Economics of Tariffs
>> Saturday, January 22, 2011
It's been fashionable among the economics opinion-makers to follow the gospel of free trade and globalisation. Tariff barriers have been removed or reduced and international trade has grown. Free-trade zones have been established. Treaties signed that take away governments' control over imported product standards, and by extension our own control over the safety and quality of imported foods and other products. A 'level playing field' is created.Download Exam Drill of Economics for Social Science Program
Let's look at two hypothetical countries - - Country A we'll call Alphatica and Country B we'll call Betaria.
If Alphatica drops its import tariffs for computer monitors to zero, it's opening up its domestic market to foreign competition. Betaria maintains a tariff barrier to imports of computer monitors which protects its own industry. Now the computer monitor makers in Alphatica don't have the same protection as the makers in Betaria, so they're at a disadvantage. They can try to export to Betaria, but the tariffs applied to their products there make them uncompetitive. The local monitor makers in Alphatica soon go out of business, losing manufacturing employment and technical expertise. Alphatica becomes a computer monitor importer, without a domestic industry or know-how. The monitor makers from Betaria see the lack of competition and raise their prices accordingly.
No big deal?
So multiply this situation over a number of different industries. You soon see the picture - - Alphatica, through its liberal tariff policies has exported many jobs in manufacturing and industry to other countries. The ones with some form of tariff protection. The ones who support and nurture local industry. Alphatica is no longer able to make its own consumer goods, nor provide employment in making them.
There is greater strain on the government to provide unemployment benefits and other economic relief to badly affected areas that were once the economic engines of the nation. There is less tax revenue now, so taxes are raised to pay for this relief, putting further strain on remaining profitable industries. Or else taxes are not raised, and government deficits grow and grow instead, in the hope that someday the debt crisis will be solved.
Sounds all too familiar?
And heaven help Alphatica if its food growers become uncompetitive in a free market, and the country becomes dependent on food imports just to feed itself.
Now, tariffs have been used in the past to subsidise inefficient industries. Lazy companies that don't invest in modern plant and equipment; that don't innovate; whose directors are complacent - - but who are politically well-connected - - could exist and even flourish under a corrupt tariff regime.
But tariffs can also be set in a transparent fashion, matching other countries' tariffs. A balance can be reached between healthy competition and destructive competition. Ultimately, there's more wealth to be created - - and shared - - through cooperation than through competition.
Tariffs are a tool.
