Question

Expound on the imposition of a tariff. Ascertain that you include any effects on production and consumption. Is the tariff good for the nation imposing it? If so, why is it beneficial? Is it damaging to the nation imposing it? Why and how?

Answer 1

A tariff is a tax which increases the cost of imported goods and is paid to the customs authority of the country imposing it. They are of several types like-

1. Licenses
2. Import quotas
3. VERs (Voluntary export restraints)
4. Ad valorem tariffs etc.

There are several reasons why a country might enact such a policy-

1. Infant industry argument- Increased competition from imported goods can threaten domestic industries. They might have to cut costs which can lead to unemployment in the importing country, something no government will be on-board with.
2. National Security- To protect industries which are deemed strategically important for the country like defense-oriented companies
3. Politics- Retaliation in the form of tariffs is commonly used. For eg- India recently hiked import duty to 200% on all goods imported from Pakistan because it believes that the recent terrorist attack was sponsored by the state government.
4. Safety of consumers- Tariff on goods which the government believes could endanger the country’s population. Eg- Canada might place a tariff on imported beef from the US if it thinks that the goods could be polluted with a disease
5. Aging industries- To protect aging and inefficient domestic industries from foreign competition.
6. To raise revenue

Stakeholder analysis

The impact of tariffs on organizations, customers and the administration moves after some time. In the short run, more expensive rates for products can diminish utilization by individual purchasers and by organizations. Amid this period, a few organizations will benefit, and the government will see an expansion in income from duties. This prompts a lower purchaser surplus in the short run. (See Figure-1) In the long haul, these organizations may see a decrease in efficiency due to a lack of competition, and may likewise observe a decrease in benefits because of the rise of substitutes for their items. For the government, the long-term effect of subsidies is an increase in the demand for public services, since increased prices, especially in foodstuffs, leave less disposable income. As you can see by comparing Fig-1 and Fig-2, when a tariff is put in place, it increases prices and limits the volume of imports.

Producers in the importing country experience an increase in well-being as a result of the tariff. The increase in the price of their product on the domestic market increases producer surplus in the industry. The price increases also induce an increase in the output of existing firms.

Government. The government receives tariff revenue as a result of the tariff. Typically, the revenue is simply included as part of the general funds collected by the government from various sources. These funds help support many government spending programs, which presumably help either most people in the country, as is the case with public goods, or certain worthy groups.

The net effect consists of three components: a positive terms of trade effect, a negative production distortion, and a negative consumption distortion.