Tax Tariffs Explained

General Finances
By JingCheng Woo,

What is a tax tariff?

A tariff is a tax paid on imports and exports of goods and services. In theory, imposing a tax on an imported product would cause its price to increase, which results in a decrease in demand. This makes the price of locally-produced products relatively lower and more attractive to the consumer.


There are two main motivations for imposing tariffs by the government:
1. to generate revenue and
2. to protect domestic industries from foreign competition.


 

Are Tax Tariffs good or bad for the economy?

Good

Bad

Tariffs promote protectionism.

Protectionism is the use of tariffs to shield a country’s domestic industry from foreign competition. This could generate money and jobs in the country. In theory, tariffs raise the prices of the imported goods making domestic goods more attractive (cost-wise) to consumers. The greater demand for local goods may also lead to an increase in the bottom line (also known as profit) of local companies. With higher profits and demand, more jobs are created in the domestic market to meet this demand, reducing unemployment in the economy.

Tariffs interfere with the free market.

Free trade is a policy that eliminates tariffs between countries. Tariffs remove the ability of international market systems to allocate resources efficiently. For example, Country A is efficient in making shoes and Country B is not efficient in making shoes, but efficient in making gloves. Should Country B impose tax on shoes from Country A, C ountry B would have to divert resources from making gloves to making shoes. This decreases efficiency in net resources.

Tariffs reduce trade deficits for the domestic economy.

Tax tariffs are believed to counteract trade deficit. Trade deficit is the difference between a country’s imports and exports. In theory, imposing tariffs can change the demand in favour of the country and reduce trade deficit.

Tariff increases prices for locals.

Domestic manufacturing may not be the most efficient way of producing certain goods. The unfair advantage the domestic companies have over foreign companies would allow domestic companies to increase the price of their products. Also, for industries that depend on exports as raw materials, tariffs would increase their costs to produce, leading to higher cost for consumers.

Tariffs may reduce labour exploitation.

Globalisation has resulted in richer countries outsourcing the manufacturing process to poorer countries. Richer countries exploit the cheaper labour in poorer countries, trapping them in a poverty cycle. If tariffs are higher, it may decrease the number of sweatshops around the world.

Tariffs promote trade wars.

Often, when a country imposes a tax tariff on another country’s product, the other party may likely strike back with tax tariffs as retaliation. This may result in lower trade volumes and rising prices for both countries.

 

Takeaway:

Tax tariffs are a highly debatable topic, but there is one thing that most economists can agree — trade restrictions hurt growth and prosperity. Since the beginning of time, any population that cuts off from external trade has suffered economically and socially. Closing off a country to trade would hurt the country’s purchasing power and weaken productivity. Trade Tariffs should be used to stabilize, but not deter trade.

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