Tariffs, the word seems to be everywhere these days. But, what exactly is a tariff? How does it work? And why is it not always the best way to go?
Many people think that tariffs are simple, easy to implement, and that they are a great way to get more money into the public purse of a country.
To understand how tariffs work, we have to know what the point of them is. Tariffs are essentially a tax on imported goods. They work in two ways, the first is an additional cost added to an imported good. Cars are a good example. So a car that is valued at 25,000 might have a tariff added when it is exported to another country, that country pays an additional sum of money, say 1,000. So that car now has 26,000 in cost. You, the consumer, pay that extra 1K for buying that car that was exported to your country because your country levied a 1k tariff on that car that has been imported. A more common approach is to add a percentage to the value. Like 10% on that 25k, which means that same car would have a price tag of 27,500k.
Many politicians think that tariffs are great ways to get consumers to buy local, protect national security, and get extra money into the economy of their country. Well, yes, they do that, but there are some serious downsides to tariffs. Tariffs are intended to protect domestic industries, encourage local production, or even exert political leverage. However, these seemingly simple taxes can ripple through economies far beyond their intended use. The biggest risk to the economy by imposing a tariff is severe price increases in the economy of the country imposing the levy. Costs are always going to be passed down to the consumer via the supply chain.
This can hit families particularly hard, especially those on tight budgets, who may find themselves paying more for everyday necessities. Whether it's clothing, electronics, or groceries, tariffs erode purchasing power and can contribute to inflation. High inflation can cause job losses as well. Businesses will always look to maintain the bottom line. Part of that means lowering production of goods and reducing staff. Less product drives up the price of the item being sold in another country, so while a tariff does hurt the exporter, it also impacts the importer.
Trade Wars and Global Instability are another risk. Tariffs by nature are often used in hostile ways against another country. They can cause the attacked nation to escalate, devolving into a tit-for-tat trade war, where countries retaliate with their own tariffs on goods from the original imposing nation. This form of protectionism can disrupt global supply chains, create uncertainty for businesses, and lead to a decline in international cooperation. These trade disputes damage economic relationships and can create political instability in the nation imposing the tariff as well as the target nation, which right now in our world is a risk that no politician should want to take.
Tariffs are often intended to protect domestic industries, they can ironically have the opposite effect. By making imported components more expensive, tariffs can raise production costs for domestic manufacturers who rely on these goods. This can make their products less competitive both domestically and internationally. Tariffs can shield domestic industries from the competition that drives innovation and efficiency, leading to stagnation and a lack of long-term growth.
Tariffs can also restrict the choices available to consumers. When imports are made more expensive, businesses may choose not to import certain products, limiting consumer access to diverse and potentially innovative goods. By limiting international competition, tariffs can also stifle innovation, as domestic producers face less pressure to improve quality and develop new products.
Tariffs can artificially inflate the price of goods and services in certain industries. This causes a drain on investment. Tariffs also cause resources to be used in a manner that hinders growth in an economy. The misallocation of resources can hinder overall economic growth and reduce long-term prosperity. Resources are diverted from industries that may have stronger growth potential to those being artificially protected, potentially stunting, or radically slowing down innovation and economic advancement.
Tariffs are complex and their Implementation, enforcement, and administration of them is a time-consuming process. It requires dedicated government resources and can lead to bureaucratic inefficiencies. Furthermore, tariffs can be easily circumvented through legal loopholes or illegal smuggling, resulting in further complications and loss of government revenue.
While tariffs may appear to be a quick fix to perceived economic and other political problems, their downsides are often considerable. Increased consumer costs, trade wars, damage to domestic industries, reduced choice, distorted resource allocation, and challenges in implementation all point to the fact that the use of tariffs are not the smartest way to help a country. Instead, policymakers need to consider the broader economic implications and explore more effective approaches that foster fair trade, encourage innovation, and promote long-term sustainable growth. A more considered and comprehensive strategy is crucial to harnessing the benefits of global trade without resorting to the potentially damaging effects of widespread protectionism. Lastly, they should never be used to enforce the will of one nation upon another. Such tactics risk causing the one nation to possibly go to war against another. It's wiser to use diplomatic resources to resolve differences and develop cooperation between nations.
Want to learn more about Tariffs, check these resources out.
EDC, a Canadian website, has an article called Tariffs 101: What are tariffs and how do they impact international trade?
Another source, this one from the US perspective is USC Dornsife, the article Tariffs: What are they, who pays for them and who do they benefit?
And we cannot forget about Wikipedia, yes they have an article about tariffs.
