Decision making in trade-DB2 - Essay Example

An investigation into tariffs applied on goods. The term ‘tariff’ may be defined as a tax which is added to imported goods. Sheri Cyprus, author of ‘what is a tariff? (March 14, 2011) explained that tariff regulations are different in each country. She also explained that there are five different types of tariffs which include; revenue, ad valorem, specific, prohibitive and protective. The revenue tariff is one way of increasing funds for the government. For example, let’s say the UK doesn’t grow coffee.

The government would create a tariff on importing coffee and this is how the government would benefit from there. Whilst on the other hand, the ad valorem tariff can be described as a tax that is specifically a percentage of the import value. However, the tariff may be applied in two ways; either charged based on the value of the imports or based on the quantity of goods. Then the ‘prohibitive tariff’ as the name suggests is one marked so high, it either prohibits or lessens the import levels on a product.

Then there is the ‘Protective tariff’. The tariff bears a lot of pros and cons. This type of tariff may either foster the growth of the economy or make goods extremely expensive on the behalf of the customers. The researcher strongly believes that the main reason for high tariffs on agricultural produce is one way of controlling the flow of imported agricultural products. Not only that, it is stratagem used to protect small local farmers from competition from foreign companies. In doing so, competition in this market for farmers would be lessened.

As such imposing tariffs on products is one way to position consumers to support local products especially in domestic countries. The roles played by tariffs have unavoidable effects on prices from the imposition. The foreign exporters keep the price that they charge for the product; however, the domestic price of the imported product rises by the value of the tariff. Local producers competing with these imports may also raise their domestic prices as the domestic price of imports rises. Even though not always the case, but local producers gain from the government’s imposition of tariffs on competing imports.

They attain higher prices for their products, they are able to produce and sell a larger quantity and they receive more producer surplus. “We thus have two domestic winners (domestic producers and the national government) and one domestic loser (domestic consumers) because of the imposition of a tariff.” (‘Basic Analysis of a tariff’, n.d.) Since the goods with the imposed tariff have increased-everything boils down to the consumer to buy less of the goods. More than likely, consumers will be spending less which means domestic producers in other industries are selling less, which may result in a decline in the economy.

Benefits of the domestic production caused by the increased domestic production in the tariff protected industry plus the increased government revenues does not offset the losses the increased prices cause consumers and the costs of imposing and collecting the tariff. Imposition of tariffs which affect consumers and producers will naturally affect the economy. In addition it affects the country imposing the tariff as well as the country facing the imposed tariff. It is easy to determine how a foreign tariff hurts the economy of a country.

Foreign tariffs influence the costs of domestic producers which causes them to sell less in those foreign markets. Let’s say for example, with reference to the softwood lumber dispute, it is estimated that recent American tariffs have cost Canadian lumber producers one and a half billion Canadian dollars. Mike Moffat (the economic effects of tariffs, 2011) declared that producers cut production due to the decline in demand which resulted in jobs being lost. As a result these job losses impact other industries as the demand for consumer products decreases because of the reduced employment level.

In other words, foreign tariffs, along with other forms of market restrictions, cause a decline in the economic health of a nation. On the contrary as well, Moffat also explained that except in all but the rarest of instances, tariffs hurt the country that imposes them, as their costs outweigh their benefits. Tariffs cause domestic producers to now be faced with reduced competition in their home market and the reduced competition causes prices to rise. For a fact we know the advantages and disadvantages of having tariffs.

However, whether or not tariffs are implemented-customers still have to pay the ‘price’. The only thing is imports may provide a variety and stimulates competition-but it is done at the expense of the customer. Based upon the research conducted, it is still hard to determine the necessity of this tax. Works Cited Page Cyprus, S. ‘What is a tariff’, wisegeek.com, (Mar 14, 2011), retrieved from: http://www.wisegeek.com/what-is-a-tariff.htm ‘Basic Analysis of a Tariff’, wright.edu, (n.d.) retrieved from: http://www.wright.edu/~tdung/Chapter7_Pugel.

htm Moffat, M., ‘the economic effects of a tariff’, (n.d.) about.com, retrieved from: http://economics.about.com/cs/taxpolicy/a/tariffs_2.htm