Research on Tariffs on Imports and their Negative Effects

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Abstract.

 Tariffs are the policy measures that governments exercise to ensure that the import substitution process is accelerated and finally achieved; they are duties or taxes to be specific. Import substitution is the process where the government ensures that local industries produce what was previously gotten through imports and to strengthen the home currency against the foreign trade rate. Import tariffs when imposed results to the protection of the local market by making imports more expensive: these policies/tariffs include, quotas, licenses, advanced deposits on imports, ban of other products from being imported into a country and complex trade tariff for foreign exchange. Import tariffs could have either positive or negative impacts both in the domestic market and by extension in the global market: misallocation of the country’s resources could just be an impact for instance.

Over the years, both in the domestic and in the global market, trade barriers have a great deal reduced: countries are trying to reduce tariffs that would hinder trade in the quest of achieving trade liberalization.  In general, it is accurate to say that trade barriers (tariff barriers, non-tariff barriers and even informational barriers) affect trade volumes, this despite the fact that countries have tried to get rid of import tariffs to make trade more tolerant. International trade is normally typified by the domestic market bias syndrome; this is owing to factors such as: the national currencies being different, purchaser tastes and first choices, import tariffs including tariff and non-tariff barriers like the costs of transport, import and cross-border expenses and policies on exclusive rights on large-scale markets.

Free trade encourages specialization and comparative advantage, here producers produce only the commodities that they can produce best and at the lowest of production cost. Comparative advantage could be as a result of a number of reasons: one country is well endowed in natural resources while another is blessed with sound technical know-how and this explains why one country is better placed to produce tea and tea products while the next petroleum and its products. This means that a country produces at low manufacture costs and this guarantees high quality production since all the labor and financial efforts are geared towards one course. Comparative advantage when taken advantage of could lead to benefits of production in bulk such as discounts and high turnover and in the global market, specialization has ensured healthy distribution of resources ( Archibald, R.1998. pp 857-880).

Trade liberalization also has a number of advantages: an upward pitch in commerce, increased advancement in technology, skill benefits and general economic growth. When resources are equitably distributed in the economy, this leads to sound economic well-being in an economy and good integration in the global economy. Technological advancement normally leads to high quality production which in the long run will result into increased production hence giving an economy a competitive edge over the others in the globe. Economic growth will definitely lead to increase in employment opportunities in the long run. Even though the above advantages hold water, there are scores of imperfections of trade that is not liberalized and below are the evidences that prove that import tariffs have negative economic impacts on the countries imposing them and by extension, on the global market.

Research has proven that trade barriers have a direct impact on multilateral trade; border costs is one of such factors, in case cross-border barriers were absent, international trade would increase five fold. Due to geographical barriers therefore, domestic trades flourishes more than foreign trade. National currency is a factor that is a trade barrier: the relationship between two countries using the same currency and the volume of trade is directly proportional; this means that in the case of bilateral trade, a common currency is likely to cause trade to flourish than in the case of two countries with different legal tender. Overall, organizations like the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization have worked to ensure tariffs are reduced especially in developing countries to guarantee trade integration, all the same, the use of anti-dumping measure and other specific duties have increased (Batiz, L.R. 2003, pp 196-200).

A score of import barriers: both tariff barriers such as high duties and rates and non-tariff barriers such as restrictions on trade volumes and procedural or bureaucratic requirements that follow have restricted trade. Commerce in North Africa and the Middle East does not boom-despite the small geographical gap- because of the high tariffs between the two regions. The question whether trade restrictions is the best policy normally begs: in the case of an ideal market, that is, where there are no externalities, then trade liberalization would best be suitable however when the market has inequitable competition and there are externalities, then trade barriers have to be imposed. General analysis shows strong evidence that import tariffs by and large have negative impacts on the domestic markets as well as the global economy.

