Free Pros And Cons Of Tariffs Essay Sample
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Tariffs or duties are the most common instruments of protectionist policy. Tariff is a state tax applied on import (import duties), export (export duty) or transit of goods (transit fee). Import duty can be introduced either to increase budget revenues or to restrict import and support domestic producers. In the first case, it is called fiscal tariff, in the second case - protective tariff. Protective tariffs result in raised prices for foreign-made goods. In case of elastic demand, sales of foreign-made goods against which tariff was imposed are likely to decrease, making foreign producers to withdraw from market. This, in turn, results in lower level of competition and provides favorable conditions for domestic manufacturers.
Tariffs are most effective if the government applies them in order to support infant industries’ development or diversification of the economy (Kwon, 2013, p.243). Protection of pioneer industries is a temporary measure of protection of young domestic firms against the fierce competition with more mature and efficient foreign firms. Thus, import tariffs allow infant industries to grow stronger and become efficient producers. It should be noted that these arguments are irrelevant to the industrialized countries. In low-income countries, it is very difficult to determine, which industry is able to achieve economic maturity and, therefore, deserves protection. Moreover, the protective tariffs may not disappear, but rather tend to be maintained even when the industry has reached its maturity. Tariffs are frequently used by the countries with single-industry economy, heavily dependent on international markets (i.e., petroleum exporting countries). Wars, cyclical fluctuations, adverse changes in the industrial structure cause large-scale and often painful process of restructuring of economic systems. Hence, the government desires to protect the domestic economy from external influences, providing greater internal stability. In part, import restrictions in developing countries are justified, while this argument has little relation to the developed countries. Secondly, the economic costs of diversification may be rather large; for example, in monoculture economies manufacturing industry can be extremely inefficient.
It was already mentioned that tariff imposition might be justified in particular situations if introduced by a developing country. Today there is an international mechanism of regulation of international trade – the World Trade Organization (the successor of the General Agreement on Tariffs and Trade). Under the WTO Agreements, the main goals of the organization are liberalization of trade, reduction of tariff and non-tariff barriers, and proving all nations with equal opportunities in foreign trade. What actually happens is that the developing counties are forced to reduce tariffs by reason of unification of conditions of trade. The world’s average tariff rate for imported goods decreased from 13.7% in 1989 to 7.1% in 2008 mainly at the expense of low-income states. Low-income states cut down tariff rate for imported goods from 20% in 1989 to 15% in 2008, while import tariff of high-income countries remained at the level of 6-7% (Kwon, 2013, p. 242). We cannot fail to agree with Miles (2006), who states in his review of “Fair Trade For All: How Trade Can Promote Development” that trade rules under the WTO Agreements are biased against the least powerful economies. Among the most acute problems Miles points out asymmetric access to markets (situation, when a particular country has the opportunity to export without tariff and non-tariff barriers the types of goods that it does not produce), agricultural subsidies in Europe and the U.S., which restrain the economic development of exporters from abroad (i.e., Africa, Eastern Europe, etc.).
Import tariffs help to increase the level of domestic production and, thus, increase employment level. This argument is becoming increasingly popular, especially when the economy is on the verge of recession. It is believed that the increase in total costs (due to an increase in net exports) resulting from the reduction in imports has a stimulating effect on domestic economic development, which entails a sharp rise in national income and employment. However, it is clear that all participants in world trade are not able to simultaneously gain benefits from the introduction of import restrictions, as exports of one country is imports to another. Thus, the aim to achieve full employment in a country can only be reached at the expense of breaking ties with trading partners. Countries affected by import restrictions are likely to take retaliatory measures, which can deprive all participants of benefits of foreign trade. Meanwhile, the increase in import also indirectly creates new jobs, by eliminating obsolete industries and creating new ones. At the same time, import restrictions can only change the structure of employment, marginally affecting its level. In general, the effects of import restrictions should be assessed on the level of national and global economy as a whole, as surpluses of the stakeholders, which take advantage of tariffs (national producers and government) can be lower than losses of another stakeholders (consumers and importers). According to Pugel (2011), the effects of tariffs vary depending on whether imposed by small or large country. If imposed by a small country, the net effect of import restriction on the national economy can be estimated by comparing revenue gains of domestic producers and the government with the losses of consumers. In this particular case, import tariff is likely to cause negative impact on the national economy for two reasons. Firstly, domestic producers usually raise prices in response to the increase in prices of imported goods. Domestic producers increase the volume of output solely due to restraint of competition, continuing using out-of-date technologies, which appear to be inefficient. Thus, by imposing import tariffs, the government discourages domestic producers from investing in research and development and searching ways to decrease input costs. Secondly, consumers are forced to buy products at higher prices and reduce the level of consumption. Lower active demand leads to the decrease in GNP and employment, as the economic balance will be reached at a higher price level (prices are not elastic to the downside). The situation becomes more complicated if the goods, against which tariff is imposed, are imported not for consumptive use, but for processing at a particular stage of production cycle. Import tariffs against raw and other materials and components undermine downstream industries, “increasing their input costs, lowering production and increasing final prices for their output goods” (McDonald, Punt, Rantho & Van Schoor, 2008, p. 42).If we deal with large country, which is the only importer of a particular type of goods (monopsony), the importers cannot reorient to another distribution area. Thus, the importers will have to cut down prices in order to remain competitive in the domestic market. In this situation, the introduction of tariff will negatively affect trade balance and will cause net loss to the global economy. (Pugel, 2011)
Among developed countries, it is a common practice to apply Anti-dumping and Countervailing Duties against developing counties, which have cheaper factors of production and, therefore, lower prices on goods for export. According to GATT ArticleVI, “a product is to be considered as being introduced into the commerce of an importing country at less than its normal value, if the price of the product exported from one country to another(a) is less than the comparable price, in the ordinary course of trade, or,(b) in the absence of such domestic price, is less than either(i) the highest comparable price for the like product for export to any third country, or(ii) the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profit”(General Agreement on Tariffs and Trade, 1986). In fact, some foreign firms produce certain products at a lower cost than their competitors in the importing country do. What at first glance may be considered as dumping, in fact, is often the result of the principle of comparative advantage (more favorable geographic location, cheap resources, etc.). Countervailing duties are most frequently applied against so called non-market economies. Today the term "non-market economy" is far from a purely economic concept, as it has actually become a political instrument of discrimination in international trade. The problem is that the parties of international trade can interpret the GATT Article VI “Anti-dumping and Countervailing Duties” and Agreement on Subsidies and Countervailing Measures in different manners. In case of imports from non-market economy, the fair value is determined on the basis of price or value in a third country with market economy (analog or proxy country).The most heated disputes concerning imposing countervailing duties arise between China and the USA. In 2007, the USA joined Canada to impose countervailing duties on particular Chinese products for the first time. In response to countervailing duty investigations, China brought in the complaint to the WTO Appellate Body, as the USA in its policies used double remedy (antidumping and countervailing duties simultaneously in the same situation). This fact was recognized as direct violation if WTO Agreements. Even after the WTO decision to ban double remedies, the EU falled back on double remedy against China in 2011 (Ahn, 2011). The problem of manipulation with non-market economy status of China, Vietnam, etc. is nowhere near solution. The problem of countervailing duties has not disappeared, quite the opposite, the number of WTO Members imposing double remedy measures has been constantly increasing (Ahn and Lee, 2011, p.363).
