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What Are Tariffs and Non Tariffs

Tariffs are taxes imposed on imported goods at national borders. While historically used to generate government revenue, tariffs also protect domestic industries by making imported goods more expensive relative to domestic alternatives. However, tariffs can harm domestic consumers through higher prices over time and may lead countries to engage in trade wars through retaliatory tariffs.

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61 views

What Are Tariffs and Non Tariffs

Tariffs are taxes imposed on imported goods at national borders. While historically used to generate government revenue, tariffs also protect domestic industries by making imported goods more expensive relative to domestic alternatives. However, tariffs can harm domestic consumers through higher prices over time and may lead countries to engage in trade wars through retaliatory tariffs.

Uploaded by

Ronalie Sustuedo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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What Are Tariffs?

A tariff is a type of tax levied by a country on an imported good at the border. Tariffs have
historically been a tool for governments to collect revenues, but they are also a way for
governments to try to protect domestic producers.

As a protectionist tool, a tariff increases the prices of imports. As a result, consumers would
choose to buy the relatively less expensive domestic goods instead.

In today’s global economy, many products bought by consumers have parts from other
countries or were assembled overseas. As a result, tariffs can also affect consumers of
products that they believe were made in their home country.

Many economists, however, argue that tariffs create market distortions that can actually harm
domestic consumers over time. They could also lead to the imposition of tit-for-tat tariffs among
countries on their respective exports that could lead to a damaging trade war.

KEY TAKEAWAYS

 Tariffs are duties on imports imposed by governments to raise revenue, protect


domestic industries, or exert political leverage over another country.
 Tariffs often result in unwanted side effects, such as higher consumer prices.
 Tariffs have a long and contentious history, and the debate over whether they represent
good or bad policy rages on to this day.

U.S. Tariffs and Free Trade


In today’s market-leaning global economy, tariffs have earned something of a bad reputation.
Many economists argue that they are bad for the economy and harmful to consumers.

For instance, the Smoot-Hawley Tariff has been blamed for worsening the Great Depression in
the 1930s. In an attempt to strengthen the U.S. economy during the Great Depression,
Congress passed the Smoot-Hawley Tariff Act, which increased tariffs on farm products and
manufactured goods.1  In response, other nations, also suffering from economic malaise, raised
tariffs on American goods, bringing global trade to a standstill. Because of the tariffs during that
era, economists have estimated that overall world trade declined about 66% from 1929 to
1934.

Since then, policymakers on both sides of the aisle have shied away from the use of trade
barriers like tariffs and instead toward free-market policies that allow nations to specialize in
certain industries and incentivize optimal efficiency. Indeed, the United States had not broadly
imposed high tariffs on trading partners from the early 1930s.

This more-or-less laissez-faire approach to trade in the United States remained after World
War II up until the election of President Donald Trump. Trump was one of a few presidents to
speak openly about trade inequities and the threat of tariffs when he vowed to take a tough line
against international trading partners, especially China, to help American blue-collar workers
displaced by what he described as unfair trade practices. In addition to tariffs on Chinese
imports, the Trump administration also levied taxes on products made in Canada, Mexico, and
the European Union (EU), among others. These were subsequently rolled back by the Biden
administration.
How a Tariff Works
Tariffs are used to restrict imports by increasing the price of goods and services purchased
from another country, making them less attractive to domestic consumers. There are two types
of tariffs:

 A specific tariff is levied as a fixed fee based on the type of item, such as a $1,000 tariff
on a car.
 An ad valorem tariff is levied based on the item’s value, such as 10% of the value of the
vehicle.

Governments may impose tariffs to raise revenue or protect domestic industries—especially


nascent ones—from foreign competition. By making foreign-produced goods more expensive,
tariffs can make domestically produced alternatives seem more attractive.

Governments that use tariffs to benefit particular industries often do so to protect companies
and jobs. Tariffs can also be used as an extension of foreign policy: Imposing tariffs on a
trading partner’s main exports is a way to exert economic leverage.

Tariffs can have unintended side effects. They can make domestic industries less efficient and
innovative by reducing competition. They can hurt domestic consumers, since a lack of
competition tends to push up prices. They can generate tensions by favoring certain industries,
or geographic regions, over others.

For example, tariffs designed to help manufacturers in cities may hurt consumers in rural areas
who do not benefit from the policy and are likely to pay more for manufactured goods. Finally,
an attempt to pressure a rival country by using tariffs can devolve into an unproductive cycle of
retaliation, sometimes known as a trade war.

