Pros and Cons of Tariffs - Essay Example

Pros and Cons of Tariffs Pros and Cons of Tariffs Tariffs are customs taxes levied by a particular country on its imported goods, usually applied as a percentage of the total cost of the products (McEachern, 2015, pg.1). The result is the raising of prices of the import, and this gives advantage to the locally produced products. Tariffs also known as custom, import duties, or import fees are generally barriers to trade that are protect the locally produced goods and promoting domestic industries. In the end, this enables local industries to survive stiff competition, which foreign industries might offer in the local market if allowed to trade freely. Functions of Tariffs Tariffs serve particular functions in a given country. These include protection of the domestic industries and providing an alternative means of solving trade distortions. It also serves as a source of revenue for the country that levies tariffs on its imports. In addition, tariffs is a tool of protecting domestic industries by changing the conditions under which goods compete in such a way that competitive imports are placed at a disadvantaged end as compared to locally produced goods. Tariff quotas are used also in striking a balance between market access and protection of domestic industry. They work by assigning duties to law duties to imports up to a certain level and the higher rates to any imports that exceed that level. There are alsotariff rates. Tariff rates are the rates at which tariffs are imposed. An imposition of tariff has the potential of reducing the welfare of the world economy. One of the basic components of tariff system is tariff classification. National tariffs are organized in such a manner that they consist of tariff classification numbers that are assigned to goods and corresponding tariff rates. The other component of tariffs is valuation of goods for tariff purposes. The effects of import tariffs cannot be under estimated for it raises domestic prices in the country imposing the tariff. In countries that do not have an influence on the international prices, the amount of the tariff however in countries that have an impact on the international prices, the prices are less than the amount of tariffs due to the fact that part of the tariff is reflected in a reduction in international prices. Placing tariff on an imported good has a number of outcomes, which are quite advantageous to the home country. Advantages of Tariffs Firstly, it promotes domestic products. When a government choose to place a tariff on an imported good, the producers in turn lowers the prices of the locally produced goods. This will make the foreign goods more expensive and hence they become less competitive in the market. This ensures continuity in the local industries. In addition, it increases government revenue. The government of every home country collects revenue which willthen be used to support its function. This helps in improving government budget. In addition, domestic producers within the domestic market gain a lot when government imposes tariffs on the imported goods. This is because they will get higher price for the products they produce and hence they will end up selling large quantities as well as receiving more product surplus. In addition, it helps in solving eco-dumping. This is because tariffs address harmful environmental production, especially among the overseas countries that are used to dumping their goods in the local markets. This helps in promoting and ensuring environmental equality and welfare. It also helps in protecting and preserving domestic employment. Tariffs levies are often published publicly. In case there is a possibility that foreign goods will become more competitive than the local ones, then the local industries are in the risks of closure. These local industries are sources of employment to many locals and if they will be close down it will render them jobless. This case has been in a reverse session, and the only weapon is tariffs. For that reason, tariffs protect and promote employment. The government may use tariffs also to protect the consumers or its citizens especially from harmful goods. For example, the government can levy high taxes to foodstuffs for instance, meat if it feels that it is not safe or it may be contaminated with disease. Use of tariffs also can come in time when the government would like to protect local infant industries against stiff competition. Many developing nations employ the Import Substitution Industrialization (ISI) strategy. The government may even levy tariffs of goods in industries they would like to invest in the country. This will provide local industries an advantage of production of cheap goods and hence they will be more competitive than industries importing goods. This will promote employment as well as revenue. Moreover, they help the government to establish controls and checks against aggressive trade practices by the foreign firms. International competitors or sellers may decide to employ aggressive tactics in trade for example planning to flood the local markets with their goods in order to gain market share and put the available domestic producers and firms out of business. The government may therefore use the tariffs to reverse the situation. It also boosts environmental concerns the government might have. If the government sees that the foreign goods’ existence in its economy does not adhere to the environmental concerns, then it will take actions to prevent. If the foreign goods therefore do not adhere to the environmental standards then government will prevent them from entering the local market easily using tariffs. If the goods are not safe for consumption then