Trade Wars and Tariff Woes
International trade which is the exchange of goods and services (imports and exports) between countries, could give them access to resources and products they otherwise would not be able to use. Countries could export goods in order to import items which they cannot produce themselves. By trading internationally, not only the consumers enjoy larger variety of goods and services, but also resulting increased competition can lead to lower prices and more product innovation, which by having more choice, better quality and cheaper products would raise the standard of living. Markets abroad where there is an increase in demand for their products will allow firms to exploit in large scale production. Also firms will be exposed to new ideas and skills as multinational corporations might bring new manufacturing skills to a developing country. It allows countries to specialise in goods and services they are best at producing. Countries specialise because they have the resources to produce the goods and services efficiently and are better than other countries in producing them. Countries cannot produce all the things they require because resources are unevenly distributed.
Imports are crucial to developed countries to maintain high living standards. Products would often be cheaper when imported from developing countries due to cheap labour and increased competition. Developing countries can import goods which they do not have the technology to produce themselves. Trade also gives the countries access to new materials, creating new industries to make new products which help to improve the economy. Trade between two countries must benefit both or at least not be any worse than no trade, such that no country pays more for a good imported than it would cost to produce it themselves and neither they accept less for a good exported than what it cost them to produce. Trade liberalisation is reduction of tariffs and other restrictions placed (protectionism). Countries may negotiate trade agreements beneficial to them. Terms of trade index of a country is the relative price of its exports compared to imports. Country is better off when the index rises making it to afford more imports and effectively worse off when the index falls.
Tariff is a levy imposed by one country on goods and services imported from another country to influence it, raise revenue or protect competitive advantages. Most countries are limited by their natural resources and their ability to produce certain goods or services. They trade with other countries to get what their population needs and demands. However trade is not conducted in an amenable manner between trading partners. Factors such as internal politics, competition, geopolitics and others can make trading partners unhappy. One of the ways governments deal with trading partners they disagree with, is through tariff. Tariffs are imposed by governments to raise revenue, protect the domestic industries or exert political leverage over another country. Tariffs often result in unwanted effects such as higher prices for the consumer on goods and services purchased from another country which makes them less attractive to domestic buyer. Tariffs are used to restrict imports, but it affects exporting country too as people in the importing country shy away from the products due to high cost. There are two types of tariffs: specific tariff levied as fixed rate, constant sum on the type of item and ad-valorem tariff levied as variable based on import value of the item.
Tariffs can be used to raise revenues for governments called revenue tariff and is not designed to restrict imports. Tariffs can also be used to benefit particular industries often to protect companies and jobs. By making foreign products more expensive, tariffs could make domestic alternatives seem more attractive. Tariffs could be used as an extension of foreign policy to exert economic leverage, by their imposition on a main export of a trading partner. By reducing competition, tariffs could make domestic industries less efficient and by pushing up the prices would hurt domestic consumers. By favouring specific industries or geographic regions over others, they can generate tension. Attempt to pressure a rival country by using tariffs can devolve into an unproductive cycle of retaliation, known as trade war. Tariffs will produce revenues which can relieve some of the tax burden on the people and help reduce deficits. Tariffs can be used to ensure that domestic products receive preference within the country to support businesses and economy. It can help stabilise a market and make prices predictable. When a country uses tariffs to punish or discourage actions that it disapproves, the affected country responds with similar tariffs, which does not benefit both.
Free trade is international trade without restrictions such as tariffs or quotas, which provides benefit from specialisation, increased competition and ability to transfer resources. Governments might want to impose certain trade barriers (protectionist policies) in tackling disadvantages of free trade. There may be a risk of too many job losses if domestic firms are out competed by foreign firms. Governments might opt to impose trade barriers to protect infant industries that are just starting out, until they are able to compete with international companies. It may ban import of certain goods or impose quotas on import of other goods to correct balance of payments problem. There are various policies used by governments to protect domestic industries. Tariffs could be imposed in the form of tax on selected imports which makes import more expensive helping domestic manufacturers to compete and raise taxes for the government. Quotas can be fixed, which limits the quantity of certain imported goods and their demand over the quota will be diverted to domestic products.
Embargoes can be imposed on certain goods like ivory or for political reasons against countries. Reduction of value of currency raises the prices of foreign imports but lowers the prices of domestic exports to make them competitive in international markets. Imposition of tight standards on foreign products will prevent import of those goods, which do not comply with requirements. Giving subsidies to domestic producers to reduce the cost of production of domestic goods makes them cheaper to buy. Policies particularly tariffs and subsidies are used to make products attractive. Maintaining domestic production capacity has advantages even if such products are available at lower prices internationally. Subsidies can be given by government for exports which could increase foreign exchange earnings. Imposing of tariffs results in consumers buying less at a higher price (loss of consumer surplus) while domestic suppliers produce more at a higher price (gain of producer surplus). As the loss of consumer surplus is greater than that of gain of producer surplus, the net effect is deadweight welfare loss to the country. When consumers pay higher prices for goods associated by tariffs, it can lead to inflationary effect on the rest of the economy and rise in cost of living.
Trade disputes occur when one country or a trading bloc is seen to act unfairly when trading internationally such as use of protectionist policies. Trade imbalance occurs when a country exports or imports more than its trading partner. If imports are more than exports, it results in trade deficit (negative balance of trade) and if exports are more than imports, it results in trade surplus (positive balance of trade). Trade imbalance could lead to economic tension and may prompt retaliatory measures such as tariffs or trade barriers. World Trade Organisation (WTO) provides a forum for its member countries to discuss trade agreements and settle disputes using a set of rules. It aims to help trade to be as free and fair as possible and has guidelines which members must follow such as they must treat all trading partners as equals and foreign and domestic goods on par. Trade wars and tariff woes in diminishing foreign reserves and raising poverty rates have more impact on poor nations.
