PROS AND CONS OF TARIFFS
Prosand Cons of Tariffs
Prosand Cons of Tariffs
Atariff is a tax or charge levied on imports or exports entering orleaving a particular country. While the sole purpose of the tariff isto restrict trade, there are a number of advantages that accrue withthe imposition of tariffs. Generation of income, restricting tradeand protecting industries are the advantages that accrue with theimposition of tariffs. On the other hand, the imposition of tariffsin an economy carries some disadvantages along with itsimplementation in the economy. In most cases, the increase in theprices of goods and services, reduction of sales volume and traderelations are the cons of imposing tariffs in an economy. Thediscussion on tariffs will illustrate their advantages anddisadvantages in an economy.
TheAdvantages of tariffs
Oneof the main advantages of tariffs is the protectionism function,where they act as tools of protecting local industries from externalcompetition. Most times, consumers will opt for foreign commoditiesthat are produced instead of buying the same commodity producedlocally. This trend forces the government to impose tariffs oncertain goods so as to protect their own domestic industries or atthe same time make extra money (Gandolfo& Trionfetti,2013).It should be noted that consumers are not prohibited in any way tobuy foreign goods, but the art of imposing tariffs on those foreigngoods makes them expensive (Northrup& Turney, 2003).The consumer will have no choice but to buy the locally availableproducts produce by the local industries.
Asa result, another advantage of tariffs, creating jobs is achieved.The imposition of tariffs leads to the creation of jobs in an economydue to the protectionist function of tariffs levied on the imports ofgoods, which can be available in the local market. By imposingtargeted tariffs on the importation of certain products, thegovernment prevents the exporting of employment to other countriesand encourages the creation of jobs in the country. This is becauseimporting goods gives the foreign producers the local market andtakes the market away from the local manufacturers (Gandolfo& Trionfetti,2013).Therefore, the local industries cannot grow when the local populationis creating a market for the foreign producers other than their ownindustries. Imposing tariffs cuts the demand and production capacityof the foreign manufactures and gives the same to the localproducers, thereby increasing local production (Gandolfo& Trionfetti,2013).By increasing production levels in the country, the tariffs end upcreating jobs locally.
Insuch circumstances, it is the responsibility of governments toprotect their domestic employment. As we have seen above, when thereis a stiff competition of imported goods with a country’s domesticgoods, there the domestic industries end up being threatened. Thiscan result in the domestic companies firing their own employees ordeciding to shift to oversee countries, all with the purpose ofcutting costs (Smith,2005).The effect of this will result in a country having an increasednumber of unemployed, unhappy electorates. When ascending to power,many leaders always promise to create employment to their localcitizens, and tariffs open a way of preserving jobs for those whoalready have jobs.
Theimposition of tariffs is also an advantage to the infant industriesin a country, which are competing with established internationalmanufacturers. A government can also decide to impose tariffs solelyin order to protect its own infant industries that are still tryingto pick up (Smith,2005).When a country wants to come up with its own industry, producing andsupplying a particular type of a good, it must protect the localmarket from the dominance of foreign producers. To achieve this, agovernment must make imports expensive. At the same time, thegovernment must make exports to the local consumers expensive for theforeign producer to viable pursue. To do this, the government will beforced to impose high tariffs on similar products produced fromforeign countries and in the process discouraging local consumersfrom buying the product.
Anotheradvantage of imposing tariffs is the protection of consumers fromcheap or low quality products from foreign markets. Governments canalso choose to protect their own local consumers when they feel thatsome imported goods are low quality and promote dumping of cheapproducts from foreign producers (Michaely,2009).In such a case, a government will impose high tariff on the good, sois to discourage foreign producers from exporting them to localmarkets. At the same time, the imposition of a high tariff will forcelocal consumers to avoid them as they would be highly expensive toimport.
Theimposition of tariffs on a product to protect consumers from lowquality products is implemented when a government has no legalgrounds of imposing a total ban on the product (Gandolfo& Trionfetti,2013).This may be as a result of lack of evidence or adherence tointernational trade agreements that may be in favor of the exportingcountry. A good example is where country A imposes a high tariff onmeat or beef from country B. Country A does this if the governmentbelieves that the meat from country B is low quality, but not enoughreason to ban its importation. As a result, the meat imports fromcountry B to country A will reduce or end, because its consumers willfind alternative market to import from.
Anothersignificant advantage of imposing tariffs by a government is thegeneration of income from the fee levied on imports and exports.Income by the government is earned through the specific types oftariffs levied in the form of cash. For instance, the governmentraises income from the Ad valorem tariffs placed by the importingnation while putting into consideration the percentage of the goodbeing imported overall value (Gandolfo& Trionfetti,2013).
Thegovernment also raises income from the specific tariffs, where afixed fee is always levied on any amount or value of a good beingimported. For example, a country could be charging $500 for all carsbeing imported into its market. The tariff is always flexibledepending on the type of good. For instance, all fresh fruitsimported could be levied at $10 while fresh animal products beingimported could be levied at $30. All this translates into income forthe government.
TheDisadvantages of Tariffs
Oneof the disadvantages of tariff is inefficiency of local industries,particularly when the tariffs are used as tools for protecting localindustries. When local industries are protected from foreigncompetition through tariff imposition, they face an easy tradeenvironment which may make them compromise on quality(Baier & Bergstrand, 2001). Inthis case, we can see that the art of imposing tariffs on foreigngoods can result to the local industries to be less efficient as theyare not subjected to eternal competition. At the same time, tradewars might arise between nations where the foreign nation might hitback by imposing their own tariffs on all imported goods from a givennation.
