In simplest terms, a tariff is a tax. It adds to the cost of imported goods and is one of several trade policies that a country can enact.
Why Are Tariffs and Trade Barriers Used?
Tariffs are often created to protect infant industries and developing economies, but are also used by more advanced economies with developed industries. Here are five of the top reasons tariffs are used:
1. Protecting Domestic Employment
The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment. The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply. In economics, however, countries will continue to produce goods until they no longer have a comparative advantage.
2. Protecting Consumers
A government may levy a tariff on products that it feels could endanger its population. For example, Country A may place a tariff on imported beef from the country B if it thinks that the goods could be tainted with disease.
3. Infant Industries
The use of tariffs to protect infant industries can be seen by the Import Substitution Industrialization (ISI) strategy employed by many developing nations. The government of a developing economy will levy tariffs on imported goods in industries in which it wants to foster growth. This increases the prices of imported goods and creates a domestic market for domestically produced goods, while protecting those industries from being forced out by more competitive pricing. It decreases unemployment and allows developing countries to shift from agricultural products to finished goods.
4. National Security
Barriers are also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Defense industries are often viewed as vital to state interests, and often enjoy significant levels of protection. For example, while both Western Europe and the United States are industrialized, both are very protective of defense-oriented companies.
Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. Retaliation can also be employed if a trading partner goes against the government’s foreign policy objectives.
Non-Tariff Barriers to trade can arise from:
o Import bans
o General or product-specific quotas
o Complex/discriminatory Rules of Origin
o Quality conditions imposed by the importing country on the exporting countries
o Unjustified Sanitary and Phyto-sanitary conditions
o Unreasonable/unjustified packaging, labelling, product standards
o Complex regulatory environment
o Determination of eligibility of an exporting country by the importing country
o Determination of eligibility of an exporting establishment (firm, company) by the importing country.
o Additional trade documents like Certificate of Origin, Certificate of Authenticity etc
o Occupational safety and health regulation
o Employment law
o Import licenses
o State subsidies, procurement, trading, state ownership
o Export subsidies
o Fixation of a minimum import price
o Product classification
o Quota shares
o Multiplicity and Controls of Foreign exchange market
o Inadequate infrastructure
o “Buy national” policy
o Over-valued currency
o Restrictive licenses
o Seasonal import regimes
o Corrupt and/or lengthy customs procedures
A tariff is a tax imposed by the local government on goods and services coming into a country. They increase the price of the goods being imported. Tariffs were created by the government to protect local businesses from low-priced competitive products
Every county has its own currency and its patrons know how to use it but everything you know about your own currency changes when you are dealing with another country.
The rate given by one country for another countries currency is called the currency exchange rate. The daily exchange rate for the rest of the world is made according to the rates used when two banks trade between different countries.
Rates of currency are always fluctuating and that can be a major barrier to trade because the buyer could end up paying way more than intended. When a country’s currency is devalued in relation to another countries currency it means the country with the lower value can sell more because the other country saves money. However, it discourages the devalued country from buying the goods and services from the country with the higher currency value because they would pay more for less.