Why would a country want to impose import tariffs?
Economics in News #3
In previous articles of this series, we have seen what are tariffs, their types, how each type is calculated, and how they affect various stakeholders — consumers, domestic manufacturers, the government, and domestic producers.
We have also touched upon the more evident reason why a country would impose tariffs on its exports: to protect domestic consumers; or on its imports: to protect domestic manufacturers.
However, we have yet to truly understand the intentions of countries behind imposing import tariffs.
After all, what reasons would motivate countries to tax their imports and face the wrath of other nations?
The world in itself is the best and greatest case study available. Taking the recent case of tariffs slapped on by the U.S. and countries including China on each others’ imports, let us understand how it all began.
Why did Trump decide to tax imports?
We don’t want to take the place of journalists or the media from where we all get our share of news. Especially not when we aren’t on the ground where this is happening. But to lay down the foundation for this case, we’d like to present a little bit of background.
The story goes that U.S. President Donald Trump believes that
- American jobs are declining;
- U.S. manufacturers are losing out because of offshoring and consequently, cheaper goods being imported from other countries;
- the U.S. trade deficit with certain countries is largely to blame on those countries’ unfair trade practices;
and therefore, to protect these U.S. firms, he has decided to tax imports from such countries with the view to safeguard national security.
It is believed that import tariffs, which raise the price of those targeted imported goods, will discourage American consumers from buying them. American consumers are hence, expected to instead start buying those same goods from domestic manufacturers, thus satisfying Trump’s goal to bring back money in the pockets of U.S. manufacturers and improve the trade deficit.
Economics teaches us that when a country imposes trade barriers like tariffs, it is following the policy of protectionism.
Protectionism is simply a practice wherein countries want to protect their domestic manufacturers from foreign exporters in the face of increasing competition from these exporters.
By imposing trade barriers, countries usually want to make sure that foreign companies are not snatching away domestic consumers from their own domestic manufacturers.
Why? Because doing so would mean that they would have to pay money to an outsider or a foreign country, i.e. it would result in an outflow of foreign exchange.
Thus far, it seems that all of this boils down to one thing: countries put up trade barriers and follow protectionism because they do not want to pay more than required to other countries.
“Why should I pay you when I can buy the same thing from my own countrymen, albeit at a higher cost?”
That’s where the catch is: “albeit at a higher cost” and probably, with fewer choices.
In the previous article, “How America’s Tariffs Can Result in the Entire World Economy Losing Out,” we saw how the price of goods would increase and the supply would decrease because of the imposition of import tariffs.
Why, then, would a country want to follow through with its policy of protectionism?
One rationale would be if the exporting country were exporting its goods for selfish reasons. What kind of selfish reasons?
Say, for example, that China has produced an excess of toy cars and wants to export them to the U.S. at a cheaper price because it is not able to find enough consumers for these surplus toy cars within its own country (often known as sporadic dumping). Or, say that it wants to export these toy cars for a lower rate to capture a greater market share in another country and drive out domestic competition (also known as predatory dumping).
Let’s also say that in both cases, China decides to export the toy cars at a cheaper price than for which it sells them to its domestic consumers. Now, because China is exporting toy cars at a price way lower than what it would charge in its own country, it is following a practice called dumping.
Further, this export price may even be lower than the cost at which U.S. firms are able to produce the same kind of toy cars.
Since U.S. firms would find it next to impossible to match China’s low price, they would start losing their sales. Because U.S. consumers would find it cheaper to buy Chinese toy cars, they would shift their consumption from that of American toy cars to those imported from China. In such a case, the U.S. government may be desperate to protect its domestic manufacturers of toy cars. To do so, it would react by imposing a tariff on toy cars.
Thus, one reason why countries impose tariffs would be if they think that the exporting nation is dumping its goods in their nation.
But what if their belief is proved wrong and the exporting nation was not (or believes it was not) dumping its goods? That is where retaliation takes place, wherein the country on whose imports tariffs have been imposed may decide to respond with its own set of retaliatory tariffs.
Now, this sounds a bit familiar, doesn’t it?
So, is that all?
Well, no. There are plenty of other reasons why a country would want to impose tariffs and follow protectionism.
Among them, one would be if, as we saw above, domestic firms are unable to match the low costs of production of the exporting country. In such a case, trade barriers may be imposed by the importing country to allow its domestic industries to grow and achieve those same economies of scale without being subjugated by foreign competition (also known as the infant industry argument and more applicable to small and developing industries or developing nations).
The above point may also serve as reason for the domestic government to believe that its employment rate will get adversely affected if its firms are not able to compete with the exporting nation’s goods. It may think that production will suffer if domestic consumers continue to buy the cheaper imports and as a result, employees will be laid off . To avoid loss of jobs and thus protect its people, the country may follow protectionism.
Also, it may be that the low costs of production in the exporting country are a result of lower wages or availability of cheaper or low cost labor. Meanwhile, there may be less availability of labor and consequently, a higher demand for it in the domestic industry. As a result, it may not be able to afford such low wages. To encourage a level playing field, the domestic government may decide to adopt protectionism as a means to combat low costs of production in the exporting nation.
One more reason that countries impose trade barriers is if they believe that by doing so, they will be able to decrease their current account deficit or trade deficit. This means that their imports are greater than their exports, causing more money to go out of the country than that which is coming in. Thus, to correct their balance of payments, countries may choose to follow protectionism.
This is especially true in the case of the recent U.S. tariffs, wherein Trump blames the U.S. trade deficit on unfair trading practices of other countries. However, imposing trade barriers here can lead to trade wars and severe retaliation, as we have seen in this case with countries like China, Canada, and Mexico and the European Union also imposing tariffs on certain American goods.
Further, countries may impose tariffs if the government is in need of funds (for example, to increase public expenditure) and wants to increase its revenue, as we saw in the previous article. Here, the increase in its revenue would be equal to the quantity of imports multiplied by the import tariff per unit.
Additionally, countries may impose trade barriers on imports that do not reach specific standards, do not fulfill a certain measure of quality, or are harmful to consumers or the environment.
However, not all of the above arguments for protectionist measures are logically sound.
By imposing tariffs in certain cases, governments may be encouraging inefficiency through increased production at higher costs than required.
Alternatively, it may be attempting to uphold a domestic industry that is on its way to disintegration because of its inefficiency.
This may also be preventing employees from moving on to more meaningful jobs in other industries.
Also, some of these arguments may lead to retaliation and trade wars, as we have seen above, thus defeating the purpose of imposing trade barriers in the first place.
The only times when protectionism is advocated are in the case of developing nations, their infant industries, and the need for their governments to raise revenue; or when the goods being exported are harmful or substandard.
Now that you know why a country would want to impose import tariffs, what do you think? Was the U.S. right in taxing imports?
Special thanks to Reasons for Protectionism by EconplusDal on YouTube and International Economics by Dominick Salvatore for supplementing my learning and equipping me with the knowledge to write this article.
Up next…
What alternative measures can countries take in place of tariffs? Can they avoid trade wars, while successfully achieving their goals to ultimately reach a win-win solution? We weigh the effects of different non-tariff barriers to trade to help us answer these questions.
In the meantime…
If you feel that you are better off for having read this article, then the next time your eyes scan the headlines and you spot the word “tariff,” take a couple of seconds to mentally send us some love and blessings.
You can also make our day by sharing your feedback and suggestions in the Comments section below. After all, learning is a two-way process, and we would appreciate all the help we can get!
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