

Trade wars and the general strained international relations are among the most well known disadvantages of tariffs. Such a scenario got witnessed between the United States and China in 2018. In that year, both nations imposed tariffs on each other’s products, amounting to hundreds of billions of dollars resulting in a trade war and damage to the relationship between the two countries (BBC News, 2020). For a long time, the United States President Donald Trump accused the Chinese of the theft of intellectual property as well as trading practiced that is anything but fair. The war started when president Donald Trump undertook the imposition of tariffs worth more than 360 billion dollars on goods from China in attempts to make imported products more costly and encourage the purchase of goods that undergo production locally. The Chinese government then opted to retaliate by imposing tariffs worth above 110 billion dollars on American products. After the delivery of three tariffs in 2018, Washington DC added a fourth one forcing Beijing to hit back using duties that range from 5% to 25% on goods from the United States. The Chinese resorted to all these retaliation measures because they felt like the American government was merely creating barriers to prevent the rise of the Chinese economy.

Despite the fact that tariffs have the potential to strengthen and expand a country’s economy, such taxes could have adverse effects on the economy. One potential avenue of damaging the economy is through discouraging foreign investment. Direct foreign investment is instrumental in the growth and strengthening of any economy. Such investment allows for increased production, more job creation, among other essential economic factors. However, tariffs that are not well-considered and implemented could result in lower rates of investment (Fouda, 2012). Such an incident occurs because no investor would want to risk his or her finances in a country where taxes are extremely high, thus limiting the profit margin.

Another disadvantage of tariffs is that it could facilitate the release of expensive yet low quality products into the local market once the competition gets reduced. While the reduction of competition through tariffs can give small business establishments the chance to grow, and big domestic industries more stability in the market, the lack of competition bears several cons. For instance, local production companies may most likely produce goods of lower quality and unfairly price them if they do not have any serious competition, and their market share remains stable. Additionally, tariffs could bring about a shortage of goods and services in the local market. In some cases, the number of goods produced or services offered by local establishments May not fully satisfy the entire population hence the need for importation. The high tariffs on imported products and services could discourage business giants from sending such products into the country, resulting in a shortage of goods and services in the market.

Moreover, tariffs could ensure the elimination of variety from the market (Fouda, 2012). Every market has consumers with a variety of preferences and desires on the type of products and services they need. Importation grants the consumers to have an extensive pool of products from different countries made using different procedures and products to suit their needs. However, tariffs hinder the availability of options through discouraging imports leaving customers with a thinner range of products to choose from, resulting in low or lack of consumer satisfaction.

Conclusion

Tariffs are mainly the taxes or duties that any government can impose on any products or services that enter the country through another country. The primary purpose of tariffs is to promote the purchase of local products by making foreign products more expensive. Like most business decisions, tariffs have both pros and cons. The main advantage of tariffs to a country is allowing for the growth of smaller companies and stabilizing the position of the already established businesses in the market. On the other hand, the main disadvantage of tarrifs is the triggering of trade wars and putting a strain on international relations. Such a scenario was witnessed in 2018 when the United States government and the Chinese government resorted to subjecting each other’s products to tarrifs worth hundreds of billions of dollars.

References

BBC News. (2020). A Quick Guide to the US-China Trade War. Retrieved from: https://www.bbc.co.uk/news/business-45899310

Fouda, R. (2012). Protectionism and Free Trade: A Country’s Glory or Doom? International Journal of Trade, Economics and Finance, 3(5), 351-354.

Nunn, N. & Trefler, D. (2012). The Structure of Tariffs and Long-term Growth. American Economic Journal: Macroeconomics, 2(4), 188-194.