Import tariffs more often than not result to evolution of exchange rates and the balance of payments: this by extension leads to financial linkages such as economic decisions, the monetary state of affairs of entities and the domestic exchange rates. The lending rates generally become negative to the differences in the exchange rates between the domestic market and the global market. On the other hand, due to financial frailty, there is an increase in economic threat due to the less credibility of the market exchange rates, when exchange rates lose reliability; the domestic economy becomes less attractive for investors. When the local exchange rates become weak, the economy can not afford the assets in the local market and this means the economic crisis surges (Eatwell, J & Taylor, L. 2002.pp 271-275).

Effects of tariffs on the consumers: when tariffs are levied on commodities, the consumers get the product at an increased price; this in turn reduces the welfare owing to the duty levied. General increase of the commodities prices will also lead to increase in prices of alternate goods and this leaves the consumer with less variety to choose from. On the other hand, the producers experience an increase in their welfare due to the duties imposed on products, this leads to increase in their superfluous hence the amount produced also increases. When productivity of the existing concerns increases, more firms could sprout in the process; this could result into increment in production costs, overhead costs and fixed costs.

When the importing country’s government gets funds due to the duties levied, these funds could be used for public development but could also just be used inequitably. In some cases, such funds could only benefit a minority of targeted individuals thus, it may not be well accounted for and it is not likely to be certain about who will be the sole beneficiaries. They also have an effect on the exporting countries: they experience negative terms of trade, there is an alteration in the general consumption and in volumes of products and an overall drop off in the economic well-being of the country . This brings us to the conclusion that import tariffs have a negative impact on the country imposing them (Yellen, J.1998. pp 23-28).

The protection argument: here, it is believed that the domestic market is protected when tariffs are imposed; this point of view is very legitimate but it is practically not possible to determine which firms in the economy are going to prosper and which ones not. Against this background therefore, it becomes tricky for the government to come up with the most excellent criteria to decide which entity should be supported to expand; this means a firm with potential may be denied a fair chance of protection. Another negative effect of trade barriers is that they are normally imposed for unreasonably long duration and not revised by far: this means that when companies have fully expanded, they can corner the market and take unfair advantage of other young firms in the industry; this explains why well established companies are time and again unwilling to have tariffs revised. Such companies already have a competitive advantage over the others in the industry-due to protection-and this makes the flaws of protection of firms evident, that is, there is selectivism (James, B. 1991. pp 65-78).

Economically speaking, it is realistic to say that protection of firms can better be achieved through government subsidies than levying tariffs. Subsidies reduce the burden- on producers- of production cost and therefore the costs are not passed down to the consumers. When the government keeps an eye on the production process, it ensures accountability on the part of the producers a factor that reduces wastages, reduction of expenditure further makes the whole process more cost-effective. Subsidies in general give the local producers an upper hand to compete globally with other producers/firms who sell produce that are not expensive.

Dumping: most economies forbid dumping; this occurs when commodities are sold at a price generally less than what they go for in their local market. There are arguments that import tariffs protect an economy from dumping, in some economies, when a manufacturer takes part in the practice then a tariff is imposed on such a manufacturer. To have a balancing effect, such a producer raises the prices of such commodities and the cost is passed down to the final consumer. Dumping is a common practice even in perfect economies and this explains why every country imposes duties that are dead set against dumping (Mordechai .K. 1975.pp 75-78).

The types of dumping often practiced by producers are: sporadic dumping, predatory dumping and persistence dumping. Foreign firms may at times sell their produce at prices that are less expensive- than in their own countries- overseas so as to reduce the level of rivalry and also to have the benefit of monopoly that they have in their own countries. Mostly, the demand of non-pliant commodities like clothing does not change with changes in prices; this means that the commodities will be more affordable in the domestic market hence the local produces are driven out of competition. The sales and the production volumes of the foreign producers remain constant over time and this in the long run is risky both to the consumers and the domestic market at large. Sporadic dumping occurs if a producer has excess of produce at home and wants to sell it in the oversees market at a lower price than it is actually sold at home, in this case, such a producer is also dumping.

