Question

What are the main motives for imposing a tariff or an export subsidy? Which is more harmful?

Answer 1

Let us first see what is a tariff and export subsidy and their motives.

1. Tariff- Its a tax/charge imposed by the country government on imported goods and services from other countries.

Motives -

a) It forms a source of earning to the country.

b) It brings less competition to the domestic goods and services and helps them thrive.

c) It protects the domestic goods by increasing the price of the commodity.

2 . Export subsidy - Its a policy of the government of a country which will encourage goods export by a tax benefit, loan with less interest rate or direct payout etc

Motives -

a) It brings down the price to the foreign importers

b) Instead of the commodity getting perished it can be sold.

It is however difficult to directly comment once which is harmful as they depend on the economic policy of the country at large.

If tariffs are more than the consumers are affected due to lack of alternatives and high prices and vice versa.

On the contrary higher export subsidies will increase the domestic inflation rates.

Therefore an optimal values of tariff and export subsidies have to maintained to have maximum economic benefit.