When trade barriers are discussed, it is apparent that tariffs form the basis of the usually applicable form of protectionism. In fact, the world trade organization (WTO) was purposely designed to help affiliate states in negotiating for the joint reductions in tariffs. According to the WTO, tariffs include levies that are imposed on the exported and imported commodities. Nevertheless, in general terms, tariffs entail any duty charged when importing a commodity. Despite the fact that tariffs have been reported to have negatives effects on economies, they play key roles for countries that apply them. The advantages of tariffs include acting as remedies for trade restrictions, protection the local industries, and acting as sources of generating revenues for governments.
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The pros of tariffs
Most state administrations depend on the incomes generated from tariffs to fund the state-run projects. In the previous years, the income generation purpose formed the basis of the application of tariffs by governments. However, the establishments of the regular local tax programs and economic growths have minimized the significance of tariffs in the industrialized states. For instance, in the financial year 1996, the Japanese government generated 90.0 billion yens through tariffs income. The amount of revenue generated in that financial year was just 1.70% of the overall tariff revenues (Edwards, 2012). Despite that, in most evolving states, the amount of revenues accrued may form an essential part of the tariffs functions.
On the other hand, tariffs have commonly been used as a planning instrument in protecting local firms via altering the circumstances under which commodities compete. That is, when used as a policy instrument, governments or policy-makers may impose tariffs on the charged prices to make the imported commodities that are competitive to be disadvantaged in the domestic markets. In fact, the analysis of the tariffs imposed by various states shows that they are reflecting the level of rivalry among local firms.
Tariffs quotas, in most cases, are employed when countries intend to create an equilibrium point amid the protection of local firms and market access. Such tariffs tend to assign high charges to the imported commodities, which surpass a certain capacity and no levies or minimal import charges up to a given amount (Barry & Overland, 2012).
Thus, in principle, the world trade organization proscribes the utilization of quotas when a country intends to protect the infant and local firms. However, the WTO authorizes states to use tariffs to safeguard the local infant industries from unnecessary competition. As a result, the costs incurred when states protect local firms from international rivalry accrue in terms of a decline in the global economic welfare as well as the economic welfare of the protecting state. Despite the assertion, tariffs still emerge as the most appropriate form of protectionism compared to quotas or quantitative barriers.
In order to remove trade biases, policy actions implemented by states have always endorsed the use of punitive tariffs. For instance, the anti-dumping tariffs found in the Antidumping Act authorize different states to do away with the confirmed circumstances of harmful dumping (Shapter & White, 2012). Besides, the Act on Subsidy permits states to put countervailing tariffs provided the nations that export their commodities offer subsidies to the producers such that, even if they are not proscribed, nevertheless hurt the local firms of a state that imports.
The world trade organization Act endorses the use of tariffs as opposed to using quotas when protecting local and infant firms. The argument is that tariffs can be easily negotiated downwards compared to negotiating a decrease in quotas (Hatta & Ogawa, 2007). When monopolies are present in the market, tariffs tend to reduce the market distortion effects and encourage exporting countries to improve their efficiencies in order to react to the imposed tariffs. Besides helping a state to generate revenues, tariffs are also charged equitably.
It is argued that when tariffs are reduced, the measure assists in mitigating the expenses associated with losing productivity, which results due to biases in the pricing system as a result of the imposed tariffs. When tariffs are reduced, the market is expanded and this allows manufacturers in states that export commodities to revel in economies of scales while generating economic returns to the entire nation (Wang & Lee, 2011). However, nations that are considered to be large claim that there are benefits attached to tariffs such as the improvement in business terms. Wherever tariffs are used in cases where failures in the local markets are apparent, there is a possibility that the welfare will be increased.
Pros of Tariffs
Increases Prices a and limits Variety
Tariffs are charges imposed on imported goods into a country. The importer has to pay the government some charges in order for the goods to be allowed into the country. The fundamental impact of an import levy is that it increases the charges on commodities in the economy. The change in local price is equal to the amount of the imposed tariff. The shipper has to recover the levies once the commodities are sold in the indigenous marketplaces, which is the price of commodities charged in order to cater for that rate (Edwards, 2012). The resultant effect is an increase in the price of those particular goods.
Tariffs hearten domestic Monopolies
Domestic companies feel comfortable and tend to practice monopolistic behavior since the government has protected them through imposing tariffs on the imported goods. The action may lead to the production of low-quality goods and limiting technological advancement. Monopolistic behavior leads to low production, production of inferior goods, and high cost of goods since there is the lack of competition from other firms that produce similar goods.
Tariffs lead poor utilization of world resources
Tariffs act as barriers to the exchange of world resources. The assertion is based on the fact that many countries impose unfriendly tariffs on commodities leading to limited movement of goods across countries. In fact, this may be caused by quantitative restriction, for instance, quotas that limit the quantity of goods that can be imported into a country, hence limited movement of commodities across boundaries (Hatta & Ogawa, 2007).
Reduces the volumes of foreign trade
Consumers in the importing country may be forced to buy from the local market due to the high prices of the imported goods. Foreign producers will become discouraged to produce more hence less foreign trade. In addition, the reduction in foreign trade means that the producers will produce less and employees will end up losing jobs in a country that does produce (Hatta & Ogawa, 2007).
Consumer choice reduction
One of the benefits of international trade is the consumer choice. When prices are increased, it automatically leads to an increase in prices of the imported goods, which translates to limited goods being imported into the importing country. There will be limited goods for the consumers to choose. Consumers may lack a particular product in case the importing country does not produce such a product.
Countries may decide to adopt similar measures on international trade. This leads to losing out in international trade given that countries may not export the products for a profit. The measures adopted may not be that friendly and may limit the importation of products.
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Tariffs discourage innovation and efficiency
Due to lack of competition, domestic producers may end up using the same technology in the production hence no advancement in innovation. Favoring local producers instead of encouraging free trade through limited tariffs or no tariffs may lead to a less efficient economy while the state becomes less competitive in the global scene (Shapter & White, 2012).
Tariffs lead to Trade Wars
A trade war occurs if one country imposes tariffs in retaliation to other country’s trade tariffs. The countries involved in these wars will end up losing trade with each other (Wang & Lee, 2011). Trade wars always spread quickly within a region and may lead to no trade in certain regions hence slow economic growth and a rise political rivalry within countries in these regions.
Tariffs damage to consumers
Tariffs end up being taxation to the consumers given that manufacturer’s transfers the cost of the tariff to the prices charged on the commodities that tariff has been imposed on (Wang & Lee, 2011). Tariffs on food and other necessities make up the large expense to the low-income earners. This leads to a negative effect on the financial status of the low-income earners. Domestic producers also increase prices due to lack of competition from the imported goods. This also affects the consumers of these products negatively (Wang & Lee, 2011).
From the financial point of view, it is prudent to summarize that tariffs tend to increase the productive capacity of an economy. The assertion is based on the fact that tariffs reduce price biases, improves economic well-being and offer protection to both the infant industries as well as local firms. Given that tariffs generate both costs and revenues for an economy, the welfares outweigh the costs.
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Hatta, T. & Ogawa, Y. (2007). Optimal tariffs under a revenue constraint. Review of International Economics, 15(3), 560–573. Web.
Shapter, S. & White, S. (2012). Incidence and estimated annual cost of emergency laparotomy in England: Is there a major funding shortfall? Anaesthesia, 67 (3), 474–78. Web.
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