What is an example of a tariff?


An example of a tariff could be a tariff on steel. This means that any steel imported from
another country would incur a tariff—for example, 5% of the value of the imported goods—paid
by the individual or business importing the goods.

What is the purpose of a tariff?


Tariffs are a way for governments to not only collect revenue but also protect domestic
businesses. Tariffs increase the price of imported goods, making domestic goods cheaper in
comparison.

Who benefits from a tariff?


The importing countries usually benefit from a tariff, as they are the ones imposing the tariff
and collecting the revenue. Domestic businesses also benefit from tariffs because it makes
their goods cheaper than imported goods, hence driving up the demand for their products.

How do tariffs hurt consumers?


Tariffs hurt consumers because it increases the price of imported goods. Because an importer
has to pay a tax in the form of tariffs on the goods that they are importing, they pass this
increased cost onto consumers in the form of higher prices.
How do tariffs affect you?
If you are a consumer, tariffs affect you because they result in an increase in the price of
imported goods.

If you are a domestic producer, tariffs can help you by making your goods cheaper compared
to international goods, thus helping your business.

If you export your goods to other countries that impose tariffs, this may reduce the demand for
your goods, thus hurting your business.

What Is a Nontariff Barrier?


A nontariff barrier is a way to restrict trade using trade barriers in a form other than a tariff.
Nontariff barriers include quotas, embargoes, sanctions, and levies. As part of their political or
economic strategy, some countries frequently use nontariff barriers to restrict the amount of
trade they conduct with other countries.

KEY TAKEAWAYS

 A nontariff barrier is a trade restriction–such as a quota, embargo or sanction–that


countries use to further their political and economic goals.
 Countries usually opt for nontariff barriers (rather than traditional tariffs) in international
trade.
 Nontariff barriers include quotas, embargoes, sanctions, and levies.

How Nontariff Barriers Work


Countries commonly use nontariff barriers in international trade. Decisions about when to
impose nontariff barriers are influenced by the political alliances of a country and the overall
availability of goods and services.

In general, any barrier to international trade–including tariffs and non-tariff barriers–influences


the global economy because it limits the functions of the free market. The lost revenue that
some companies may experience from these barriers to trade may be considered an economic
loss, especially for proponents of laissez-faire capitalism. Advocates of laissez-faire capitalism
believe that governments should abstain from interfering in the workings of the free market.

Countries can use nontariff barriers in place of, or in conjunction with, conventional tariff
barriers, which are taxes that an exporting country pays to an importing country for goods or
services. Tariffs are the most common type of trade barrier, and they increase the cost of
products and services in an importing country.

Often times countries pursue alternatives to standard tariffs because they release countries
from paying added tax on imported goods. Alternatives to standard tariffs can have a
meaningful impact on the level of trade (while creating a different monetary impact than
standard tariffs).
Types of Nontariff Barriers

Licenses
Countries may use licenses to limit imported goods to specific businesses. If a business is
granted a trade license, it is permitted to import goods that would otherwise be restricted for
trade in the country.

Quotas
Countries often issue quotas for importing and exporting both goods and services. With quotas,
countries agree on specified limits for products and services allowed for importation to a
country. In most cases, there are no restrictions on importing these goods and services until a
country reaches its quota, which it can set for a specific timeframe. Additionally, quotas are
often used in international trade licensing agreements.

Embargoes
Embargoes are when a country–or several countries–officially ban the trade of specified goods
and services with another country. Governments may take this measure to support their
specific political or economic goals.

Sanctions
Countries impose sanctions on other countries to limit their trade activity. Sanctions can
include increased administrative actions–or additional customs and trade procedures–that slow
or limit a country’s ability to trade.

Voluntary Export Restraints


Exporting countries sometimes use voluntary export restraints. Voluntary export restraints set
limits on the number of goods and services a country can export to specified countries. These
restraints are typically based on availability and political alliances.

Example of Nontariff Barriers


In December 2017, the United Nations adopted a round of nontariff barriers against North
Korea and the Kim Jong Un regime. The nontariff barriers included sanctions that cut exports
of gasoline, diesel, and other refined oil products to the nation. They also prohibited the export
of industrial equipment, machinery, transport vehicles, and industrial metals to North Korea.
The intention of these nontariff barriers was to put economic pressure on the nation to stop its
nuclear arms and military exercises.

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