How Tariff Duty Affects International Trade: A Comprehensive Guide
Tariff duty is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. It is one of the most widely used instruments of protectionism, along with import quotas and export quotas and other non-tariff barriers to trade. In this article, we will explain what tariff duty is, how it works, what are its types, effects, and benefits, and how it affects international trade.
What is tariff duty?
A tariff duty is a tax levied by the government of a country or by a supranational union on imports or exports of goods. The purpose of tariff duty is to raise revenue for the government, protect domestic industries from foreign competition, and regulate foreign trade and policy. Tariff duty can be fixed (a constant sum per unit of imported goods or a percentage of the price) or variable (the amount varies according to the price).
How does tariff duty work?
Tariff duty works by increasing the price of imported goods, making them less competitive and less attractive to consumers. This creates an incentive for consumers to buy local products instead, boosting the domestic economy. Tariff duty also reduces the quantity of imports, improving the trade balance and reducing the trade deficit. Tariff duty can also be used to counteract unfair trade practices by foreign countries, such as dumping, export subsidies, or currency manipulation.
What are the types of tariff duty?
There are two main types of tariff duty: specific and ad valorem. A specific duty is a levy of a given amount of money per unit of the imported goods, such as $1 per yard or per pound. An ad valorem duty, on the other hand, is calculated as a percentage of the value of the imported goods, such as 10% or 20%. A compound duty is a combination of both specific and ad valorem duties.
What are the effects of tariff duty?
Tariff duty has both positive and negative effects on the economy and society. Some of the positive effects are:
- It increases government revenue, which can be used for public spending or debt reduction.
- It protects domestic industries from foreign competition, which can foster innovation, employment, and growth.
- It encourages import substitution industrialization, which can diversify the economy and reduce dependence on foreign markets.
- It corrects market failures caused by externalities, such as environmental or social costs.
Some of the negative effects are:
- It increases the price of imported goods, which reduces consumer surplus and welfare.
- It creates deadweight loss, which is the loss of economic efficiency due to distortions in the market.
- It reduces the quantity and variety of goods available to consumers, which lowers their standard of living and satisfaction.
- It invites retaliation from trading partners, which can escalate into trade wars and reduce global trade.
What are the benefits of tariff duty?
Tariff duty can have some benefits for certain groups or sectors in society. Some of the benefits are:
- It benefits domestic producers, who can sell more products at higher prices and earn more profits.
- It benefits domestic workers, who can enjoy more employment opportunities and higher wages.
- It benefits domestic consumers, who can enjoy higher quality products and more national pride.
- It benefits domestic governments, who can exercise more control over their trade policy and national security.
How does tariff duty affect international trade?
Tariff duty affects international trade by changing the relative prices and quantities of traded goods. Tariff duty makes imports more expensive and exports more competitive in the global market. This affects the demand and supply curves of both domestic and foreign markets, creating changes in equilibrium prices and quantities. Tariff duty also affects the terms of trade, which is the ratio of export prices to import prices. Tariff duty improves the terms of trade for the importing country, but worsens it for the exporting country.
How Tariff Duty Affects Global Demand in Different Industries
Tariff duty is a tax levied by governments on the value of imported products. It is a type of trade barrier that can have various effects on the global demand for different goods and services. In this blog post, we will explore how tariff duty can increase or decrease the global demand in three industries: agriculture, manufacturing and services.
Agriculture
Agriculture is one of the most sensitive and protected sectors in international trade. Many countries impose high tariff duties on agricultural products to protect their domestic farmers from foreign competition and to ensure food security. However, these tariffs can also distort the global demand for agricultural products by making them more expensive and less accessible for consumers in importing countries. For example, according to the World Trade Organization (WTO), the average tariff rate on agricultural products in 2018 was 15.2%, compared to 4% for non-agricultural products . This means that consumers in countries with high tariff duties on agricultural products have to pay more for their food, which can reduce their demand for imported products and encourage them to consume more domestic or substitute products. On the other hand, countries with low or zero tariff duties on agricultural products can benefit from lower prices and higher quality of imported products, which can increase their demand for foreign products and stimulate trade.
Manufacturing
Manufacturing is another important sector in international trade, accounting for about 70% of global merchandise exports in 2019 . Tariff duties on manufactured products can have different effects on the global demand depending on the type and level of the tariffs, the elasticity of demand and supply, and the degree of competition in the market. Generally speaking, higher tariff duties on manufactured products can decrease the global demand by raising the prices and reducing the quantity of imported products in the market. This can hurt both consumers and producers in importing countries, as they have to pay more for less variety and quality of products. However, higher tariff duties can also increase the global demand by creating an incentive for domestic producers in importing countries to increase their production and exports to other markets where they can sell at lower prices. This can benefit both consumers and producers in exporting countries, as they can enjoy more market access and higher profits.
Services
Services are the fastest growing sector in international trade, accounting for about 50% of global GDP and 25% of global exports in 2019 . Unlike goods, services are not subject to physical barriers or tariffs at the border, but they can face various non-tariff barriers such as regulations, standards, licensing, quotas, subsidies, etc. These non-tariff barriers can affect the global demand for services by creating obstacles or opportunities for service providers and consumers in different countries. For example, according to the WTO, the average restrictiveness index for services trade in 2016 was 16.5%, ranging from 6.8% for transportation services to 37.1% for professional services . This means that some service sectors are more open and competitive than others, which can influence the global demand for different types of services. Generally speaking, lower non-tariff barriers on services can increase the global demand by lowering the costs and increasing the quality and variety of services available in the market. This can benefit both service providers and consumers in different countries, as they can access more markets and opportunities.
Tariff duty is a complex and controversial issue that can have various effects on the global demand for different industries. Depending on the level and type of tariffs, the elasticity of demand and supply, and the degree of competition in the market, tariff duty can increase or decrease the global demand by affecting the prices, quantity, quality and variety of products and services available in the market. Therefore, it is important for governments to carefully assess the costs and benefits of imposing or reducing tariff duties on different sectors and to cooperate with other countries to achieve a fair and balanced trade system.
References:
https://core.ac.uk/download/pdf/6958854.pdf
https://core.ac.uk/download/pdf/6958854.pdf
https://web.archive.org/web/20210308192131/https://www.cepal.org/prensa/noticias/comunicados/8/7598/chang.pdf
http://drodrik.scholar.harvard.edu/files/dani-rodrik/files/after-neoliberalism-what.pdf
https://www.wto.org/english/res_e/statis_e/its2020_e/its2020_e.pdf
https://hts.usitc.gov/
https://en.wikipedia.org/wiki/Tariff
https://www.britannica.com/money/topic/tariff
https://www.trade.gov/import-tariffs-fees-overview-and-resources
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