How Do Tariffs Affect Different Sectors of an Economy - Coursework Example

How do tariffs affect different sectors of an economy Are tariffs ever effective and justified Is there a better policy A tariff is a tax or duty placed on a foreign good by the domestic government. Tariffs are derived on the basis of percentage after using a formula. Tariffs rates differ from goods to goods unlike sales tax. These rates are not applied on local goods. Mike Moffat (2003) in his article "The Economic Effect of Tariff" tells us why governments impose tariffs: To protect local industries from foreign competition. To protect aging and inefficient industries from foreign competition. To protect from dumping of local companies by foreign ones. Tariffs are one of the means of adjusting current account deficits, but they cannot be freely used to adjust the balance of trade as international organizations like World Trade Organization and the International Monetary Fund outlaw their imposition in certain cases. Tariffs we can say have generally fallen in the post World War 11 period as the industrialized world has moved to desirably free trade between organizations. Tariffs do not cost too much to the economy. World Bank estimates that if all these tariffs were removed, the global economy would increase by 830 billion dollars by 2015. The economic effects of tariffs are on those countries, which are either imposing tariffs, or tariffs are being imposed on them. Foreign tariffs on a country increase the cost of domestic producers, which causes them to sell less in those foreign countries. According to Robert Longley. (2002). He states in his article US Nails Tariff on Canadian Lumber the American tariffs have cost the Canadian Lumber producers around 1.5 billion Canadian dollars. This has resulted in the reduction in production and cut down of jobs as the demand of product goes down. This all impacts other industries and overall impact the economy of the nation. The country who is imposing tariffs is also affected as the cost of it outweighs the benefits. Tariffs are bad for domestic producers as it causes reduction in competition, allows prices to rise due to reduction in competition, the sales may rise too as the competition is low. The demand may increase due to which more workers need to be recruited. Consumer spending may increase too. Hence the tariffs also increase government revenues that can be used to the benefit of the economy. There are also costs to tariffs. When the country, which is imposed with tariffs, brings the foreign products in, the overall cost of that product rises. With high prices people are less willing to buy that product. Now here the foreign country sees a decline in the demand of its products. the domestic producers of the foreign country decrease their production which overall affects the economy of that foreign country. When a foreign country imposes tariffs it forget that the same country would also impose tariffs on their export of products. Therefore we can say that tariffs overall harms both the concerned countries. In the year 2000 President Bush raised tariffs on imported steel goods between 8 and 30 percent. The Mackinac Center for Public Policy cites a study which indicates that the tariff will reduce U.S. national income by between 0.5 to 1.4 billion dollars. The study estimates that less than 10,000 jobs in the steel industry will be saved by the measure at a cost of over $400,000 per job saved. For every job saved by this measure, 8 will be lost. All the studies up till now very well prove that tariffs harm the economies more than benefiting them so the question that arises is why do countries impose tariffs Well the logic is that if one thing is harmful to A then it is somehow beneficial to B. Even though A would be affected largely than B's benefits, but this is how the economics go. When the tariffs imposed are calculated in terms of individuals within a country, the amounts are very low. Nobody would want to fight over such a meager amount. But those individuals who are at a loss and even if they would fight over their loss, they would be benefiting the company B. There are also gains of tariffs imposition. We don't know how many industries would be closing down or how many jobs would be lost if the tariffs are not enacted by the government. Normally when the gains are looked at, the costs of tariffs get forgotten. Europe is fighting politics with politics: The European Union is threatening $2 billion in sanctions against 361 products, from Florida orange juice to Wisconsin-made Harley-Davidson motorcycles, to textiles made in the Carolinas - all states where Republicans and Bush could feel election heat. Example: Telecommunications Tariffs The purpose of telecommunication tariffs is to cover the cost of service to the provider. We know that if the telecommuter would not recover its cost the organization would go bankrupt. Tariffs are also used to cover maintenance, additional research and other indirect costs associated with providing the service. However, telecommunications service providers have to be careful not to over-price each service, as prices have a direct influence on demand for that service. Modern Tariffs The Encyclopedia says that the tariffs that are imposed today are of two types, a tax levied on the quantity, whether by weight, size, or number, of the goods; or ad valorem duty, a percentage of the foreign or domestic price. The ad valorem duty is generally considered to be preferable but more difficult to levy, requiring complex procedures to determine the value of goods. Tax levied duties are best applied for protectionist purposes, since their size varies inversely with the prices of imports. For example, an import taxed at $5 per ton, and costing $100 per ton, may have an effective duty of 5%. However, if its price drops to $80 per ton a threat to domestic producers the effective duty may rise to more than 6%. Certain tariffs are also designed to offset dumping. Encyclopedia further says that since World War II, free trade is being favored more. Through instruments such as the most-favored-nation clause and the reciprocal trade agreement, two nations may agree to lower their respective tariff barriers. More comprehensive agreements, such as those of the European Union and other customs unions, lower or even eliminate tariffs among groups of nations. Finally, the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), have since the 1950s sponsored a number of initiatives for lowering the customs duties of most major trading nations. The United States has participated in the movement toward freer trade by lowering its customs duties from the high rates of the Hawley-Smoot Tariff Act (1930); by playing an instrumental role in the several GATT tariff initiatives, including the Uruguay round (1986-93), which created the WTO; and by signing (1992) the North American Free Trade Agreement (NAFTA) with Canada and Mexico. Tariffs as trade barriers Tariffs are one of the reasons of trade barriers which in general term is any government policy or regulation that restricts international trade, the barriers can take many forms, which also include Import duties, Import licenses, Export licenses, Quotas, Subsidies and Non-tariff barriers to trade Tariffs like most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results. Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency, this can be explained by the theory of comparative advantage. In theory, free trade involves the removal of all such barriers, except perhaps those considered necessary for health or national security. In practice, however, even those countries promoting free trade heavily subsidize certain industries, such as agriculture and steel. Examples of free trade areas are: North American Free Trade Agreement (NAFTA), European Free Trade Association, European Union (EU), and South American Community of Nations. There is a better policy Frank William Taussig. (2000) in his essay in the encyclopedia Britannica states about free trade as a better policy, it says that the free trade policy is one in which the government does not discriminate against imports or interfere with exports. A free-trade policy does not necessarily imply that the government abandons all control and taxation of imports and exports, but rather that it refrains from actions specifically designed to hinder international trade, such as tariff barriers, currency restrictions, and import quotas. Wikipedia in Encyclodictionalmanacpedia. (2006) gives some alternatives to free trade: Tobin Tax A Tobin tax is the suggested tax on all trade of currency across borders. This is supposed to put a penalty on short-term speculation in currencies. Fair trade The fair trade movement, also known as the trade justice movement, promotes international labor, environment and social standards for the production of traded goods and services. The movement focuses in particular on exports from the Third and Second Worlds to the First World. Balanced trade Balanced trade is an alternative economic model to free trade. Under balanced trade, nations are required to provide a fairly even reciprocal trade pattern; they cannot run large trade deficits. If deficits appear, the surplus nation must find a way to balance out trade or risk sanctions, fees, or quotas. Critics say this may discourage innovation as one country may reduce its efforts to produce products needed by the other. Free Trade Advantages A Harvard study which examined data from developing nations over the period 1970 to 1990 found that those with open trade policies registered economic growth at an average rate of 4.5 percent annually -- compared to only 1 percent among those with closed borders. And among developed nations, the Harvard study found GDP among those with open policies during the same 20-year period grew an average of 2.3 percent annually -- contrasted to growth of only 0.7 percent annually among those with restrictive policies. Free trade and its benefits. Free trade means that you will not have high tariffs and barriers. There is a tremendous economic benefit to the competition by being able to buy overseas. The other economic argument is that in order to keep a product out, the government can put on a tariff, a protective tariff. There is really no need for reciprocity. Free trade is beneficial because it is a moral right. Free trade is beneficial because there is an economic advantage to buying products at a certain price and the competition is beneficial. There really are no costs in the long run. Free trade does not require management. Free trade does not have any interference. There is no need for an international management. It opens up the doors to subsidies. Conclusion Recollection all the information gathered we can see that how economy is badly affected by the imposition of tariffs. The alternatives are being considered today. Mike Moffat (2003) also writes that the US has proposed World Trade Organization to remove all tariffs from industrial and consumer goods by 2015. This would benefit both developed and developing countries. The proposal that US has given would eliminate tariffs on the nearly $6 trillion in annual world goods trade, lifting the economic fortunes of workers, families, businesses, and consumers. A tariff is a tax. We cannot think of it as doing something good. A tariff is a tax on the consumer. The competition is what really encourages producers to produce better products at lower costs and keep the prices down. In case of free trade, producers do not enter into free trade for the benefit of somebody else. We also know tariffs play some role in the economies of the countries, but why should the consumers suffer The alternative available for tariffs as stated above, free trade, is said to serve well both for the producer and consumers. It also helps in the economic growth of countries. Not only that it creates competitions within products. Such competitions make organizations more stronger and keep the industry active and on their toes on a continuous basis. References 1. Mike Moffatt. (2003). Tariffs: Costly Control - Arkansas Steel Products Industry. Retrieved November,22nd 2006, from http://economics.about.com/b/a/022948.htm. 2. Frank William Taussig. (2000). Essay from the Encyclopedia Britannica Retrieved November 22nd 2006, from http://www.econlib.org/library/Taussig/tsgEnc1.html. 3. Robert Longley. (2002). US Nails Tariff on Canadian Lumber Retrieved November 22nd 2006, from http://usgovinfo.about.com/library/weekly/aa032202a.htm. 4. Robert Longley. (2002). US Proposes Tariff-Free World to WTO. Retrieved November,22nd 2006, from http://usgovinfo.about.com/library/weekly/aatariff_free.htm. 5. Encyclodictionalmanacpedia. (2006). Tariffs: Retrieved November 22nd 2006, from http://www.answers.com/topic/tariff. 6. Mike Moffat (2003). The Economic Effect of Tariff. 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