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Effects of Trade Tarrif on Financial Growth

Trade Tariffs have been used across the world for thousands of years. Seen as being protectionist – preserving local markets and controlling provincial economies – the use of tariffs has been largely condemned by the academic and professional communities, as the consensus has come to understand it has a detrimental effect on financial growth and welfare. This article takes a broad glimpse at them and their uses…


Smoot-Hawley


Although the use of tariffs very much extends backward into the history of civilization, it could be argued that it is in the 20th century that tariffs really cut their teeth. Global trade has existed as long as civilization has too but it is in the 20th century – when mass transit and travel technologies bloomed – that trade evolved and influenced the use of tariffs. In the Financial Times, Horowitz discusses how when ex-President Donald Trump instigated a trade war with China and brought in various tariffs on Chinese products, the controversial world leader was flying in the face of centuries of economic theory, practice, and experience.




Figure 1: Types of Tariff (as indicated by Investopedia) Although much debate has bubbled around the subject, a notorious potential lesson from history regarding the use of tariffs came in 1930 when the US adopted the Smoot-Hawley measures all of 92 years ago. It has been variously argued that that strategy led to a bounding trade war which exacerbated an already festering economic downturn that was becoming the Great Depression in the US.


Economic misery then spread globally and ended up playing a very significant role in the unfolding of the Second World War. Following the crash of Wall Street in 1929, the US government felt forced to adopt a protectionist stance and supply a quick fix to desperate issues of mass unemployment and plummeting commodity prices.


Ad Volarem


Rudimentarily, tariffs are a tax or levee on imported goods from outside the border’s of a given country. Historically (and pointed out by the Institute for Government), tariffs were largely used by governments as a means to generate revenue. It is a more contemporary utility that tariffs are used to protect local industries from foreign competition. In essence, by placing a hike on goods coming into a country or region, the customer base of that region is persuaded to purchase the cheaper domestic merchandise (or services) alternative. The recent notion behind a tariff is to deliberately make merchandise or service less competitive, to hobble them so-to-speak, rather than purely to extract money from them.


Figure one (Investopedia) shows the typical types of trade tariffs, as well as further types of impediments to the free flow of trade. Where one type of tariff applies to the variety of imports being brought into a region, the other is a proportional levy based on how much the merchandise or service is worth. The former is called a Specific Tariff while the latter is referred to as Ad Volarem. This is in contrast to other types of penalties or restriction that can be brought to bear.


Licenses can restrict the number of entities in the market, quotas can restrict the amount of a product or service, content requirements can dictate what proportion of a market must be composed of domestic products, and voluntary export restraints can be imposed by the originating country or region (rather than the destination one).


There are some less aggressive reasons for employing tariffs too. A government may feel it needs to protect its citizens from a product that has risks attached to it (such as goods that are vulnerable to disease). Infant industries especially in developing nations sometimes need greater protections to find a foothold in the market and limiting the access of richer countries and their own products can be necessary, at least in the initial stages.


When questions of National Security arise, tariffs can be a useful tool for a government wanting to protect its defense industries. Equally, if a country breaches internationally established law, tariffs can be put in place as a penalizing measure and may also be used to coax said country to fall in line.


Consensus


The general consensus of experts and professionals alike is that tariffs are detrimental to the global economy. Initially, this is somewhat obvious if taken to the extreme. If all countries and regions everywhere established tariffs for everything, the consumer at ground level would be faced with limited choice and therefore would become helpless to offset any price increases due to reduced competition (limited options). Governments certainly see increased revenue when exports enter domestic markets. Domestic industries benefit through the lack of competition as well as greater influence over the marketplace. Ultimately, tariffs tend to favor the producer and penalize the end consumer.


Over time too, the effects of trade tariffs changes. In the short-term, increased prices on merchandise reduce uptake by consumers and businesses. In this period, some businesses will make a profit and the government will receive monies from duties. As the tariff stays in place for the longer term, inefficiencies can creep into production due to an absence of competition, and, alternatives and substitutes might penetrate the marketplace and strip the initially benefitting business of profits. As less disposable income increases with time, pressure on the government for revitalized or new public services can begin to erode budgets. As tariffs remain in effect, the lack of downward pressure on domestic prices from foreign competition allows local producers to maintain raised pricing tactics. Domestic consumers are left having to pay the higher prices. Further still, as tariffs remain, whole businesses that cannot maintain their competitiveness, and would normally fold, can stay afloat and bloat the domestic marketplace.


World Trade Organization


Up to the middle of the 20th century, the use of tariffs enjoyed a freedom that made the global economy more volatile. All a country had to do was perceive an emerging threat to their domestic financials and they could then set tariffs in place, for the most part without any political reprisals other than parallel nations setting their own tariffs, often in a tit-for-tat squabble. International economics was left at the mercy of the whims of national governments. Critics aside, the appearance of the World Trade Organization has greatly helped to stabilize the ship and reduce the efficacy of the trade tariff as a money-making or political strategy in modern times (Donald Trump’s shenanigans notwithstanding).

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