The Economic Implications of Tariffs - Coursework Example

Abstract This paper focuses on the economic implications of tariffs. The reasons behind tariff imposition have been highlighted, as well as their implications on foreign investors interested in offering their products in the domestic market. The paper draws attention to the adverse effects of imposition of tariffs by governments on economic growth. It also offers suggestions regarding areas of further research. Introduction Tariffs are government taxes that are obligatorily levied for imported products. They are part of the government revenue sources. The amount of tariff charged on goods depends on its value at the entry of the destination country. Tariffs have adverse effects on an economy. However, governments continue imposing them on investors who import commodities from foreign nations (Gregory 2000 p 16). This essay is a critique of the economic implications of tariffs. It highlights the major reasons why governments impose tariffs on imported goods, which include; protection of the emerging as well as aging and incompetent local firms from unhealthy foreign competition, to enhance sustainability of local companies through prevention of dumping effect from foreign companies which may offer their products locally at an extremely low price that leads to losses by domestic firms (Mansfield and Yohe 23). The essay also presents the negative views of tariffs in regard to promoting trade and economic growth, which have been supported by various organizations such as the WTO and Word Bank. The double impact of tariffs on the economy imposing the tariffs as well the economy on which the tariffs have been imposed is highlighted. The impact of tariffs on the prices of locally manufactured goods, changes in demand for the goods and employment in the economy imposing the tariffs has been illustrated using the United States as an example of an economy imposing tariffs on foreign products from china (Swire 2009), and the Republic of Korea which illustrates an economy that does not impose taxes on foreign products in the domestic market. The essay also indicates the invisibility of the negative impacts of tariffs on the economy compared to the projected advantages. It also indicates the areas that need further research regarding tariff imposition, whereby researchers can search for information from published sources. Reasons Why Governments impose Tariffs One of the major reasons why governments impose tariffs on imports is to enhance the development of the emerging domestic industries to attain a size that able to cope with foreign competition. In other words it is one of the protectionism strategies for protecting upcoming industries. The tariffs may not be long-lived since they only serve the purpose when the industries are beginning. For example, in order to enhance the development of the bio-fuels industry, the U.S government imposed the tariff barrier for ethanol imports from Brazil (Zimmerman 2009). Another reason for imposing tariffs on imports by governments is to allow the incompetent and aging domestic industries to recover without threats from effective foreign competitors. With the emergence of new technologies in the developed countries, the aging domestic industries in the less developed countries tend to face competition as superior products from foreign competitors enter the local market. Governments impose tariffs on imports in order to protect the local firms from collapsing (Mansfield and Yohe 2003 p 81). Dumping is also another problem that governments try to prevent through the application of tariffs. Foreign companies may offer their products at a relatively low price to the extent that the local producers may incur losses if they sell at that price. Dumping may be facilitated by low costs of production by foreign companies making them capable of offering their products at cheap prices. Such a situation presents unfair competition to the local industries, and may lead to their collapse (Stephanie 2000 p 450). The reasons for imposing tariffs are seen as paramount to the survival of local industries. Tariffs maintain job security for the local employees through enhancing their existence in production devoid of competition. They are also a source of government revenue, which is important for financing government expenditure. An increase in the local prices of products due to lack of competition leads to a rise in the tax levied on the local producers, thereby increasing government revenue (Mansfield and Yohe 2003 p 67). However, in spite of these advantages to the government, there are a number of negative implications. Impacts of Tariffs on the Economy Tariffs are known to have adverse effects on economic growth both to the country imposing the tariffs and the country for which tariffs are imposed. These effects have prompted organizations such as Word Bank and the WTO to advocate for elimination of tariffs. For example, Tirschwell (2003 p 56) observes that anticipations of the Word Bank indicate that without the tariffs and other trade obstacles, it would be possible for nations to increase their rate of economic growth. The countries which face tariff barriers usually have a problem marketing their products in the foreign country due to increased prices that lower their competitiveness in comparison to the domestic producers in the target country. The exporting country suffers from lack of market for locally produced products. On the other hand, when foreign companies are unable to produce in a country that imposes tariff barriers, it