Anotherdisadvantage of imposing tariffs is the impact they have on thebilateral and multilateral trading relationships with othercountries. The imposition of a tariff may induce a retaliatoryrelationship where the concerned countries hurt each other’s tradeby imposition of tariffs on the other country’s exports (Gandolfo& Trionfetti,2013).This may be as a result of a country being motivated to imposetariffs as a retaliation strategy. A country may think that anothercountry has not played by the agreed rules and thus is forced toimpose high taxes on all imported goods entering from the othernation. Retaliation also comes in handy when another nation simplydecides to go against the host nation on foreign government policies.
Anotherdisadvantage of tariffs is that they create a cost aspect in theirimposition. For tariffs to be effective, they require a country toincur a cost for their imposition to be implemented. This cost is inthe form of employees for tax authorities, tariff infrastructure andsystems put in place (Gandolfo& Trionfetti,2013).The disadvantage comes where the costs incurred outweigh the benefitsgenerated from the tariff. For example, if a tariff meant to protectdomestic producers leads to high administrative costs of imposing it,it ends up being a disadvantage. This may happen where with noreasonable competition, the price of commodities will rise, whichwill also guarantee the sales of those producers to also rise.
Anotherdisadvantage of tariffs is that they can lead to reduced employment,instead of creating or protecting local employment. Tariffs may limitthe importation of new technology and production potential to acountry, especially tariff levied on machines, raw materials andentrepreneurial equipment(Baier & Bergstrand, 2001). Ifa tariff is imposed on such goods or resources, local productionreduces as producers end up relying only on the local technology. Ifthis happens, the need for the domestic producers to employ moreworkers reduces, which will mean that the jobs will reduce in thecountry (Michaely,2009).As a result, the employment in the country reduces or stays at theold low level, other than creasing through the use of foreigntechnology.
Onesuch good example that can show how bad tariffs can affect acountry’s economy is the imposition of tariffs on the imposition ofsteel. This will have the short run of benefiting the local producerswho will benefit from high prices to a point that they can even makehigh profits. But in the long run, the increasing cost associatedwith steel will make the cost of production in the economy high. Thelarger cost incurred are then distributed evenly to all consumersthrough high prices (O`Rourke& Smith, 2007).In addition, the production of basic goods will reduce, since steelis used in most factories. The infrastructural development willreduce as almost all industries use steel from buildings, railway,communication, and energy industries among many others. The impact isa crumbled economy, which will rely on imports to sustain itsconsumer needs.
Anotherdisadvantage of imposing tariffs is the possibility of hurting theeconomy of the country by reducing the quantity and gains of thecountry’s exports. Remember as all this is happening, the tariffincreased and this means that the government is generating moreincome to benefit the economy. The consumer will be left with onlytwo viable options, either to buy less of those expensive goods orseek solace in buying less of other goods. With this increase inprice would mean that the consumer income will be deemed to bereduced.
Moreimportantly, imposing high tariffs on certain goods discourages theirexportation to export and reduces the quantity of exports. This hasthe negative effect of reducing the amount of revenue a governmentcollects on such commodities (Jones& Martin, 2008).At the same time, reduced exports mean that the country’s foreignexchange will reduce. As a result, both the balance of trade andbalance of payment gets affected negatively, and reduces.
Anotherbasic disadvantage of tariffs is that they make life expensive forlocal consumers by increasing the price of the products. As far astariffs are concerned, the consumer is always on the receiving end.This happens because the proportion of tariffs levied on imports istransferred by importers to the consumer in terms of a high price(Baier,& Bergstrand, J. (2001).The only time that consumers can be said to benefit from tariffs iswhen in the long run, the domestic industries use the advantage ofthe tariffs to improve on the quality of the production instead ofrelaxing.
Itis therefore a disadvantage that consumers benefit from the effectsof tariffs, but at a cost (O`Rourke& Smith, 2007).This happens because tariffs are designed to mostly favor the localproducers and the government. When tariffs are imposed on certaingoods, they have the impact on making related domestic production tobe favored and not the consumers. On the other hand, imposing oftariffs on certain goods ensure that the government benefits directlythrough revenue collection and not mainly consumers.
Theimposition of tariffs has both advantages and disadvantages to theeconomy, the producers, consumer and the government. Imposing tariffsearn the government income and gives it a tool to protect localmarkets and industries from foreign markets. Imposing tariffs isadvantageous to consumers as they are protected from low qualityproducts from foreign producers. At the same time, tariffs protectproducers from competition from foreign products throughprotectionism policies. However, tariffs attract a cost in theircollection, reduce exports and may limit the introduction of foreigntechnology. At the same time tariffs may end up punishing the localconsumers as they are transferred in terms of prices. Despite thediscussed disadvantages, tariffs are not only important but necessaryfor an economy and their advantages prove the reason why they shouldbe levied.
Baier,S., & Bergstrand, J. (2001). The growth of world trade: tariffs,transport costs, and income similarity. JournalOf International Economics,53(1),1-27.
Gandolfo,G., & Trionfetti,F. (2013). InternationalTrade Theory and Policy.New York: SpringerScience & Business Media
Jones,V., & Martin, M. (2008). Internationaltrade.[Washington, D.C.]: Congressional Research Service.
Michaely,M. (2009). Tradeliberalization and trade preferences.Hackensack, N.J.: World Scientific.
Northrup,C., &Turney, E. (2003). Encyclopediaof tariffs and trade in U.S. history.Westport, Conn.: Greenwood Press.
Smith,J. (2005). In praise of tradeoffs. BMJ,330(7498)Retrived From, <http://dx.doi.org/10.1136/bmj.330.7498.0-g>29 October, 2015