It is important to understand the pros and cons of tariffs. The laissez-faire doctrine stipulates that trade between countries should be free from government interference. Market forces of demand and supply should determine the prices of goods and services. Despite the existence of this policy, nearly all countries around the globe have abandoned it.
They have adopted a protection strategy such as tariffs to increase the price of imports and make them unfavorable to the locals. They are of the view that nations should not primarily depend on foreign products. Instead, they should focus on local production to develop a self-sufficient economy. Whereas governments levy tariffs on imports in a bid to attain various objectives among them protecting infant industries and employment, diversifying sectors and prevention of dumping; the policy is often associated with adverse impacts including reduction of variety, inefficient allocation of resources, and retaliation.
Advantages of Tariffs
Tariffs Protect Infant Industries
Imports pose a significant challenge to the local industries due to their low prices. Aggressive import competition has resulted in the collapse of many domestic industries all over the world. New industries with potential growth advantage may not flourish unless they are protected against the threat emanating from foreign competition. By protecting them, they are placed in a better position to develop, grow as well as to become competitive globally. Protection by the use of tariffs also enables local industries to acquire a comparative advantage. As a result, they may expand and enjoy economies of scale. Numerous developing countries have adopted the import substitution industrialization policy to protect infant industries. They impose tariffs on imported products, especially in sectors that need to develop. The increase in the price of the imports lowers their demand and creates a local market for goods that are manufactured domestically. Elimination of competitive pricing from imports permits such industries to develop without the risk of being compelled out of business.
Tariffs Promote the Diversification of Industries
The primary goal of each country is to become self-sufficient in all areas so that it does not encounter difficulties in case of an emergency. Other economists advocate for protection using tariffs as a way of diversifying a country’s industries. In today’s competitive business world, the modern economy must consider pursuing a long-term strategy of diversification to ensure stable growth of all sectors. Such policy is instrumental in the attainment of balanced development as well as inherent strength in an economy. Additionally, a nation is placed in a better position to benefit from external economies.
An unbalanced economy stems from excessive specialization leading to over-dependence on other countries. This scenario is dangerous, both politically and economically. For example, a country that relies on imports may suffer hardships in times of war. The economic implication is the risk of economic dislocation in the event the industries where the state depends on are affected adversely by unlikely circumstances. Self-sufficiency cannot be attained by having a few sectors and depending heavily on foreign countries. Thus, it is paramount to promote diversification of industries by imposing tariffs to build a balanced growth and make nations independent.
To Prevent Dumping
Dumping involves selling commodities in a foreign market at a much lower price than in the home market in an attempt to gain a significant market share. It is intended to drive out competitors and command the entire market. It tends to offer short-term benefits to the customers. The local industries, especially in underdeveloped nations, are not capable of competing with foreigners because of the economies of the scale that they enjoy. The use of tariffs is advocated as a measure to counter this challenge. Higher taxes may be levied to protect domestic manufacturers against the dumping of imports at a lower price. It may prevent a country from receiving rejected products. In the long-run, the production sector will be competitive and profitable.
Protecting Domestic Employment
One of the pillars of economic growth and development entails the creation of employment opportunities. In the recent past, the economy of the United States has been adversely affected as a result of the amendment of the tariff’s policy that resulted in an influx of Chinese products. The removal of tariffs on imports from China resulted in the loss of about 2.4 million manufacturing jobs between 1991 and 2011. It is evident that tariffs play an essential role in creating jobs by protecting and providing a conducive environment for the local industries to grow as well as to manufacture their products. For instance, cheaper imports are restricted, thereby promoting domestic sectors which create more jobs. Countries such as China and Mexico have been in the public domain for providing cheap labor, thereby denying locals employment. Levying tariffs leads to the creation and expansion of jobs, which could have been outsourced at a lower cost. It implies that locals are exposed to more employment opportunities and better wages that significantly help them to improve their standards of living.