Pros And Cons Of Tariffs Essay Examples

Customs tariff is a tool of trade policy and state regulation of domestic market due to its interaction with the world market. Despite such a convincing argument of supporters of free trade in the real world import tariffs are used as the main method of state regulation of foreign trade in virtually all countries of the world. Customs duty is imposed on the customs value of the goods - the normal price of the product evolving in the open market between independent seller and buyer, according to which it can be sold in the country of destination at the time of the customs declaration. Tariff escalation as raising the level of customs duties of goods is used to protect domestic manufacturers of finished products and to stimulate import of raw materials and semi-finished products (U.S. Customs and Border Protection, 2004).
There are a number of specific issues related to tariffs. Tariff rate can be so high that will block all imports. Therefore, there is a problem of finding the optimal tariff level that can maximize the level of national economic welfare. Countries can use the tariff quota - a kind of variable duties, which rates depend on the volume of imports of goods: when importing within certain quantities it is taxed at the basic rate of tariff quota and above a certain volume of imports is taxed at a higher rate above quota tariff. Export tariff, which exists in some countries, plays mainly fiscal and balance function (Love & Lattimore, 2009)

Cons of tariffs

Historically, the main dispute between supporters and opponents of protectionism was focused on the discussion of the arguments "for" and "against" the use of tariffs as a means of economic policy. Arguments traditionally given by proponents and opponents of tariffs are used in almost all countries and therefore deserve separate consideration.

Opponents of tariffs usually base their argument on the following:

Tariffs slow down economic growth. Analysis based on general equilibrium theory shows that the economic welfare of a small country is reduced by the introduction of import tariff anyway. Economic well-being of a large country also decreased in all but one case, when the effect of improving the terms of trade covers economic loss arising from the introduction of the tariff. But since the one’s state’s import is other countries’ export, the terms of a country trade can be improved only by the deteriorating terms of trade, and hence the prosperity level in countries that are its trading partners. Therefore, in any case, the impact of tariffs on the global economy as a whole is negative, because they lead to a decrease in the volume of international trade (Bhagwati & Ramaswami, 1963).
The unilateral imposition of tariffs often leads to trade wars that undermine the stability of international trade and the international economy as a whole. Trading partners, to apply unilateral import tariff and to protect domestic producers from the influx of cheaper goods from abroad are at risk to experience the response tariff sanctions, which often affect the basic goods they export. Events can be developed on "action-reaction" as long as the trade is reduced and so the negative economic consequences of this will be so great that the country will sit at the negotiating table and agree on tariff levels that suit each of them (Bhagwati & Ramaswami, 1963).
The tariff increases the tax burden on consumers, who have to buy both imported and similar domestic products at higher prices. Thus part of consumer income is redistributed to the state treasury and their disposable income is reduced. This hidden redistribution of income in favor of the state (especially in poorer countries where per capita income is not very large) can lead to the emergence of new and worsening of existing social contradictions. In addition, the import tariff leads to an overall increase in the price level and, as a necessary consequence, the cost of living in the country (Love & Lattimore, 2009).
Tariff on imported goods indirectly undermines the country's exports, complicating the problem of the balance of payments. In many countries, exports include imported parts and components, and the rise in prices on those imported parts and components increases the cost of production of export goods, which become less competitive on world markets. In addition, the tariff reducing imports (which is the export of another country), reduces its export revenues and, consequently, the ability to import from the first country. Demand for exports decreases, leading to cuts in production and exacerbate the problems of employment. Studies of the import tariff effect on seven Latin American countries exports in the postwar period have shown that at least half of the import tariff nominal size was paid by exporters who suffer from its introduction (Broda, Limão, & Weinstein, 2006).
Tariff leads the reduction in the overall level of employment. Protecting jobs in local businesses that produce goods that compete with imports, import tariff at the same time leads to reduction in employment in the export and other related sectors. Decline in exports due to import restrictions may be so large that the positive impact of the tariff on the level of employment in industries that compete with imports, may be offset by the negative impact on employment in export industries. Moreover, employment in the sector, competing with imports, will require raising their wages because of the rising the costs of production. To prevent the workforce outflow in these industries, export sectors also raise wages, which affect the growth of costs and reduce the competitiveness of their products and, consequently, exports as a whole (Broda, Limão, & Weinstein, 2006).

Pros of tariffs

Despite such a convincing argument of supporters of free trade in the real world import tariffs are used as the main method of state regulation of foreign trade in virtually all countries of the world. Set of arguments in favor of customs tariffs as a means of the state trade policy is very wide, and each country makes a special emphasis on those that are more suited to its local conditions. There are following arguments in favor of customs tariffs.
Tariff is protection of infant industries (infant industry argument). New industries that have only arise in some countries, but already highly developed in the other, need the temporary customs protection. Without such protection, at least for the period of formation, the influx of cheap foreign goods will ruin a new industry, not allowing it to develop (Love & Lattimore, 2009).
Tariffs are means of stimulating domestic production. As the local industry cannot compete with cheaper goods produced abroad where used more advanced technology, so it needs to be protected with import tariff. Moreover, its absence can lead to a loss of jobs as a result of production cuts that will impose an additional burden on the budget, making it necessary to pay unemployment benefits. As a result of rising unemployment standards of living will fall, social tensions will arise (Love & Lattimore, 2009).
Tariff is an important source of budget revenues. This argument is traditionally actively used by developing countries and countries with economies in transition. In low financial and fiscal discipline, many of these countries are simply unable to collect the taxes owed to the state from the population and businesses and, therefore, cannot maintain the required level of social benefits, funding for defense, public order, and so on. The tax on imports or exports, which is the customs duties, is organizationally much easier to collect than many other types of taxes, because in most countries it should be paid at the time of physical crossing the state’s customs border. Control over key roads crossing the border and ports with a small customs in many cases is much cheaper than building an extensive state tax collection system, which would be able to secure their payment by all subjects of economic life (Broda, Limão, & Weinstein, 2006).
Tariff is the protection of national security, the country’s international prestige, its culture and traditions. These arguments are classified as non-economic arguments and they are usually expressed by groups lobbying for those industries that are/are not competitive on the world market or produce products which are already in the late stages of their life cycle. Very often, these arguments are put forward by political-weight monopolistic producers of uncompetitive products that are going to get all the economic gains from the tariff. National security, which requires each country to have on its territory for at least the required manufacture in the event of an emergency, historically often serve as an argument justifying the introduction of import tariffs in many countries, such as oil in the US in 1959 - 1973 years. However, after the oil crisis, it became clear that it is much smarter and cheaper to create strategic reserves of oil in peacetime prices than support through tariffs less effective national production (Broda, Limão, & Weinstein, 2006).

References

What Every Member of the Trade Community Should Know About: Tariff Classification, U.S. Customs and Border Protection, 2004.
Patrick Love and Ralph Lattimore, “Protectionism? Tariffs and Other Barriers to Trade”, in International Trade: Free, Fair and Open?, 2009
J.N. Bhagwati, V. K. Ramaswami 'Domestic Distortions, Tariffs and the Theory of Optimum Subsidy', 1963.
Christian Broda, Nuno Limão, David E. Weinstein ‘Optimal tariffs: the evidence’, 2006.