Why Countries Use Tariffs
Most countries have limitations due to their natural resources and production capacities. As a result, they engage in international trade to fulfill the needs and demands of their population. However, trade isn’t always smooth. Many factors, including policies, geopolitics, and competition, influence trade relationships.
One way governments handle disagreements is through the imposition of tariffs. A tariff is essentially a tax levied on goods and services imported from another country. The reasons behind this can be to raise revenues, protect competitive advantages, or influence foreign geopolitics.
Key Takeaways
- Governments can impose tariffs to generate revenue, safeguard domestic industries, or exert political control over another nation.
- Tariffs can lead to undesirable effects such as increased prices for consumers.
- The debate surrounding tariffs, whether beneficial or harmful, remains heated and persistent.
Decoding Tariffs
Tariffs serve as a restriction on imports by making them more expensive, which ideally makes them less desirable to domestic consumers. Two primary types of tariffs exist:
- Specific Tariff: Charges a fixed fee per item, e.g., a $500 tariff on a vehicle.
- Ad-valorem Tariff: Based on the item’s value, like a 5% fee on the total value of the imported product.
Why Governments Implement Tariffs
Governments may impose tariffs for several reasons:
- To raise revenues.
- To protect domestic industries.
- To shield consumers.
- To safeguard national interests.
Raising Revenue
Tariffs can serve as a significant source of revenue for governments without the primary purpose of limiting imports. For instance, during fiscal years 2018 and 2019, the U.S. government collected $41.6 billion and $71.9 billion, respectively, due to newly imposed tariffs.
Protecting Domestic Industries
Specific industries can benefit from tariffs. For example, in 2018, the U.S. imposed a 25% tariff on steel to protect domestic manufacturing and production jobs.
Shielding Consumers
By making foreign goods more costly, tariffs can render domestic alternatives more attractive, ensuring that consumers do not buy harmful products manufactured with fewer regulations.
Safeguarding National Interests
Tariffs can also serve as an extension of foreign policy by imposing economic pressure on opposing trading partners.
The Ripple Effects of Tariffs
Not all tariff outcomes are as governments intend:
- Domestic industries may become less efficient and innovative.
- Consumers usually encounter higher prices due to reduced competition.
- Certain regions or industries may feel more favored or penalized, causing tensions.
- Tariffs can lead to trade wars, cycles of retaliation between countries.
The Pros and Cons of Tariffs
Pros
- Revenue Generation: Governments can generate additional revenue to reduce deficits or support public services.
- Negotiation Tools: Tariffs can open the door for renegotiation of trade terms.
- Support Domestic Goals: Tariffs often ensure domestic goods receive preference.
- Market Stability: They can stabilize market prices by adding predictability.
Cons
- Intergovernmental Tensions: Imposing tariffs can strain international relations.
- Risk of Trade Wars: An unfavorable reaction can escalate into trade wars where neither entity benefits.
Historical Outlook on Tariffs
Pre-Modern Europe
In pre-modern Europe, wealth was defined as tangible assets such as gold and land. High trade barriers like tariffs were common to protect wealth.
Emerging Economic Theories
Adam Smith, in his 1776 publication, started challenging this mercantilist setup, proposing that open trade is beneficial. Later economists developed the idea, leading to the current appreciation for comparative advantage.
19th and Early 20th Centuries
For a while, relatively free trade flourished. Wars and economic turmoil challenged open trade concepts, leading to fluctuating tariffs over centuries.
2010s
Recent events, such as Brexit and U.S. tariffs on Chinese imports, underscore ongoing debates between free trade and protectionist policies.
Simple Definition of Tariff
A tariff is an extra fee charged on imported goods.
Example of a Tariff
One of the iconic examples is the British tea tax that sparked the Boston Tea Party in American history.
How Do Tariffs Work?
Tariffs reroute financial incentives away from exporting countries by adding extra costs to their goods.
Conclusion
Tariffs have been a long-standing tool for governments to achieve various goals—political, economic, or protective. While they can sometimes open avenues for renegotiation and market stability, they can also precipitate international tensions.
Understanding tariffs helps you decode international relations, trade disputes, and economic outcomes, offering a broader perspective on global economics.
Related Terms: customs duties, protectionism, trade war, comparative advantage, mercantilism.
References
- U.S. Customs and Border Protection. “Trade Statistics”.
- U.S. Customs and Border Protection. “CBP Trade and Travel Report Fiscal Year 2019”. Pages 1, 6-7.
- Federal Register. “Proclamation 9705 of March 8, 2018: Adjusting Imports of Steel Into the United States”.
- U.S. Department of Commerce. “Announcement of Actions on UK Imports Under Section 232, March 22, 2022”.
- U.S. Department of Commerce. “Section 232 National Security Investigation of Steel Imports: Information on the Exclusion Process”.
- Federal Register. “Proclamation 10420 of June 27, 2022: Increasing Duties on Certain Articles From the Russian Federation”. Pages 38875, 38877.
- Kordas, Ann et al. “World History, Volume 2: From 1400: 5.3 The Mercantilist Economy”. OpenStax, 2022.
- FasterCapital. “Tariffs: Tariffs and Mercantilism: Understanding the Link”.
- Smith, Adam. “An Inquiry Into the Nature and Causes of the Wealth of Nations”. Strahan, 1776.
- Britannica Money. “Comparative Advantage”.
- Office of the Historian. “Protectionism in the Interwar Period”.
- World Trade Organization. “What Is the World Trade Organization?”
- Office of the United States Trade Representative. “United States-Mexico-Canada Agreement”.
- Gov.UK. “EU Referendum Outcome: PM Statement, 24 June 2016”.
- Council on Foreign Relations. “Free Trade at Risk in This Year’s U.S. Campaign”.
- Congressional Research Service. “Escalating U.S. Tariffs: Timeline”. Pages 1, 4.
- U.S. Census Bureau. “U.S. Census Bureau History: The 1773 Boston Tea Party”.
