Question

"The imposition of a tariff on a good will always have a negative welfare effect on a
country." Agree? Disagree? Explain

Answer 1

Introduction: -

Tariff on a good is an additional tax which the government imposes up and over the price of a commodity to earn additional revenue and to support local industries which are relatively new and may not have an equal amount of competency to be able to produce goods and services.

Over the years, countries have been able to reduce the tariffs as much as possible so as to allow for free trade to take place and so as to promote export as well as healthy competition which enhances the capital in any economy and ensures that the aggregate demand for goods and services in a country is high and unemployment and poverty can be reduced as far as possible. The establishment of the World Trade Organization in the year 1995 stepped up reforms in developing countries as like which were using protectionist measures that have a negative welfare effect and is explained in details as follows.

Case Specifics: -

A negative welfare effect takes place in any economy, when the result of a tariff is that the local companies turn complacent and it leads to lesser quality of goods and services and decreased public welfare. In such economies, wherein the tariff is extremely high, the negative welfare effect leads to retaliation by the international community which then sets its own tariffs on the country and an overall loss for both parties takes place.

However, it is to be remembered that this negative effect is determined by the industry or product on which the tariff is applied. Not all scenarios yield the same result. For example, the United States enhanced the tariff on China on manufacturing of steel & aluminium recently to give a boost to the local companies which have always been more than capable of manufacturing at same levels.

When a tariff is raised by a country for a specific industry the net outcome may not always be negative. When done to counter the irrational behaviour of a competitor it may have positive results for business owners as well as the community at large. The size of the United States economy is big enough to counter any retrospective tax from China.

Therefore, in common opinion by economists, not all tariffs bring in negative welfare effect on the economy. These need to be industry specific to bring in positive results for the economy as a whole.

Please feel free to ask your doubts in the comments section.