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Tariff and its Pros and Cons
Tariff refers to a government imposed tax on movement of goods across a political or economic boundary (Gillespie & Hennessey, 2015). Tariff is also considered as custom, import fees, or import duty. Tariffs are rarely imposed on exports. Tariff is usually applied as a small percentage of the overall cost of the goods, including insurance and freight charges. On average, it is about 5%, but tariff rates can vary in different countries depending on the product the country want to protect. Tariffs are either completely or partially removed in between countries having free trade agreements with each other. The overall influence of the tariff on a country can be estimated by considering the loss of consumers and the profits that mount up to domestic companies, producers, and the government (Vaidya, 2006). Import tariffs are found to have positive as well as negative effects on economy (Gillespie & Hennessey, 2015).
When "small" countries imposed tariffs, it would not affect the foreign price of products. This is due to the fact that the country imports a very small amount of the good, and its action would have no effect on the price of the product across the globe. On the other hand, if the tariff is imposed by a "large" country having a huge share of import of a product, it could result in decrease in the price of the product across the globe. This thing is helpful for consumers but it could affect the company producing that product (Vaidya, 2006).
Pros of Tariffs
Pros of tariffs are those points, which are in favor of government imposed taxes on imports of goods.
Protection of country's products
Tariffs are helpful in giving an advantage to products of a country. They can help a country's manufacturers and workers by protecting them from competition with foreign businesses. In the long run, tariffs are thought to help consumers by protecting domestic industries. This is due to the fact that domestic production could be improved and become more attractive for consumers as compared to imports. This is also known as protective tariff. In this case, we can consider an example in which a piece of cloth costs about $5 in U.K. and the same amount in the U.S. American government can protect the domestic industry by imposing a tariff to increase the price of British cloth for people living in America. This is showing that as a result of tariff producers of a country are better-off.
Increase in the price or value of the product of producers could help in increasing producer surplus in the country. Existing firms would also be able to increase the output as a result of increase in value of their products and would also be able to establish more companies. This thing could also help in increasing employment opportunities.
Improvement in government's revenue
Tariffs are also helpful for a government to improve its economy by increasing its revenue, though it is a small percentage of total tax revenue. Governments can use the revenue generated from tariffs in the completion of economic and social goals. Countries can also use the revenue in the expansion of infrastructure.
Reduction of undesirable activity
Tariffs can also help in reducing the undesirable activity as, for example, it can be applied to the goods that are considered harmful for the society such as tobacco, alcohol, gambling, and drugs. In this case, it is considered as one of the most popular forms as compared to other taxes. By increasing the cost of unhealthy behavior, countries can also contribute towards a healthier society. It is also considered that consumers of alcohol and tobacco result in higher financial burden on society by forcing it to pay for medical treatment of conditions caused by the consumption of such undesired products, so tariffs can also help in reducing that burden.
Cons of Tariffs
Cons of tariffs are those points, which are against the government imposed taxes on imports of goods.
Decreasing the choice for consumers
Tariffs can hurt the consumers of a country, who have to pay more on purchase of their favorite products. This condition can become worse, when the country's manufacturers and producers are unable to develop a product similar to the imported product. Moreover, increase in the costs of imported products results in the decline in consumer surplus.
Reduction of the trade and business
Tariffs can also cause reduction in the trade as well as business as a result of an increase in prices of products and materials. This reduction in trade can also result in the decrease of business with those countries, whose products' sale have been reduced in the country due to increase in prices. Overall reduction in the trade causes manufacturers and producers to develop less of their products resulting in decreased number of jobs in the developing country. For example, it was found that computer manufacturers started thinking of shifting their production facilities to other countries, when the U.S. Department of Commerce increased taxes on advanced flat screens for laptop computers. Such kind of shifting could hurt the business and decrease the number of jobs (Gillespie & Hennessey, 2015)
It is also said that reducing or restricting the competition with foreign businesses or companies can result in inefficient firms or businesses. In the long run, this phenomenon can result in decline in necessary improvements that could be achieved in the presence of tariffs.
Decrease in welfare and negative impact on exports
Based on economical perspective, tariffs decrease the welfare as they limit the trade as well as competition, preventing the achievement of specialization and scale economies leading to inefficiencies in resource allocation. Tariffs on necessary products can also result in discrimination between the rich and poor people. So, poor people often try to reduce this discrimination by paying a greater amount of their earning in the form of tax.
Experts are also of opinion that eventually, tariffs on imports can negatively affect a country's own exports by way of a pass-through effect. It is clear that as a result of tariffs, imports decline resulting in the decrease in the use of foreign exchange to purchase the items leading to a decline in the demand for foreign currency. This results in a comparative increase in the currency of the importing country in the foreign exchange market, thereby increasing the expenses of exports (Vaidya, 2006).
Increased prices of domestic products
Experts have also reported that tariffs cause increase in domestic prices of certain products. Those increased prices can be "passed on" to other goods and services in the country, whether they are traded or nontraded goods or services, resulting in higher country-wide prices (Vaidya, 2006).
Trade wars between countries
High tariffs can also result in trade wars between countries (Reagan, 1989). These trade wars can occur in the form of trade disputes between nations and can also affect trade agreements and negotiations, and sometimes result in disagreements. These disagreements can also hurt the incomes of the countries involved in disagreements or disputes. It has to be considered that trade can only work when countries have a fair agreement of import and export.
Unlawful trading and "sinful" behavior
Unusually high amount of tariffs can result in an increased level of unlawful trading in the form of smuggling as well as black markets. It is also thought that the government can start showing high level of reliance on the revenue generated from increased amount of tariffs, thereby encouraging the "sinful" behavior to regulate the revenue stream.
Concluding Remarks
Tariff is one of the good revenue sources for the governments but an in-depth study of tariffs is important, so that it would not become a problem for the people living in the country and it would not affect the competition.
Overall welfare effects of the tariff on a country is evaluated by summing the gains as well as losses to consumers, producers, and government of that country. Tariff rates have to be estimated by considering these gains and losses. It has been found that if tariff is more than the optimal rate, it results in decline of national welfare. With increase in tariff, level of imports also decline, and at a significantly high tariff, imports could be completely eliminated, thereby prohibiting trade and business. Usually, analyses show that tariffs are helpful and beneficial for the domestic producers as well as governments but they hurt consumers, and overall negative effects are shown by a tariff on the importing country. Moreover, "small" countries face more problems with tariffs, and with increase in tariff, national welfare show larger decline.
References
Gillespie, K., & Hennessey, H. D. (2015). Global Marketing: Taylor & Francis.
Reagan, R. (1989). Public Papers of the Presidents of the United States: Ronald Reagan, 1987: Best Books on.
Vaidya, A. K. (2006). Globalization: Encyclopedia of Trade, Labor, and Politics: ABC-CLIO.
