Tariffs

Tariffs are government-imposed customs duties levied on imported commodities. This is calculated as a percentage of the total cost of the product, which includes insurance and freight. The inclusion of tariffs enhances the price of imported items while making domestic goods cheaper. As a result, they are utilized to safeguard native producers and industries by making imported items more expensive than locally produced goods. Tariffs are employed as trade obstacles in order to protect domestic industries. Tariffs are sometimes known as import charges, customs, or import fees (MisesInstitute, 2017).

Tariffs can be dated back to the 18th century in the United States. Following the declaration of independence, the first Congress of the United States passed the first law linked to the tariffs. The first act was that of 1789 that United States imposed giving way for the goods coming into the country as imports to be taxed at 10%. This act was aimed at raising revenue for the government and at the same encourages production of goods domestically within the country. Priors and during the first and second world wars, tariffs were very important in financing these wars. In 21st century the use of tariffs continued with major amendments being made to make it less controversial. This is the time when several countries entered into trading agreement either to remove tariffs among their trading block or reduce the rate to a certain agreed one to encourage trade. This paper will discuss the pros and cons of usage of tariffs and their impact on different aspects (MisesInstitute, 2017).

Tariffs were created with key aim by the governments to finance their operations they were highly dependent on it. For instance, when the US government started imposing tariffs in 1790’s, they relied on it almost 95% in order to finance its operations. This declined as the years went by as other ways of financing such operations such as property taxes, sales taxes and pay as you earn taxes among others were discovered. By 2010, US only relied slightly above 1.2% on tariffs as its source of revenue for Federal Budget. The ongoing usage of tariffs as source of revenue has continued to bring in debate on the negative results of its usage. One of the most cited consequences of continued usage of tariffs is that is results into increase on the prices of basic goods and services. The taxation of the goods coming into the country is known to lead to increase in their prices as such represent extra burden to their consumers. This is negatively affects the citizens of countries which greatly rely much on imports as they definitely pay higher prices to get certain goods and services (MisesInstitute, 2017).

The facts that imposing tariffs on products leads to increase in their prices could greatly hurt the users of those goods which could not be produced internally. This is more so for countries which lack necessary technology and capacity to undertake particular productions. Such move is cons to the poor and middle income earners; who are financially disadvantaged to afford the high prices. Tariffs imposed are not linear among the different industries hence some are may feel that they have not been treated fairly. This implies that tariffs will increase certain inequality in the economy (Blanchard, 2007).

Imposition of tariffs is known to affect the internal foreign policy of a particular country. For instances, in the event US raises taxes on electronics from China, it is more likely that Chinese government is going to reciprocate by increasing the tariffs on imports from US. This could trigger trade war hence negatively affecting the bilateral relationships between the two countries. Trade war is a negative impacts linked to the use of tariffs. In 2005, the European Union and China were involved in trade war and dispute as a result of tariffs imposed in their textile sector as the arrangement had expired.

Tariffs can negatively affect the growth of industries in small economies as they will make their products uncompetitive compared to the countries with advanced technologies and economies of scale. This implies that it will be hard for such smaller countries to export to larger and developed economies and such could imply it will be hard for such to develop to same levels. This could be worsened by the fact that such big economies could not be having any incentives to sign trade agreements with these smaller countries as they do not matter much to them. To counter this, some countries could plan to lower the quality of their products so that they could sell at lower prices after taxes being imposed on their products. This is to enable them lower the production costs and be able to compete with the developed economies despite the tariffs imposed (Blanchard, 2007).

Tariffs are not healthy for fair competition as they may be used to deny some countries from selling their products in others. Local companies could use the fact that the foreign ones are paying taxes to deny them local markets.

Despite these limitations, tariffs could be used positively in different ways as discussed below. Imposing tariffs on imported goods has proved to be a sure way of protecting local manufacturers and industries from foreign competitors. For example, firms from developed countries could decide to dump their products in less developed one with a plan to sell their. This could lead to less of jobs as the industries could not sustain the competitive force from the advanced economies. To prevent dumping and unfair competition, governments use tariffs on imported products to make them more expensive or of the same price as the locally manufactured hence protect the local industries and hence create local jobs.

Tariffs as used before are still a source of revenue for many governments world over. The taxes imposed on imported goods form a part of revenue for funding important projects. By levying taxes, governments are able to enable the functioning of their economies and governments projects.

The application of tariffs agreements has brought about good relationship among nations. For many years, India and Pakistan have had an overwrought relationship. This has greatly limited the extent of economic cooperation between the two nations. One of the longest lasting agreements of such a nature is on the sharing of river waters that has subsisted since the 1990s. Considering the poor security relationship between both countries; which continue to engage in conflict, some analysts have wondered whether increased economic cooperation can positively impact the security relationship between the two neighboring countries. Economic cooperation initiatives that would benefit both nations would be projects in the energy sector such as interlinking electricity grids and the installation of gas pipelines. Such projects would encourage the development of regional trade and investment relationships (The Economics of Fair Trade, 2014).

The application of tariffs represents a great economic tool that governments globally can employ either to get revenues or protect their infant industries so as to compete in a fair platform with the developed ones. From the discussion, I agree with the use of taxes as a mean to protect local industries because doing leads to creation of employment for the citizens and encourage industrialization. This is so for the developing countries in Africa as they are not able to effectively compete with the foreign companies from China and Europe which makes use of advanced technology in their factories.

References

Blanchard, E., (2007). Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements. The B.E. Journal of Economic Analysis & Policy. Volume 7, Issue 1 2007 Article 54.

MisesInstitute., (2017). American Tariffs and Wars from the Revolution to the Depression. Retrieved from https://mises.org/library/american-tariffs-and-wars-revolution-depression

The Economics of Fair Trade. (2014). Journal of Economic Perspectives, 28(3), 217-236. doi:10.1257/jep.28.3.217