Pros and Cons of Tariffs

Tariffs are the most common barrier to trade used by national governments. Webb (2009) defines a tariff as a tax that the national government imposes on either export or import goods. National governments normally impose tariffs on its import and export goods with three different intentions. These include: to generate revenue, to remedy trade distortions, and to protect domestic industries. The revenue function is one of the major reasons why national governments impose tariffs on goods. Furthermore, the World Trade Organization allows countries to apply tariffs as a way of protecting their domestic industries. Additionally, trade distortions that result from measures adopted by other nations can be remedied using punitive tariffs. In order for the Trans-Pacific Partnership Agreement (TPP) to achieve its agenda of setting a new baseline for the future trade and investment agreements, it needs to consider the use of tariffs as a barrier to trade.

Tariffs have got numerous advantages to both domestic and foreign countries. For example, a country can easily promote its products by imposing tariffs on imported goods. When a country decides to apply tariffs on imported goods, the producer can choose to take care of the tariff either through price reduction or by extending the cost to consumers. Suppose the producer decides to pass on the cost to consumers, the price of the imported good will rise. This will promote domestic products because consumers will be encouraged to purchase goods produced in their country and avoid buying imported goods. If there are many companies in the country producing the same products, the price of goods will fall even further due to excess supply. In this manner, tariffs tend to give domestic companies a clear business advantage over the foreign producers (Pettinger, 2008).

Through tariffs, a country can save its domestic jobs and industries. When the national government imposes tariffs on imported goods, the rate of production by domestic companies will increase to take care of the rising demand. These companies will require constant labor to continue with the production process. Eventually, the increase in production will provide additional jobs for the citizens. Japan is a good example of those countries that have successfully saved its industries through the use of tariffs. Following World War II, Japan levied massive tariffs on imported products in order to strengthen its economy. In this manner, Japan managed to save its industries which continued to produce goods for the local market. Currently, Japan is a major exporter and one of the biggest economies in the world (Pettinger, 2008).

During the early years when the United States was not fully developed, tariffs were very important to the growth of national economy. The United States was able to protect its growing manufacturing industry and promote expansion to other sectors by imposing tariffs on imports. These tariffs raised prices of foreign goods especially those that were imported from England, eventually encouraging consumers to purchase domestic products. This explains why tariffs are recognized as one of the major instruments that contributed towards development of the United States into an industrialized nation (Webb, 2009).

Additionally, tariffs enable national governments to generate revenue. According to Webb (2009), governments and producers of importing countries are able to generate high revenue through tariffs. This revenue is earned in the form of producer surpluses and tax revenues as consumers are compelled to pay high prices. For example, the United States government earns high revenue by placing import tariffs on import goods. In the year 2008, approximately 2 percent of the United States government revenue was collected from import tariffs. This percentage was equivalent to 29.2 billion United States dollars (Pettinger, 2008).

Countries must not set their tariff rates too high in order to benefit from them. Preferential lower tariffs are always beneficial to both developing and developed countries applying them. Developed countries can become very good trading partners of developing countries if they grant low tariff rates. As the industrialized countries continue to import their goods into the developing country, the developing nation is encouraged to produce more goods which can later be exported. Therefore, tariffs can create a positive trading relationship between an industrialized county and a developing nation (Webb, 2009).

Although tariffs have got numerous advantages as described above, they are not without disadvantages. For instance, tariffs discourage trade between two or more countries that are willing to establish a strong business relationship. In order for a country to continue trading with another, customers in the domestic country must be able to purchase goods imported from a foreign nation. When consumers choose purchase low-priced domestic products, foreign producers are disadvantaged because their products cannot be bought. At times, foreign producers are compelled to lower their prices in order to compete with domestic products. This prevents trade between a foreign country and a domestic country. Lack of trade between nations may result into closure of industries and high national unemployment rates (Pettinger, 2008).

Moreover, tariffs limit consumer choice especially in a case where they are imposed on goods that lack substitutes. When a country imposes tariffs on imported products, their prices increase. This leaves consumers with no choice but to buy goods that are available in the market. In the event that domestic companies do not produce products that are similar to the imported ones, consumers may be compelled to purchase the foreign products with high prices inclusive of tariffs. In addition, tariffs induce price increments which create a big gap between prices in the exporting and importing countries. This results into an increase in supply in the domestic country and a subsequent fall in demand for foreign products (Pettinger, 2008).

Even though tariffs can increase production in domestic country, they can make trading partners to come up with retaliatory measures that will end up affecting the country that is granting the tariff. For example, if a country imposes high tariffs on imported goods, the foreign county may decide to apply even a higher tariff on goods that they import from the high-tariff country. Such retaliatory measures severely limit trade between trading countries. Suppose tariffs were not imposed, the countries would have continued to trade peacefully without any interference (Pettinger, 2008).

Generally, those who produce goods for the domestic market greatly benefit from tariffs. Entrepreneurs, manufacturers, agricultural producers and workers, all take part in the production of goods. So long as the quantity of goods produced for the domestic market is enough to meet the existing demand, those involved in the production process will encourage their governments to impose high tariffs in order to drive away foreign competition. However, if the goods produced cannot effectively be consumed in the domestic market and surplus results, those involved in the production process may not benefit from the tariffs. Ideally, high tariffs on imports from foreign countries are likely to attract high tariffs on export from the same country (Webb, 2009).

The tariffs charged on imports from different countries are always not the same. A country often analyzes its trading partners and identifies the most favored nation. It then chooses to charge lower tariffs on goods imported from the most favored nation than those charged on similar goods imported from any other country. However, special tariff rates are sometimes charged on goods imported from developing countries following close negotiations. The special tariffs may be lower than those charged on products imported from the most favored nation. Most of the time, industrialized nation use preferential tariffs to assist developing nations to build a stable economy (Webb, 2009).

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