Question
Analyse the reasons for imposing tariffs on imports.
Category:
Trade Protection
O level May/June 2023
.
Answer
(Step 1: Write an introduction and define tariffs)
Tariff s are the best known method of protection and are sometimes referred to as customs duties. Tariff s are taxes usually on imports.
These tariffs serve numerous purposes, ranging from protection of domestic industries to the prevention of unfair competition and a reduction in the importation of potentially harmful products.
(Step 2: Analyse the reasons for imposing tariffs on imports.)
⭐ Revenue Generation:
Tariffs serve as a source of revenue for governments, particularly for developing economies with limited avenues for tax collection. This revenue can be used for various socio-economic objectives such as investment in education or reducing a budget deficit. A tariff will be more effective in raising revenue if
demand for imports is price inelastic whereas it will be more eff ective in protecting the domestic industry if
demand for imports is price elastic.
⭐ Protection of Domestic Industries:
Another major reason for imposing tariffs is the protection of domestic industries, particularly infant and sunrise industries. Firms in a new industry may fi nd it diffi cult to survive when faced with competition from more established, larger foreign fi rms. Th is may be because the foreign fi rms are taking advantage of economies of scale and benefi ting from their names being well-known. Protecting a new infant industry may give it time to grow and so benefi t from economies of scale and to gain a global reputation. This may be achieved with a tariff on imports.
Sunset or declining industries might also need protection from foreign competition. If declining (also called sunset) industries, which have lost their comparative advantage, go out of business quickly there may be a sudden and large rise in unemployment. If the industry is granted protection and that protection is gradually removed, unemployment might be avoided. Th ere is again, however, a risk that the industry may resist reductions in the protection it receives. Th is can lead to considerable ineffi ciency.
Strategic industries related to national security can also be shielded via tariffs. Encouraging domestic consumption over imported goods can also help stimulate local industries, fostering economic growth and employment.
⭐ Discouraging Imports of Harmful Products:
Tariffs can be useful in controlling the inflow of demerit goods, which are products that are considered harmful for consumers and society owing to health or environmental implications. For example, high tariffs could be placed on the import of tobacco products to dissuade their consumption.
The figure shows that the imposition of a tariff will benefi t domestic producers as their output rises from Q to Q1. Domestic consumers lose out as they have to pay a higher price P1 and experience a reduction in their consumption from Q3 to Q2.
⭐ Improving the Current Account Balance:
Firstly, tariffs can be used to enhance a nation's current account balance. When imposed, tariffs tend to increase the prices of imports, thereby reducing the demand for them. This, in turn, can lead to an increase in net exports which raises the total demand stimulating economic growth. Furthermore, the decrease in import dependency can stimulate domestic production, potentially leading to a reduction in unemployment.
⭐ Preventing Unfair Competition:
Unfair trade practices such as dumping, where products are sold at less than their cost price, or products made via unfair labour practices can be discouraged through the imposition of import tariffs. This ensures a level playing field for domestic industries.
⭐ Retaliation:
Sometimes, tariffs may be imposed as a retaliatory measure against another country that has imposed its own set of tariffs. This is often seen in trade wars where there is a tit-for-tat increase in tariffs between countries.
(Step 3 Conclude)
Conclusion:
There are many reasons behind the imposition of import tariffs ranging from boosting domestic economies to maintaining international trade practices. Tariffs can act as a strategic tool in a nation's macroeconomic policy, influencing both domestic and international economic outcomes
The above material is protected and is not to be copied.
Preview:
- Introduction:
- Definition of tariffs as taxes on imported goods and services.
- Overview of the essay's aim to explore the economic rationale behind tariffs.
- Improving the Current Account Balance:
- Tariffs increase import prices, reducing demand and boosting net exports.
- Stimulate economic growth and domestic production, potentially reducing unemployment.
- Protection of Domestic and Strategic Industries:
- Shield emerging industries and strategic sectors related to national security.
- Encourage domestic consumption, fostering economic growth and employment.
- Revenue Generation:
- Tariffs provide revenue for governments, especially in developing economies.
- Funds can be allocated to socio-economic objectives like education or deficit reduction.
- Discouraging Imports of Harmful Products:
- Increase prices of harmful goods like tobacco to dissuade consumption.
- Preventing Unfair Competition:
- Deter unfair trade practices such as dumping or products made with unfair labor practices.
- Retaliation:
- Imposing tariffs in response to tariffs imposed by other countries.
- Prevention of Exchange Rate Depreciation:
- Manage import demand to prevent depreciation of the exchange rate and maintain economic stability.
- Conclusion:
- Tariffs serve various purposes but require careful consideration by policymakers.
- Importance of mitigating potential repercussions and achieving desired economic outcomes.
Ops... End of Preview...
Economics Study Pack required!