Apart from cooperation within the WTO mechanism, strategic trade partners are prone to signing bilateral and multilateral agreements, creating free trade areas, preferential trade agreements and customs unions to eliminate tariff barriers and to gain more mutual benefits from foreign trade. For example, North American Free Trade Agreement allowed to eliminate tariff barriers between Canada, the U.S. and Mexico. The positive effects of free trade agreement comprise free exchange of goods between the countries, overcoming the problem of illegal migration, common defensive policies against protectionist measures of the third parties. However, there is always a transition period after the free trade agreement is signed. The main problems the countries face are as follows: higher unemployment rate, decline of the industries that proved to be less competitive than the partners’ ones, reduction of budget revenue due to the tariff cancellation. The 21st century has witnessed creation of a series of integration associations in Asia-Pacific region. Preferential trade agreements of Japan and South Korea with ASEAN are supposed to be economically efficient and to provide more opportunities for intra-industry trade, even though agriculture will be excluded from the agreement. The bright example of mutually beneficial PTA in this region is the PTA between Japan and Malaysia, which made possible free trade in the steel, car, home appliances industries (Manger, 2014).
As a conclusion, it can be stated that there are different points of view concerning the correlation between tariff barriers and economic development. In general, free trade provides more benefits both to the global and national economy. Nevertheless, gaps in foreign trade rules and regulation, biased measures introduced against the developing countries make tariff barriers justified in particular situations. Thus, the effects of tariffs should be estimated in each particular case both in short term and long term perspective.
Agreement on Subsidies and Countervailing Measures (1994). Retrieved from https://www.wto.org/English/docs_e/legal_e/24-scm.pdf
Ahn, D. (2011). WTO Appellate Body--countervailing duties--nonmarket economies--public bodies--double remedies--Agreement on Subsidies and Countervailing Measures. American Journal of International Law. Retrieved fromhttp://ic.galegroup.com/ic/ovic/AcademicJournalsDetailsPage/AcademicJournalsDetailsWindow?failOverType=&query=&prodId=OVIC&windowstate=normal&contentModules=&display-query=&mode=view&displayGroupName=Journals&limiter=&currPage=&disableHighlighting=false&displayGroups=&sortBy=&search_within_results=&p=OVIC&action=e&catId=&activityType=&scanId=&documentId=GALE%7CA345277978&source=Bookmark&u=oran95108&jsid=edcdf84967881559f7ceeec5b80d398e
General Agreement on Tariffs and Trade (1986). Retrieved fromhttps://www.wto.org/English/docs_e/legal_e/gatt47_e.pdf
Kwon, R. (2013). Is Tariff Reduction a Viable Strategy for Economic Growth in the Periphery? An Examination of Tariff Interaction Effects in 69 Less Developed Countries. American Sociological Association, 19 (2), 241-262. Retrieved from http://www.jwsr.org/wp-content/uploads/2013/09/Kwon_vol19_no2.pdf
McDonald, S., Punt, C., Rantho, L., and Schoor, M. (2008). Costs and benefits of higher tariffs on wheat imports to South Africa. Agrekon, 47(1), 19-51. Retrieved from http://ageconsearch.umn.edu/bitstream/6031/2/47010019.pdf
Manger, M. S. (2014). The economic logic of Asian preferential trade agreements: the role of intra-industry trade. Journal of East Asian Studies, 14.2. Retrieved from
Miles, M. A. (2006). Trade and Justice; Marc A. Miles reviews Fair Trade For All: How Trade Can Promote Development. Harvard International Review, 28.2. Retrieved fromhttp://ic.galegroup.com/ic/ovic/AcademicJournalsDetailsPage/AcademicJournalsDetailsWindow?failOverType=&query=&prodId=OVIC&windowstate=normal&contentModules=&display-query=&mode=view&displayGroupName=Journals&limiter=&currPage=&disableHighlighting=false&displayGroups=&sortBy=&search_within_results=&p=OVIC&action=e&catId=&activityType=&scanId=&documentId=GALE%7CA149521004&source=Bookmark&u=oran95108&jsid=7e8e474837f4d250db204755fb5ea035
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