The Pros and Cons Of Tariffs

Do they hurt the economy… and are they bad for your trade operations?

Tariffs have long been a controversial topic in international trade. 

Some view tariffs as a necessary tool to protect domestic industries and jobs, while others argue that they are a trade barrier that negatively impacts consumers and hinders global economic growth. 

With the rise of tariffs worldwide, it’s never been more important to understand their true impact.

In this article, we’ll give you a deeper understanding of tariffs by exploring their role in economics, analysing their potential impact, and examining the common arguments that support and stand in opposition to tariffs.

Are tariffs negatively affecting your business? Contact clearBorder to find effective strategies for overcoming trade barriers.

The Role of Tariffs in The Economy

Tariffs are taxes imposed on imported goods and services. Countries impose tariffs to create specific outcomes in the economy, the main reason being to protect domestic industries from foreign competition. 

By increasing the price of imported goods, it becomes more expensive for foreign companies to enter the market, giving a competitive advantage to domestic companies. 

The Case for Tariffs: Protecting Domestic Industries 

Proponents of tariffs argue that they protect domestic industries from unfair foreign competition. By imposing taxes on imported goods, tariffs level the playing field for domestic producers who may struggle to compete with cheaper foreign alternatives. 

Protection from foreign competition can be particularly important for industries in the early phase of development or those considered strategically important for national security or economic stability. Tariffs can also be used as anti-dumping measures and as a source of tax revenue for governments. 

Advocates believe these measures are necessary to maintain a strong and diverse domestic economy, protect jobs, and ensure long-term economic stability in the face of global competition.

The Case Against Tariffs: Rising Costs for Consumers 

Opponents of tariffs argue that these measures ultimately harm the very people they are intended to protect. For example, tariffs can increase production costs for businesses relying on imported materials. The increased production costs are then passed on to consumers through higher prices. This is known as cost-push inflation, where rising input costs end up increasing prices for consumers.

In addition, when there is no domestic alternative for certain products, consumers end up paying more for products, as the tariff cost is often passed on to the consumer. For low-income households, this can lead to a lower standard of living and reduced economic welfare. 

In some cases, this inflation of prices may prompt banking institutions (eg., the Bank of England or the US Federal Reserve) to introduce measures that maintain price stability and market equilibrium.

Many critics of tariffs argue that free trade is a more effective approach to international commerce. Free trade aims to remove barriers, such as tariffs and quotas, to promote the unrestricted flow of goods and services between countries. Historical proponents of free trade like Adam Smith and David Ricardo argued that free trade fosters competition, efficiency, and economic growth. 

How Tariffs Affect Global Trade Relations 

Another major disadvantage of tariffs is that they can provoke retaliatory measures from other countries. This can escalate into a trade war, where countries place increasingly restrictive trade measures on each other.

Trade wars can cause global supply chain bottlenecks, reduce overall trade volume, and create an atmosphere of economic uncertainty. Moreover, retaliatory tariffs can strain diplomatic relations between countries, as they are often perceived as hostile or protectionist. 

In the global economy, tariffs can have far-reaching consequences, affecting not only the countries directly involved but also their trading partners and the broader international community.

Are tariffs impacting your business? clearBorder’s trade consultants can help you minimise the effects of tariffs. 

Historical Examples of Tariff Successes and Failures

Throughout history, countries have implemented tariffs with varying degrees of success. One notable example is the UK’s Corn Laws of the early 19th century, where the government imposed high tariffs on imported grain to protect domestic farmers. While the laws initially benefited landowners, they led to higher food prices and widespread public discontent, ultimately resulting in their repeal in 1846. 

Under the Smoot-Hawley Tariff Act of 1930, the US raised tariffs on over 20,000 imported goods. The act led to retaliatory tariffs from other countries, worsened the effects of the Great Depression, and contributed to a significant decline in global trade. 

However, not all tariff policies have been a failure, South Korea’s strategic use of tariffs and other protectionist measures in the 1960s and 1970s helped foster the growth of its domestic industries, contributing to the country’s rapid economic development. 

The Verdict: Are Tariffs Beneficial or Harmful?

The impact of tariffs on an economy is complex and multifaceted, with both potential benefits and drawbacks. 

While tariffs can provide short-term protection for domestic industries and help safeguard jobs, they can also result in higher prices for consumers and reduced international competitiveness. In the long run, tariffs can also lead to inefficiencies, slower economic growth, and strained trade relationships.

Ultimately, the success of tariffs depends on various factors, including the broader economic context, the industries targeted, and the international response. 

The Future of Tariffs in a Globalised World 

As the world becomes increasingly interconnected, tariffs are likely to remain a key topic of international debate. Some countries may continue to use tariffs as a tool to protect domestic industries. However, the growing complexity of global supply chains and the potential for retaliatory measures may make these trade barriers less attractive for many countries. 

With the growing presence of tariffs, businesses around the world will have to stay informed about changes in trade policies and adapt their strategies accordingly. This could involve diversifying supply chains, adjusting pricing, or exploring free trade agreements. 

Going forward, trade consultants will play an increasingly important role in helping businesses navigate international trade. For example, through training with clearBorder, businesses can learn about every aspect of trade, including imports/exports, freight forwarding, and customs procedures. clearBorder’s consultants can also help businesses understand international trade barriers and adapt to tariffs through strategies like supply chain diversification. 

Ultimately, the most successful businesses will be those that can adapt to changing trade policies, diversify their markets, and leverage the guidance of trade experts.

Contact clearBorder today for tailored trade support.