Significance of Tariffs

A tariff is a controlling authority that is imposed on products and services that are either imported or exported, and it is usually centered on a certain sector or product. Tariffs are intended to cause a shift in the balance of trade, often between the country imposing the business and its international trading partners. When a government sets an import tariff, the cost of importing goods and services rises. The additional marginal values imposed by the tariff have an impact on the trade balance, discouraging imports. Products cannot enter a country before the tax is paid and those who evade duties are referred to as smugglers. Many counties opt to regulate international trade using unilateral barriers of a variety of types which includes taxes. This essay will focus on duties, their benefits, the role of international trade agreements and organizations, and why governments impose tariffs.

Over the years a variety of trade agreements have been reached the most significant one is the General Agreement on Tariffs and Trade (GATT). Trade agreements have been used as a method of reducing unilateral barriers ensuring that every party benefits from increased trade. Tariffs can be levied on exports, but it is scarce for that to happen. Countries usually charge different tariff rates which will depend on the industry that is being protected but on average prices are often at around five percent. They also charge extra customs fees, local taxes, and sales taxes which are collected during clearance with customs. It is common for countries to waive off tariffs when there is a free trade agreement between each other. A good example can be the United States which has contracts with over twenty countries which is a good strategy for market entry because costumers in these countries get to pay less for products from the United States as they are tariff-free.

Significance of Tariffs

The main reason for the imposing of tariffs by a government is to raise revenue or to ensure that there is protection for domestic industries from foreign competition. The reason for this is that many consumers choose to purchase foreign-produced goods as they are cheaper. No country prohibits consumers from buying foreign-produced products, but the tariffs make these goods more costly which push the consumers to purchase domestically manufactured goods that have competing prices or are less expensive by comparison. Duties have the ability to make domestic industries less efficient because they are not subjected to global competition. They can also provoke trade wars as exporting countries also put higher tariffs on the goods they import. The following reasons explain why taxes are needed and how they benefit a nation.

Infant Industries

One of the most critical uses of tariffs is to protect early stage domestic industry from international competition. These duties are the same as incubators as they provide local sectors with enough time to establish themselves and grow to the level that it will be able to compete on an international landscape. Many countries that are developing use tariffs to protect early stage domestic industries through the employment of the Import Substitution Industrialization strategy. Governments who have developing economies usually apply tariffs on imported goods from one sector that they want to promote its growth. By increasing the prices of imported goods, it develops the domestic market for products that are produced domestically thus protecting these industries from being forced out of the market by pricing that is more competitive (WHITE, 2017). But critics argue that this type of protectionist strategy revolves around one sector grows without competition; then it might end up producing goods that are of low quality, and the financial aid necessary to maintain the state-backed industry on its feet could limit economic growth.

National Defense

A government may choose to impose tariffs on international competition if a specific part of the economy manufactures crucial products concerning national defense. The reason for imposing this type of duty is so that the government can be able to support and secure domestic production in case a conflict develops. Developing countries also choose to employ barriers as a protection cover for industries that they deem to be strategically important such as the ones that support national security (WHITE, 2017). Many nations view defense industries as being very important to state interests and most of the time they enjoy significant levels of protection. The United States and Western Europe are both industrialized and are very protective of companies that are defense-oriented.

Domestic Employment

The imposing of tariffs has always been highly politicized as the increased competition from goods that are imported can threaten local industries. When there are increased competitions, local companies may lay off workers or move the production abroad in an effort to cut cost, and this directly results in higher unemployment and citizens that are less happy. The domestic industries in their defense blame the cheap foreign labor, and how lack of regulation and poor working conditions have given international companies the ability to manufacture goods at more affordable cost. It is typical of any government economic policy to focus on establishing an environment for their citizens that have a lot of employment opportunities. Governments may choose to use tariffs as a way of discouraging consumption of imports and promote the consumption of domestic goods in an effort to support job growth in a local industry that is struggling (WHITE, 2017).

Aggressive Trade Practices

Some international competitors choose to use aggressive trade behaviors like flooding the market in an effort to acquire market share and put domestic producers out of business. To mitigate the effects of such strategies by foreign entities governments choose to use tariffs as they consider this to be unfair tactics.

Environmental Concerns

If some foreign goods do not adhere to some specific environmental standards, the government may choose to employ tariffs to decrease its consumption. The government will decide to apply a tax on products that they feel could pose a danger to their population. For instance, if South Korea feels that the beef they get from the United States could be having a disease then they may impose a tariff on the specific product.

Retaliation

There are instances where countries set tariffs as a method of revenge when they have the impression that their trading partners have not followed the rules. If a state like France has the idea that the United States has allowed their domestic wine producers who produce sparkling wine to use Champagne it might choose to apply a tariff on meat imported from the United States because the name Champagne is specific to a region in France (WHITE, 2017). To stop the retaliation by France, the United States will have to crack down on improper labeling. The retaliation strategy can also be used if a trading partner does not adhere to the foreign policy goals of the government.

Type of Tariffs

There are a number of tariffs that can be chosen from by a government to apply which include specific duties, Ad valorem tariffs, bound tariff, revenue tariff, prohibitive tariff, and protective tariff.

Specific Tariffs

A specific tariff is a fixed fee that is applied to a single unit of a good that is imported, and it usually varies considering the form of the product. For instance, a country can implement a $15 tariff on a pair of shoes they import and apply a tax of $300 for every computer being imported (WHITE, 2017).

