Question

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2) Why do economists consider tariffs inefficient? If they are so inefficient why are they still prevalent, despite the WTO? What are non-tarriff barriers and why have they become more prevalent?

Answer 1

International trade increases the number of goods that domestic consumers can choose from, decreases the cost of those goods through increased competition, and allows domestic industries to ship their products abroad. While all of these effects seem beneficial, free trade isn't widely accepted as completely beneficial to all parties. The benefits of tariffs are uneven. Because a tariff is a tax, the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from a reduction in competition, since import prices are artificially inflated. Unfortunately for consumers - both individual consumers and businesses - higher import prices mean higher prices for goods. If the price of steel is inflated due to tariffs, individual consumers pay more for products using steel, and businesses pay more for steel that they use to make goods. In short, tariffs and trade barriers tend to be pro-producer and anti-consumer.

Tariffs are appealing to policymakers as a tool for protecting domestic firms from foreign competition. Used wisely, a barrier to trade such as a tariff can promote the development of certain vital industries in the domestic economy that might otherwise not exist due to the existent of more efficient, lower cost foreign competition. Tariffs benefit domestic producers but harm domestic consumers, who must pay a higher price for the imported good than they would have to under purely free trade.

If you believe that pure supply and demand intersection create a perfect market, then intuitively, you must believe that government-imposed price distortions make the market less efficient. Consider a simplified scenario in which there are only foreign and domestic tires, domestic tires are 34.5% more expensive than foreign tires, and 10% of the domestic population is comprised of tire manufacturers. Let’s say that the government then imposes a 35% tariff that causes all domestic consumers to buy domestic tires.

The implications are simple. 90% of the domestic population loses, since they must now buy expensive domestic tires. Only the domestic tire makers gain in this scenario. Also, the domestic consumers just spent a higher proportion of their income on tires, as opposed to clothing, computers, food, etc. So, all domestic industries other than tires get less business. Furthermore, the foreign people who relied on the domestic tire market are suddenly bankrupt and can no longer import good produced by the domestic company. This hurts the domestic industries that rely on exports.

Firms may be able to shelter behind the tariff wall and remain inefficient. They may not have an incentive to reduce costs and become fully globally competitive if they believe that the tariffs will continue. This will be true also where infant industries are protected. If the tariffs remain in the long-term, the infant industry may never 'grow-up'. Firms operating with higher costs may be unable to achieve export competitiveness. In short, resources will not be allocated to their most efficient uses.

It has become commonplace to recognize that the use of tariffs to restrict international trade has been gradually replaced in recent years by the use of other tools of commercial policy. These nontariff barriers (NTBs) include such heterogeneous policy tools as import quotas, voluntary export restraints (VERs), exchange controls, domestic content requirements, and many more. It is reasonable to ask why these various alternatives to tariffs have come to be preferred. Since many of the more common NTBs, like quotas, deal directly with the quantities of goods traded rather than their prices while tariffs influence trade through prices alone, a related question is why nonprice measures of restricting trade have come to replace price measures.