7 Reasons Why Trade Tariffs Are Bad for the Economy
Trade tariffs are taxes imposed on imported goods by the government of the importing country. They are intended to protect domestic industries from foreign competition, but they often have negative consequences for the economy as a whole. Here are seven reasons why trade tariffs are bad for the economy:
1. Trade tariffs increase the prices of imported goods
Trade tariffs increase the prices of imported goods, which means that consumers have to pay more for the products they want or need. This reduces their purchasing power and lowers their standard of living.
2. Trade tariffs reduce the quantity and variety of goods available in the market
Trade tariffs reduce the quantity and variety of goods available in the market, which limits consumer choice and reduces consumer welfare. This also leads to lower quality and innovation, as domestic producers face less competition and have less incentive to improve their products.
3. Trade tariffs create inefficiencies and distortions in the allocation of resources
Trade tariffs create inefficiencies and distortions in the allocation of resources, as they create an artificial advantage for domestic producers over foreign ones. This means that resources are diverted from more productive and efficient uses to less productive and efficient ones, resulting in a loss of economic output and welfare.
4. Trade tariffs harm the exporting countries
Trade tariffs harm the exporting countries, as they reduce their export revenues and limit their access to foreign markets. This reduces their economic growth and development prospects, and may also create political and social instability.
5. Trade tariffs trigger retaliation and trade wars
Trade tariffs trigger retaliation and trade wars, as the affected countries may impose counter-tariffs or other trade barriers on the imports of the imposing country. This leads to a downward spiral of protectionism, which reduces global trade and cooperation, and increases international tensions and conflicts.
6. Trade tariffs undermine the rules-based multilateral trading system
Trade tariffs undermine the rules-based multilateral trading system, which is based on the principles of non-discrimination, reciprocity, transparency, and dispute settlement. By violating these principles, trade tariffs erode the credibility and effectiveness of the World Trade Organization (WTO) and its agreements, which aim to promote free and fair trade among its members.
7. Trade tariffs are often influenced by political and special interests
Trade tariffs are often influenced by political and special interests, rather than by economic rationale or public interest. They are used as a tool to gain electoral support or to appease certain groups or sectors, rather than to achieve optimal economic outcomes or social welfare.
Trade tariffs are bad for the economy because they create more costs than benefits for society. They hurt consumers, producers, exporters, importers, workers, and taxpayers alike. They reduce economic efficiency, growth, and welfare. They also damage international relations and cooperation. Therefore, trade tariffs should be avoided or minimized as much as possible, and replaced by more effective and less harmful policies to address the challenges of globalization and trade.
The Impact of Trade Tariffs on Global Demand
Trade tariffs are taxes imposed by governments on imports or exports of goods and services. They are usually intended to protect domestic industries, raise revenue, or achieve some political or strategic goals. However, trade tariffs also affect the global demand for the products and services subject to them, as well as the overall trade volume and welfare of the trading partners.
How Trade Tariffs Affect Demand
The demand for a product or service depends on its price, income, preferences, and other factors. Trade tariffs affect the price of imports and exports by making them more expensive or cheaper relative to domestic or foreign alternatives. This in turn affects the quantity demanded by consumers and producers in both the importing and exporting countries.
For example, suppose Country A imposes a tariff on imports of steel from Country B. This will raise the price of steel in Country A, reducing the demand for steel by domestic consumers and industries that use steel as an input. It will also lower the price of steel in Country B, increasing the demand for steel by foreign consumers and industries. The net effect on global demand for steel will depend on the elasticity of demand in both countries, which measures how responsive demand is to changes in price.
The elasticity of demand depends on several factors, such as the availability of substitutes, the proportion of income spent on the good, and the time horizon. Generally, the more substitutes there are, the lower the proportion of income spent, and the longer the time horizon, the more elastic the demand is. This means that a small change in price will lead to a large change in quantity demanded.
If the demand for steel is more elastic in Country A than in Country B, then the tariff will reduce global demand for steel, as the decrease in demand in Country A will outweigh the increase in demand in Country B. Conversely, if the demand for steel is more elastic in Country B than in Country A, then the tariff will increase global demand for steel, as the increase in demand in Country B will outweigh the decrease in demand in Country A.
Trade Tariffs and Global Demand: Evidence from Recent Data
According to the World Trade Organization (WTO), world merchandise trade volume fell by 5.3 per cent in 2020 due to the COVID-19 pandemic and related trade restrictions. However, trade began to recover as of mid-2020, but the effects of COVID-19 have varied significantly across countries and regions. In volume terms, which strip out the effects of fluctuating prices, Asia’s merchandise trade was down by only 0.5 per cent in 2020, compared to the global decline of 5.3 per cent.
One of the factors that may explain this difference is the level and direction of trade tariffs imposed by different countries and regions. According to the WTO’s World Tariff Profiles 2022, Asia had an average applied tariff rate of 6.1 per cent on all products in 2020, lower than Africa (12.1 per cent), America (7.4 per cent), Europe (5.2 per cent), and Oceania (6.4 per cent). Moreover, Asia had a higher share of duty-free imports (54.9 per cent) than any other region except Europe (56.8 per cent).
Additionally, some Asian countries have reduced their tariffs or signed free trade agreements with their trading partners in recent years, which may have boosted their trade volumes and demand for their products and services. For example, China reduced its tariffs on over 850 products from January 2020, while Japan signed a free trade agreement with the United Kingdom in October 2020.
These examples suggest that lower or reduced trade tariffs can increase global demand for certain products and services by lowering their prices and increasing their competitiveness in international markets. However, the impact of trade tariffs on global demand also depends on other factors, such as exchange rates, income levels, consumer preferences, and non-tariff measures.
References:
https://core.ac.uk/download/pdf/6958854.pdf
https://core.ac.uk/download/pdf/6958854.pdf
https://www.wto.org/english/res_e/statis_e/wts2021_e/wts2021_e.pdf
http://fordschool.umich.edu/rsie/workingpapers/Papers476-500/r489.pdf
http://drodrik.scholar.harvard.edu/files/dani-rodrik/files/after-neoliberalism-what.pdf
https://web.archive.org/web/20210308192131/https://www.cepal.org/prensa/noticias/comunicados/8/7598/chang.pdf
https://www.gov.uk/trade-tariff
https://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp
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