Ad Valorem Tariffs

The phrase Ad valorem is a Latin word that means according to value. This form of tax is applied on a product by considering the percentage of the amount of the good. An excellent example of an Ad valorem tariff is a fifteen percent tariff that is applied on the automobiles from the United States by Japan. Fifteen percent symbolizes a growth in price on the value of the car which means that a vehicle that costs $10,000 will now cost $11,500 to consumers in Japan (WHITE, 2017). This increase in price ensures that domestic producers will not be undercut and it also provides that rates will remain artificially high for Japanese car shoppers.

Revenue Tariff

A revenue tariff is a method in which the government will employ to try and increase their funds. For example, when a duty on the imports of coffee is imposed on countries that do not grow coffee it will steadily raise the flow of revenue.

Prohibitive Tariff

This tariff is put in place to discourage the import of certain goods and services. A protective tax is applied to raise the price of imported products as a measure of protecting domestic companies against competition from foreign markets. Local businesses get the opportunity to compete with the international trade when there is a higher tariff.

Protective Tariff

The purpose of a protective tariff is to artificially increase prices of imports and ensure that domestic industries are protected against foreign competition. Protective tariffs are established to defend sectors within a country. When a foreign nation produces products at a much cheaper price consumers will be more attracted to it making them snub the expensive locally produced items. A protective tariff makes these imported items more expensive enabling the local companies to compete easily.

Bound tariff

The bound tariff is explained as tariffs that a member nation of WTO accepts the legal responsibility not to inflate it above a specific level. Members of WTO to commit blind their tariffs which are during negotiations and the bound rate symbolizes the maximum level of import duty that can be taxed on a good imported into the market. A member of WTO has the ability to apply a tariff which is lower than the bound level. When it comes to tariffs negotiations, it is not only about negotiating the reduction of time, but it is also about settling tariff bindings (WHITE, 2017). Tariff bindings give traders the ability to predict by using putting an upper limit on the amount of duty that can be passed on a product.

Importance of International Trade Agreements and Organizations

The primary purpose of international trade organizations such as the World Trade Organization is to negotiate agreements that are focused towards reducing the barriers to international trade and making sure there is a fair playing field for all which contributes to economic growth and development. They provide a legal and institutional foundation for the enforcement and supervision of agreements, as well as for dispute settling from their application and interpretation (Rao, 2012). The World Trade Organization was created in 1995 to succeed its predecessor GATT. The trade organizations have helped to establish healthy and prosperous international trading systems and have directly promoted global economic growth. Trade organizations ensure the administration of agreements and enforce the reduction of trade barriers of non-tariff strategies that have been accepted by member nations. They also examine the trade policies of members to check if their policies are in line with their guidelines. International trade organizations collect foreign trade information like the WTO which gathers information in regards to export and imports, several trade strategies, and other trade statistics of nations that are members (Rao, 2012). They aid in settlement of disputes as the provide reconciliation mechanism for achieving an amicable solution to trade disputes among member nations. Disputes in trade are in three forms they include violation dispute, non-violation disputes, and a situation dispute or complaints. The WTO uses two primary approaches to resolve conflicts which involve the power based system and the rule-based system.

International trade organizations monitor developments in the economy of the world and provide services of consultancy nations that are registered under it. These trade agreements and organizations are also forums where countries that are members always negotiate on the exchange of trade compromises. It is also a platform that member nations get to deliberate on trade limits in the context of goods, services, intellectual property, among others. The primary goals of the functions of International Trade Agreements and Organizations are to raise standards of living, secure full employment, to enable largely and steadily developing real incomes and demand, and to expand the manufacture of and trade in goods and services (Rao, 2012). These goals can be attained by allowing for the optimum utilization of the resources in the world in line with the objectives of sustainable growth, while focused on protecting and preserving the environment. It is also important to note that these trade organizations and agreements are supposed to help the least developed countries acquire a growing share of the international market.

Who Benefits From Tariffs

Since a tariff is a tax, the country will enjoy revenue increase as imports are welcomed to the domestic market. The local markets also gain because of the decline in competition as a result of the artificially inflated import prices. It is however different for the consumers both individual and businesses as the higher import prices are, the more expensive goods will be to purchase (WHITE, 2017). An excellent example of the effects of inflated imports on consumers is if the cost of steel increases because of tariffs the individual consumers will have to pay more for products that require steel while business will have to pay more for steel than they used to produce goods. Tariffs are designed in a way that they are pro-producer and anti-consumer. Over time the effects of taxes on businesses, consumers, and the government have a tendency to shift. Higher prices for goods have the ability to reduce consumption by individual consumers and by companies. At this point, businesses gain profits, and the government receives revenue from duties. Companies may begin to experience a drop in productivity because there is no competition and they may also experience a drop in output because of the growth of replacement for their goods. The government will experience an impact of subsidies after a period of time through increased prices specifically on foodstuffs results in less disposable income. Tariffs decrease the cost of the goods being imported. As a result, local companies are not pushed to drop their prices from growing competition, and as a result, local consumers are left with the burden paying higher rates. Tariffs also decrease efficiencies by along businesses that would not exist in the market that is competitive to stay open.

Conclusion

Tariffs protect the domestic market as well as establish many economic benefits. Every government when they employ taxes they are usually focused on the well being of its electorates. Tariffs have secured the future of nations that are starting to develop in the international market but still ensuring that those countries that are designed remain successful. Because of human nature, people are selfish to care about others and society as a whole the problem of unconstitutional taxation will be resolved in the designing of the system and those who are paying as well as collecting tax. Groups such as the World Trade Organizations were established to combat unfair trade among international companies. The government and domestic industries get to benefit the most, but the government has ensured to use tariffs to protect their people and local businesses.

References

Rao, M. B. (2012). WTO and international trade. Vikas Publishing House.

WHITE, L. A. (2017). MODERN CAPITALIST CULTURE. S.l.: GARLAND SCIENCE.