leads to loss of employment opportunities as they try to reduce the cost of production in that country. This hurts the local economy as foreign investors pull out of the economy leaving skilled workers to depend solely on employment in the local companies. The purchasing power decreases, leading to a decline of consumption of locally manufactured goods. More over, the absence of competition from foreign companies leads to an increase in the prices of commodities in the domestic market, which leads to a reduction in the sales of local firms as demand decreases with an increase in price of commodities. This slows down economic growth in the country imposing the tariffs (Stephanie 2000 p 441). More over, a country imposing tariffs on foreign producers may prompt the imposition of tariffs on them as a retaliatory measure. This may hurt the local producers who may need to export products to foreign countries. On the other hand, efficiency in production may not be accomplished in the country imposing the tariffs as a result of preventing knowledge transfer from foreign investors to the local industries. In a situation whereby the government seeks to protect the ineffective and aging industries from collapse, the local firms may never face the competition required for them to become competitive (Gregory 2000 p 92). An example of tariffs that affect a foreign country targeting the domestic market are the tariffs imposed on Chinese products such as tires in the U.S. market. This has largely affected the Chinese tire producers. To the United States, this tariff will help in protecting employees in the domestic industries from the competitive Chinese firms that may lead to reduced productivity of local firms leading to employee layoff. Swire (2009) observes that China is likely to decrease its tire exports due to these tariffs by 1.7 billion U.S. dollars. Competition for tires produced in the U.S. is likely to go down, thereby raising the prices. On the other hand, the South Korean government encourages consumption of goods from foreign companies, which has led to the proliferation of foreign products in the domestic market. As a result, the local companies have benefited from the knowledge transfer from foreign producers, leading to improvements in local production. The United States leads in the number of foreign producers offering products in the country (Noland 2009 p 98). Tariffs that hindered foreign producers form entering the local market were removed since 1984, leading to enormous benefits in terms of economic growth and employment creation (Stephanie 2000 p 439). The local producers offer quality products at favorable prices as a result of competition from foreign producers. Conclusion Tariffs are used as government tools for regulation of the domestic market to ensure that local investors are protected from competition from foreign producers especially for the emerging and aging industries. Governments also use tariffs to protect local investors from dumping. They are also a source of income for the government. However, in spite of the positive uses of tariffs, there are many disadvantages associated with the imposition of tariffs. The adverse effects of tariffs on economies have been noted by various organizations, including the World Bank as well as the WTO (Tirschwell 2003 p 56). However, the disadvantages that the country imposing the tariffs suffers are more than those of foreign producers to whom tariffs are applied. An economy also suffers the loss of employment when foreign producers pull out because of tariffs. As a retaliatory measure, tariffs may be imposed on the country. Efficiency in production may not be accomplished due to lack of competition. China is one of the economies that face tariff barriers on exportation of tires to the U.S. market. On the other hand, South Korea reaps much benefit from removal of tariff barriers from the domestic economy (Noland 2009 p 112). In my opinion, tariffs need to be abolished due to their adverse impacts on economies, especially on the country imposing them. The more the economy opens up to foreign investors, the more it is likely to advance in terms of productivity and economic growth. They act as a major hindrance for development in the emerging economies that impose tariffs to protect upcoming industries. There are areas for further research, which include; the current trends in imposition of tariffs by economies and the accomplishments of organizations such as WTO and World Bank in advocating for removal of tariffs as well as why economies prefer tariffs to other barriers to trade, such as quotas and non-tariff barriers. References 1. Geoffrey J. A. and Reny P. J. Advanced Microeconomic Theory. Addison Wesley Paperback, 2000 2. Gregory M. N. Principles of Microeconomics. South-Western Pub, 2000 3. Mansfield E. and Yohe W. G. Microeconomics: Theory and Applications, W.W Norton & Company, 2003 4. Noland M. “Restructuring Korea's Financial Sector for Greater Competitiveness, Institute for International Economics”, Working Paper, (2009): 96-114 5. Stephanie S. “The Effects of Structural Change and Economic Liberalization on Gender Wage Differentials in South Korea and Taiwan.” Cambridge Journal of Economics 24.4 (2000): 437-459. 6. Swire M. China Strongly Opposes US Tire Import Duties, Tax-News.com, Hong Kong Sept. 15, 2009, viewed on 20th Oct. 2009 at, 7. Tirschwell, P. "An Emerging Trade Barrier." The Journal of Commerce. 15, (2003): 78-91 8. Zimmerman C. White House Responds to Brazilian Tariff Questions, July 29th, 2009, viewed on 20th Oct. 2009 at, Read More