Persistence dumping occurs when a company faces no competition at home and as such sells their produce at a high price in the local market. In the international market, the firm or the producer must sell at a lower price if it is to get good proceeds, due to the competition it faces from other firms in the global market, the firm sells the commodities at a lesser price hence this constitutes dumping. Such producers may not be necessarily concerned about competition from other producers. Organizations such as the General Agreement on Trade and Tariffs (GATT) and the World Trade Organization (WTO) have passed laws to prohibit dumping in the whole world economy and the imposition of tariffs to penalize those who contravene such policies. Reasonably though, the more practical solution to dumping would be to eliminate domination of the domestic markets by specific firms, this way, prices will not have to be increased and therefore, firms would not need to sell goods cheaply overseas. This factor would eliminate the need of duties on producers as a punishment for dumping (.Richard,P.1998.pp 74-76).

Economists have argued that abolishment of import tariffs and other trade barriers may lead to increased influx of immigrants; this could argument hold some water in the short run. When there is free trade, people tend to go to regions with higher employment openings and where returns and benefits are high but in the long run, the immigrants face adversities of living in alien land and opt to come back home. Other factors that may drive immigrant back home are: difference in climatic conditions, inability to communicate (since most of them are unqualified workers) with the locals in the foreign country and family ties.

Monopolies and or oligopolies that exist due to firms being protected by the government often lead to stagnation in innovativeness and in technological advancement. When there is no rivalry between firms in the industry, the quality of the products could be less competitive but consumers purchase them anyway, this is because, there is no firm to pose competition and so the consumer is given a raw deal because they have no variety to choose from in the long run. When the government allows foreign commodities into the local market, the domestic companies work harder to maintain a competitive edge over the others in the global economy, this means more inventiveness and high quality production which by extension leads to technical improvement, development and modernization. When costs of manufacture are reduced, there is surplus in the market and other commodities that would be supplementary are produced, overall, this means that the limited resources are adequately used to produce more goods (Whitehead,J.1991.pp 33-40).

Technological barriers become a frustration to young economies and countries that are still growing (in most cases third world countries).This puts such countries in positions where they have to achieve the required standard of production in whichever way, since most of these countries have limited resources, this calls for sacrifice of other sectors of the economy and this means great strain. Such standards by all means put a ceiling on trade and this means that the domestic economies and the global economy at large grows at a less impressive pace. This manner of intimidation by giant economies would mean the developing countries may be forced to reduce their rates and this means less development for such countries and less production in other value adding and supplementary commodities. Barriers could also lead to a sluggish pace of industrial development in the long run, this is because an economy continues to concentrate on production of a single product but there is no exploration and expansion to other sectors.

In certain world economies, it has been realized that increase in import tariffs and other barriers has led to other economies retaliating by raising their trade barriers in return. In return, commerce decreases, there is poor inflow and outflow of revenue, poor debt management is experienced, low productivity and in turn low living standards. High trade barriers also result in unhealthy competition, meager distribution of resources and wide-ranging stagnation in technological advancement  both at home and in the global market. When governments impose trade barriers, they interfere with the global economy from its smooth flowing. Quantity barriers interfere with the existence of a variety of commodities in the economy and at times goods can be available in small quantities and this presents the consumer with a small variety to choose from. Taken as a whole, import tariffs have negative effects on both the countries imposing the, the countries to which they are imposed and by extension, on the global market (Hufbauer, G.1993. pp 30-35).

Imposition of import tariffs results into increased prices of commodities: when duties are imposed on foreign producers, they tend to make up for it in the sale of the commodities. The local producers also take advantage of this and as a result, there is a surge in the prices of products in the economy. Consumers due to lack of choice consume local produce that are more affordable and this leads to value inflation which by extension is resultant to poor competition both in the local markets and in the global market. Import barriers reduce the volume of trade between countries as opposed to free up trade. When there is free trade, there is peace, equal growth and economic affluence and development in the world as a whole and this means global integration. The United States has achieved economic prosperity and financial wellbeing as a result of participating in free trade; this has meant that that her economic arsenal has increased in a short span thanks to international trade (Robert E &. Suchman.O. 1991. pp 215-222).