they will increase the tariffs hence preventing the foreign firms from entering the local market easily. The government to secure the crucial and important industries in its economy furthermore, can use tariffs. One of the common examples is the defense industries. Such industries are always seen as vital and the most important in an economy therefore they usually enjoy some of the significant levels of security and protection. For instance, United States of America is well industrialized but it always protects all her defense-oriented industries. Countries may also set tariffs as retaliation if they feel that the partner whom they trade with has not fulfilled the set by rules, has gone against the set rules, or even has infringed against her rights of trade. This can also be used if a country in partnership goes against the domestic country’s foreign policy. Even though tariffs have advantages, they also have some limitations on the economy. Disadvantages of Tariffs First is that, they discourage trade. This is because individuals especially businesses and government will avoid tax (Asakura, 2003, pg.3) stated that “when the domestic consumers decide to finally buy the cheap local products, the foreign businesses will become disadvantaged and even possible withdrew from the economy”. This will possible mean that they will stop trading with the country. This will lead to less trade within the country. However, foreign traders will be forced to reduce their own prices if in case they would like to compete with the local industries. Furthermore, these foreign investors may resort to import their goods to other countries. A reduction in trade also causes producers to reduce their production of their goods, which could lead to workers losing jobs in the producing country. Secondly, it reduces consumer choices. One of the best benefits enjoyed by the consumers in a market with variety goods is that the consumers will have variety of choices to make. When tariffs are imposed, the goods that are going to be available in the market will be few hence limiting the consumer’s choice. Furthermore, the domestic industries may not be able to produce some of the varieties produced by the foreign firms hence robbing off the consumers with the opportunity to purchase the said products. If the tariffs charges also keep on rising, it will cause an imported inflation. Inflation is a situation where the prices of the goods and services within an economy skyrockets or shoots up. If tariffs are high, it means that the foreign goods might be so expensive especially if they are the best within the local market. This will cause imported inflation, as consumers will have to buy foreign goods at high prices. Tariffs may also make the available local industries less efficient because of lack of competition. This may lead to production of reduced quality of local products. Consumers will therefore suffer, as they will have to consume the same goods. These will reduce the standards of living of the locals. Moreover, the foreign firms may decide to divert their goods to other nations but in return they also increase tariffs on the goods exported into their own home country (Aaronson, 2011, pg.3), illustrates that this will “fuel rivalry between the two nations especially in the business world” . This will increase the cost of doing business also on exports. Therefore, the exporters will have to look for ways ofcutting their production costs in order to meet the competitive nature of the foreign market. This might also compromise on the quality of the products they produce. In addition, when tariffs are charged on the foreign goods, they will have to increase their prices. This increased cost will be transferred into the local consumers. According to Brown (2003), if the goods are so much needed then it means that the local consumer will have to be exploited (pg.3-4). This will cause economic difficulties among the local. Moreover, some of the consumers might even fail or not have an ability to buy the goods imported. This will eventually decline the standards of living among the locals. In addition, many trading blocs tend to instigate very high tariffs on the imported good. This has tended to restrict the possibilities of free trade ever occurring. This therefore undermines the main goal of World Trade Organizations. Conclusion In conclusion, a country can enjoy many advantages when it applies tariffs. Tariffs are among the top most debated economic actions of protectionist a country can embrace. A bright economic business environment is achievable if the government uses the two protectionist policies. If they fail to do so then, the business world will miss the most crucial and important policies of international trade. Furthermore, as far as tariffs are concerned, every government needs to take note of the effects and impacts of tariffs towards its locally produced products. It has to weigh whether they will be able to maintain the situation after they have used these tariffs. These will ensure that the locals who are the consumers of the products in exchange do not suffer as well safeguarding the important aspects of the country’s economy. References Aaronson, S. A. (2011). Taking Trade to the Streets: The Lost History of Public Efforts to Shape Globalization. Ann Arbor, MI, USA: University of Michigan Press. Asakura, H. (2003). World history of the customs and tariffs. Brussels: World Customs Organization. Brown, A. G. (2003). Studies in International Trade Policy: Reluctant Partners: A History of Multilateral Trade Cooperation, 1850-2000. Ann Arbor, MI, USA: University of Michigan Press. McEachern, W. A. (2015). ECON macroeconomics (4th Ed.). Stamford, CT: Cengage Learning. Read More