Tariffs, Their Advantages and Disadvantages

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Table of Contents

Introduction
Advantages of Tariffs
Disadvantages of Tariffs
Conclusion
References

Introduction

The primary objective of the essay is to evaluate the pros and cons of tariffs. All possible advantages and disadvantages are described and assessed. In the end, the conclusions are made. Nonetheless, before opening a discussion, the explanation of the term should be introduced. The tariff can be defined as “custom duties on merchandise imports” (World Trade Organization, 2015, para. 1). It can be said that the tariff implies that foreign producers have to pay extra to trade on the market. Quotas also limit the number of imported goods. Nonetheless, the primary focus of this essay is the consequences of tariff implementations.

The government often applies tariffs for various reasons. However, it has always been questionable whether tariffs and quotas are beneficial for the government, consumers, foreign producers, and the economy as a whole. Even though applying tariffs can be beneficial for the domestic economy, create an additional source of revenue, and be a necessary instrument to find balance on the market, it can be destructive because it limits consumers’ choices and actions of foreign producers and hurts the global trade.

Advantages of Tariffs

In this chapter, the primary benefits of tariffs are presented. Firstly, the implementation of tariffs is beneficial for domestic producers, as the tariffs are usually applied intensively to foreign goods. It could be said that, in this case, tariffs have an advantageous influence on the national American economy, as local producers increase their popularity on the American market. This phenomenon can be defined as protectionism’s policies, as the government tries to protect its national enterprises.

Tariff of Abominations is one of the historical examples, which shows the intention of the government to protect the Northern part of the country from foreign competitors (Roberts, Hammond, & Sulfaro, 2012). Another example is Fordney-McCumber Tariff, as it was aimed to enhance the development of the agricultural sector and decrease the levels of competition on the American market (Northrup, 2003). It could be said that both of these tariffs were designed to encourage the development of the economy and enhance conditions for national producers.

Secondly, domestic products attract the attention of the customers, as they become more affordable compared to imported goods. Moreover, it was noticed that price has a substantial impact on the determination of whether the product is advantageous for the purchase (Isabella, Pozzani, Chen, & Gomes, 2012). In this case, local manufacturers have lower prices and benefit from this situation, as consumers give preferences to an acceptable price to quality ratio.

The third advantage of tariffs is the fact that they form an additional source of income for the country (World Trade Organization, 2015). The country spends a lot of resources on educational systems and military maintenance. Additionally, the government has to pay close attention to the research and development and other vital aspects such as the development of sciences and medicine. In this case, the implementation of tariffs is one of the solutions to provide additional revenue to avoid debts and default.

Finally, sometimes tariffs are the only suitable solution to finding the balance on the market, as maintaining a relevant level of imports and exports is a necessity for any country. In this case, an application of tariffs on imports “improves the trade balance” (Tokarick, 2006, p.17). It could be assumed, it is the most relevant approach to reach a balance, as only imported goods experience difficulties under these circumstances. In turn, this situation has a positive influence on domestic manufacturers, as they can generate higher revenues and gain bigger market shares.

It could be said that tariffs have logical reasoning behind their implementations. The essential aim of the government is to increase the level of well-being of the population and tariffs are one of the tools to reach this goal. Nonetheless, there are other possible ways to enhance the prosperity of the state.

Disadvantages of Tariffs

This part of the paper provides detailed descriptions of some possible disadvantages of the implementation of tariffs. The establishment of tariffs hurts the consumer’s choice, as it gets limited due to the rising prices and limited availability of products. Customers experience discomfort, as their decisions are dependent on the availability of the goods.

The implications of tariffs also have an adverse influence on foreign producers. As the primary goal of tariffs is to provide favorable conditions for the development of national manufacturers, foreign producers experience disadvantages (World Trade Organization, 2015). It could be said that, in this situation, the actions of the foreign manufacturers are restricted, as the economic conditions are not favorable for their prosperity and sustainability anymore.

Consequently, they either stop or limit their operations in the country, which applies tariffs and quotas to their products. As the prices become higher, less demand is present on the market. Subsequently, foreign companies generate lower revenues, as customers chose domestic substitutes for foreign products. Moreover, this action also affects the consumers’ opportunities, as the choice becomes limited.

Furthermore, it could be said that tariffs hurt globalization and the international economy. Nowadays the countries are dependent on each other in terms of trade of natural resources and other goods. Consequently, any implication of tariffs by one country might lead to sanctions in response. In this case, one of the historical examples is Smooth-Hawley Tariff Act, which had a positive intention but in the end turned into a nightmare.

The competition between the United States of America and China was intense and lead to the introduction of high tariffs (Wachman, 2009). In the end, it damaged the global financial economy and caused problems for the other countries (Wachman, 2009). It could be concluded that the Smooth-Hawley Tariff act hurt the international trade and global economy, as it questioned the ability of two global players to exchange goods freely.

The last disadvantage is the fact that tariffs’ implications create barriers to entry. This fact might seem beneficial. However, it is a primary reason for the development of monopolies, as only strong companies can remain competitive on the market. Foreign small enterprises and start-ups are cannot enter the market, as the competition is intense and the required financial capital is too high. Consequently, the foreign companies cannot stay competitive on the market and in the end declare bankruptcy.

This fact harms the well-being of the population and national economy, as lack of entrepreneurship is one of the tools to reduce the unemployment rate since it creates additional job offers (Gohmann & Fernandez, 2014). In this case, due to the decrease in job proposals the level of unemployment increases. In the end, it could be said that the introduction of tariffs leads to high unemployment rates and hurts domestic and global economies.

Many disadvantages were mentioned in this section. It seems that the impact of tariffs has more negative consequences than positive outcomes. The adverse effect seems rather strong, as it not only affects the economic situation of the country on the domestic level but also has an adverse influence on the international trade and world economy. It is questionable whether tariffs are the most appropriate approach to improving the situation in the country.

Conclusion

In conclusion, it could be said that tariffs have a beneficial impact on the domestic economy, as these actions help the government to generate additional revenue. Moreover, the implication of tariffs is also useful for the local manufacturers, as they will have a chance to dominate the market and gain the leading positions in their areas of operation. Furthermore, sometimes it is the only suitable technique to establish balance on the market and define the correct ratio of exports and imports.

It might seem that the advantages outweigh the disadvantages. However, it is irrelevant in this case. It was noticed that the application of tariffs has an adverse influence on the ability to trade globally. Moreover, it harms the domestic economy, as it creates a deficit of the goods, limits the consumer choice, and increases the unemployment rate. The introduction of tariffs is not the most suitable approach to fixing a national economic situation, as it has more adverse influences than benefits.

References

Gohmann, S., & Fernandez, J. (2014). Proprietorship and unemployment in the United States. Journal of Business Venturing 29, 289-309.

Isabella, G., Pozzani, A., Chen, V., & Gomes, M. (2012). Influence of discount price announcements on consumer’s behavior. Revista de Administração de Empresas, 52(6), 657-671.

Northrup, C. (2003). The American economy: A historical encyclopedia. Santa Barbara, CA: ABC-CLIO, LLC.

Roberts, R., Hammond, S., & Sulfaro, V. (2012). Presidential campaigns, slogans, issues, and platforms. Santa Barbara, CA: ABC-CLIO, LLC.

Tokarick, S. (2006). Does import protection discourage exports? Washington, DC: International Monetary Fund.

Wachman, R. (2009). Trade: Nightmare of a US-Chine protectionist war. The Guardian. Web.

World Trade Organization: Tariffs. (2015). Web.

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