How Import Tariffs Affect the Economy: Examples and Analysis

Import tariffs are taxes imposed by governments on imported goods. They are meant to protect domestic industries from foreign competition, but they also have other effects on the economy. In this article, we will look at some examples of import tariffs used as a protectionist policy, and analyze their impact on consumers, producers, and trade.

Different Forms of Import Tariffs

Import tariffs can take different forms, such as specific tariffs, ad valorem tariffs, or mixed tariffs. Specific tariffs are computed on the physical quantity of the good being imported, e.g., Australia’s 2005 schedule includes a tariff of $1.22/kg on certain types of cheeses and the United States charges $0.68 per live goat. Ad valorem tariffs are expressed as a percentage of the value of the good being imported, e.g., China’s 2019 schedule includes a tariff of 25% on certain types of cars and the European Union charges 10% on footwear. Mixed tariffs are expressed as either a specific or an ad valorem rate, depending on which generates the most (or sometimes least) revenue.

Effects of the Import Tariffs

Import tariffs have several effects on the economy. First, they increase the price of imported goods relative to domestic goods. This gives an advantage to domestic producers, who can sell more of their products at a higher price. This may create more jobs and income in the protected industry. For example, in 2018, the U.S. imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports to protect its domestic metal industry from foreign competition. This boosted the profits and employment of U.S. steel and aluminum producers.

However, import tariffs also have negative effects on the economy. First, they reduce the quantity of imports and increase the quantity of domestic production. This creates a deadweight loss, which is a loss of economic efficiency and welfare that occurs when resources are not allocated optimally. The deadweight loss arises because some consumers who would have bought the imported good at a lower price are now unable to do so, and some domestic producers who would have exited the market at a lower price are now able to stay in. This results in a misallocation of resources and a reduction in total surplus.

Second, import tariffs increase the price of imported inputs for domestic firms that use them in their production process. This raises their costs and reduces their competitiveness in both domestic and foreign markets. This may lead to lower output, profits, and employment in the downstream industries that use the imported inputs. For example, the U.S. tariffs on steel and aluminum increased the costs for U.S. manufacturers of cars, machinery, appliances, and other products that use these metals as inputs. This reduced their profits and market share, and forced some of them to cut jobs or relocate production abroad.

Third, import tariffs invite retaliation from trading partners who are affected by them. This may lead to a trade war, which is a situation where countries impose tariffs or other trade barriers on each other in response to each other’s trade policies. A trade war reduces the volume and value of trade between countries, and harms both exporters and importers. For example, after the U.S. imposed tariffs on steel and aluminum imports, several countries retaliated by imposing tariffs on U.S. exports of agricultural products, motorcycles, whiskey, and other goods. This reduced the demand and prices for U.S. exports, and hurt U.S. farmers and manufacturers.

Import tariffs are a form of protectionism that aims to shield domestic industries from foreign competition. However, they also have negative effects on the economy, such as creating deadweight losses, increasing costs for downstream industries, and provoking trade wars. Therefore, import tariffs should be used with caution and only when there is a clear justification for them.

The Impact of Import Tariffs on Global Demand

Import tariffs are taxes that governments impose on imported goods to protect domestic industries, promote local manufacturing, and address unfair trade practices. Import tariffs can have significant effects on the global demand for certain products, depending on the size, type, and duration of the tariffs. In this blog post, we will examine some examples of import tariffs and how they affect the global demand in different industries.

Steel and Aluminum Tariffs

In 2018, the United States imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports from most countries, citing national security concerns. These tariffs were intended to boost the domestic production of steel and aluminum, which are essential for the defense and infrastructure sectors. However, the tariffs also increased the costs of these metals for downstream industries that use them as inputs, such as construction, automotive, and machinery. According to a study by Trade Partnership Worldwide, the tariffs reduced U.S. GDP by 0.2% and employment by 180,000 jobs in 2019.

The tariffs also triggered retaliatory measures from other countries, such as Canada, Mexico, China, and the European Union, which imposed their own tariffs on U.S. exports of agricultural products, motorcycles, whiskey, and other goods. These counter-tariffs reduced the global demand for U.S. exports and hurt the competitiveness of U.S. firms in foreign markets. According to the U.S. Chamber of Commerce, the trade war cost U.S. exporters $37 billion in lost sales in 2019.

Solar Panel Tariffs

In 2018, the United States also imposed a 30% tariff on solar panel imports from all countries, with a gradual decline to 15% by 2021. The tariff was aimed at protecting the domestic solar industry from cheap imports, especially from China, which dominates the global market for solar panels. The tariff was expected to increase the domestic production of solar panels by 3.4 gigawatts (GW) and create 23,000 jobs in the U.S. solar industry by 2022.

However, the tariff also increased the costs of solar panels for U.S. consumers and businesses, which reduced the demand for solar installations in the U.S. market. According to a report by Wood Mackenzie and the Solar Energy Industries Association, the tariff reduced the U.S. solar installations by 10.5 GW and eliminated 62,000 jobs in the U.S. solar industry from 2018 to 2021.

The tariff also affected the global demand for solar panels, as some countries responded with their own tariffs or subsidies to support their domestic solar industries. For example, India imposed a 25% safeguard duty on solar panel imports from China and Malaysia in 2018, which increased the costs of solar projects in India and slowed down the growth of its solar market. On the other hand, China increased its subsidies for domestic solar installations in 2019, which boosted its domestic demand for solar panels and partially offset the impact of the U.S. tariff.

Banana Tariffs

In contrast to the previous examples, some import tariffs can have positive effects on global demand by reducing trade distortions and promoting fair competition. One such example is the banana tariff dispute between the European Union (EU) and Latin American countries. The EU had a preferential tariff regime for banana imports from its former colonies in Africa, Caribbean, and Pacific (ACP) countries, which was lower than the tariff applied to banana imports from Latin American countries. This created an unfair advantage for ACP bananas over Latin American bananas in the EU market.

The dispute lasted for two decades until 2012, when the EU agreed to gradually lower its banana tariff for Latin American countries from €176 per tonne to €114 per tonne by 2017. This tariff reduction increased the competitiveness of Latin American bananas in the EU market and increased their global demand. According to a study by FAO and ECLAC, the tariff reduction increased Latin American banana exports to the EU by 17% and increased their export revenues by $460 million from 2012 to 2017.

References:

https://core.ac.uk/download/pdf/6958854.pdf

https://www.trade.gov/import-tariffs-fees-overview-and-resources
https://www.thebalancemoney.com/tariff-pros-cons-and-examples-3305967
https://www.tutor2u.net/economics/reference/examples-of-import-tariffs-used-as-a-protectionist-policy
https://wits.worldbank.org/WITS/wits/WITSHELP/Content/Data_Retrieval/P/Intro/C2.Forms_of_Import_Tariffs.htm
https://www.cato.org/blog/impact-2018-tariffs-trade-gdp
https://www.tradeworksforamerica.com/wp-content/uploads/2019/05/Trade-Works-for-America-The-Cost-of-Retaliation.pdf
https://www.seia.org/sites/default/files/2019-06/SEIA-201-Tariff-Impact-Analysis-June2019.pdf
https://www.reuters.com/article/us-china-solar/china-to-increase-subsidies-for-solar-power-by-18-in-2019-idUSKCN1QI3ZM