Pros and Cons of Tariffs

PROS AND CONS OF TARIFFS 6

Tariffs refer to custom taxes, which are levied by administrationson imports. They are implemented as a fraction of the entire expenseof an imported good (Amadeo, 2016). The objective of tariffs is tomake imports more expensive as compared to domestic goods. By doingso, the government is able to safeguard its domestic industry,dealing with the production of similar goods as the taxed imports. Inthe following discussion, the essay presents the pros and cons oftariffs.

Pros

Tariffs are an effective way of promoting domestic products.Morelock (2016) explains that when the government taxes imports, themanufacturers of the imported products may increase the prices oftheir commodity as a strategy of recovering money spent on tax. As aresult, the tariff expenses are passed on to consumers, who have topay higher prices for an imported product. But, supposing that theproduct in question is also manufactured locally, customers have ahigher likelihood to opt for the domestic good, owing to its cheaperprice. Hence, this acts as an indirect way of promoting domesticgoods.

The government is able to increase its revenue through tariffs. Manygovernments generate revenue from tax collected from civilians.However, due to the many government functions, administrations mustfind ways of generating more money for their countries. Placingtariffs on imports is one such effective approach governments use toincrease their revenue. For instance, in 2008 duties placed onimports and customs accounted for close to 2% of the Americangovernment’s income. Although the percentage seems small, the totalamount earned from tariffs is approximately “29.2 billion dollars(Morelock, 2016)”. Assuming that more tariffs are placed onimports, the government will earn extra money.

Tariffs are an effective way of protecting domestic companies fromforeign competition (Amadeo, 2016). Many overseas manufacturers selltheir goods at cheaper prices as compared to domestic manufacturers.Supposing that imports are not taxed, it becomes easier for theforeign companies to have a competitive advantage over localproducers. Hence, tariffs imposed on imports make it almostimpossible for imported products to be cheaper than domestic goods.In some cases, when the tariffs are too high, foreign manufacturersopt out of an overseas market. As a result, domestic companies areable to sell their products locally without fear of competition fromoverseas.

Cons

Imposing tariffs on other countries makes America poorer whencompared to other developing nations. According to Riley (2013),tariffs transfer money from the country into other nations withreduced taxation on imports. For instance, nations like Singapore andNew Zealand are high prosperous as compared to the United States.This is because, tariffs do not only restrict the entry of productsfrom overseas nations, but also the creation of jobs for locals. Whenoverseas nations are allowed to freely trade in a foreign company, itbecomes possible to open a subsidiary company that employsindividuals from the host nation. On the other hand, when a foreignmanufacture is highly taxed, it becomes impossible to operate in thecountry with high tariffs, which resonates to no job creations.

It is important for tariffs to reduce domestic products competition.However, it is also significant to note that competition is veryimportant in influencing the types of products available in themarket. Taxes on imports limit and reduce the ability of overseascompanies to operate and compete in the same market as domesticmanufacturers. This is because the latter offer similar products atlower prices. Nevertheless, when competition is eliminated, domesticproducers may fail to produce goods that meet quality standards. Inaddition, the products may be highly priced as they are the onlyavailable products. While consumers are protected from the highprices of import goods, they may end up paying higher for domesticgoods.

Tariffs discourage trade between America and other nations(Morelock, 2016). When businesses are highly taxed, they are likelyto avoid doing business with the country that has high tariffs. Sincethe tariffs promote the consumption of local products, foreigncountries choose to withdraw their goods from the country becausethey feel disadvantaged to compete with domestic manufacturer. Thisin turn encourages reduced trade with America. At the same time, theforeign countries may retaliate by equally increasing their tariffson products from the United States. This would discourage Americafrom entering into business with the countries. The outcome is anegative impact on trade.

In addition to discouraging trade among nations, tariffs are likelyto cause trade wars (Sanders, 2016). Illustrations of such trade warshave already been witnessed in the world. For instance, China and theEuropean Union were engaged in a trade disagreement over textiles.The dispute resulted in the delay of trade agreements, which led toits expiry in 2005. America has high tariffs imposed on auto parts,which seems to restrict the ability of the country to enter intotrade agreements with countries that manufacture auto parts. Suchtrade wars have a negative impact on the earning of countries engagedin the disagreements, as the nations are unable to benefit fromtrade.

Tariffs make it impossible for job creation to be successful (Cruz,2015). When foreign manufacturers have to pay high tax rates, thisreduces their incentive to invest in the country charging high taxes.On the other hand, the overseas company may lack money to createemployment, for instance, by setting up manufacturing companies inthe countries where they sell their products, because most of theirmoney is used up in paying tariffs. Businesses that have set up inthe United States might as well react to high tariffs by relocatingto nations that do not have high tax. Such a move results in the lossof jobs for Americans working for the overseas company.

Conclusion

Tariffs have advantages as well as disadvantages. The advantagesinclude the fact that tariffs effectively promote domestic products.Overseas manufacturers are compelled to charge high prices for theirproducts as a strategy for recovering from taxes charged on imports.Thus, consumers opt for cheap domestic products. Tariffs are a sourceof extra income for the government because customs account to asubstantial amount of the money used by administrations. Last,tariffs safeguard domestic producers from overseas competition byencouraging the use of locally manufactured products. On the otherhand, tariffs are disadvantageous as they discourage trade. WhenAmerica imposes high taxes on imports, overseas nations opt not totrade with the country. As tariffs cause a decline in domesticproduct competition, they also cause an increase in the prices oflocal products while at the same time encouraging the production ofsubstandard goods.

References

Amadeo, K. (2016). Tariff: Pros, cons and examples. The Balance.Retrieved from:https://www.thebalance.com/tariff-pros-cons-and-examples-3305967

Cruz, T. (2015). A simple flat tax for economic growth. The WallStreet Journal.

Morelock, J. (2016). Advantages and disadvantages of tariffs in theUS today. Demand Media, Inc. Retrieved from:http://peopleof.oureverydaylife.com/advantages-disadvantages-tariffs-today-10751.html

Riley, B. (2013). Tariff reform needed to boost the US economy. TheHeritage Foundation, 1-1. Retrieved from:http://www.heritage.org/research/reports/2013/04/tariff-reform-needed-to-boost-the-us-economy

Sanders, M. (2016). The disadvantages of tariffs and quotas. SmallBusiness, 1-1.