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International trade increases the number of goods that domestic consumers can choose from, decreases the cost of those goods through increased competition, and allows domestic industries to ship their products abroad. While all of these effects seem beneficial, free trade isn't widely accepted as completely beneficial to all parties.
In fact, President Trump's presidential campaign was highly critical of free trade agreements. This article will examine how some countries react to a variety of factors that attempt to influence trade.
In simplest terms, a tariff is a tax. It adds to the cost borne by consumers of imported goods and is one of several trade policies that a country can enact.
Tariffs are paid to the customs authority of the country imposing the tariff. Tariffs on imports coming into the United States, for example, are collected by Customs and Border Protection, acting on behalf of the Commerce Department. It is important to recognize that the taxes owed on imports are paid by domestic consumers and not imposed directly on the foreign country's exports. Often, goods from abroad are cheaper because they offer cheaper capital or labor costs; if those goods become more expensive, then consumers will choose the relatively costlier domestic product.
Overall, consumers tend to lose out with tariffs, where the taxes are collected domestically. Tariffs are often created to protect infant industries and developing economies but are also used by more advanced economies with developed industries.
The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment and a less happy electorate. The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply.
In economics, however, countries will continue to produce goods until they no longer have a comparative advantage not to be confused with an absolute advantage.
A government may levy a tariff on products that it feels could endanger its population. For example, South Korea may place a tariff on imported beef from the United States if it thinks that the goods could be tainted with a disease. The use of tariffs to protect infant industries can be seen by the Import Substitution Industrialization ISI strategy employed by many developing nations.
The government of a developing economy will levy tariffs on imported goods in industries in which it wants to foster growth. This increases the prices of imported goods and creates a domestic market for domestically produced goods while protecting those industries from being forced out by more competitive pricing. It decreases unemployment and allows developing countries to shift from agricultural products to finished goods.
Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the development of infant industries. If an industry develops without competition, it could wind up producing lower quality goods, and the subsidies required to keep the state-backed industry afloat could sap economic growth.
Barriers are also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Defense industries are often viewed as vital to state interests, and often enjoy significant levels of protection. For example, while both Western Europe and the United States are industrialized, both are very protective of defense-oriented companies.
Drawbacks of Tariffs Tariffs can antagonize existing issues between governments, leading to consequences that are political as well as economic. A famous example of tariffs changing the global political scene is the American Revolutionary War. One of the main issues driving a wedge between Britain and its American colonists was the high tariffs placed on goods shipped to the colonists.
The Townshend Acts passed in Parliament established high tariffs on the colonies, who had no say in the measures.
The politics involved in tariffs can also trigger escalating trade conflicts between countries in modern times as well. In , the United States implemented protective tariffs on steel and other imported goods from around the world.
Other nations, particularly in the European Union and China, found this problematic, saying they would add new tariffs on U. For better or worse, tariffs help shape world markets and relationships on a daily basis. Government trade negotiations may seem pretty distant from most of our everyday lives, but we buy products affected by tariffs every day: food, clothes, cars, electronics, and more.
The prices of these products may be protected by import tariffs if the product is also produced domestically, or the price may be increased by tariffs if it comes from another country. Even if we cannot see the tariff negotiations going on behind everything we use, know that they exist and they are constantly guiding our consumption from behind the scenes.
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More than any other recent administration, President Trump has cited national security concerns as a justification for protectionist trade policies. His administration imposed tariffs on steel and aluminum imports on the basis of national security reviews known as Section investigations , and threatened to do so for automobiles, uranium, and titanium. The administration has framed its China trade policy in national security terms, particularly with respect to technology competition involving companies such as Huawei and TikTok.
Evaluating the impact of trade policy on national security is difficult. Yet he appears unlikely to simply return to the trade paradigm of the Clinton, George W. Bush, and Obama administrations. Several Democratic trade policy advisors have argued that Biden should break with earlier, more pro-corporate approaches to trade.
Either way, a Biden administration would almost certainly adopt a more confrontational trade policy with China than Clinton, Bush, and Obama did.
For his part, if Trump wins a second term, we should not necessarily expect just a continuation of his first-term trade policies.
While Trump himself has long had protectionist impulses, during his first term his team of advisors was divided between a more establishment, pro-trade group and a more protectionist faction. This dynamic would likely extend during a second term, which suggests the Trump administration might be more likely to follow through on some of his more extreme ideas.
These include withdrawing from the WTO though to be sure, this idea would still face strong resistance and provoking further trade fights with allies such as Europe, Canada, Mexico, and Japan. The coronavirus is rapidly spreading around the world, threatening to become a global pandemic. However, tariffs can also hurt domestic companies in related industries while raising prices for consumers. Tariffs can also erode competitiveness in the protected industries.
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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Partner Links. Related Terms Tariff A tariff is a tax imposed by one country on the goods and services imported from another country. What Is Market Distortion? Market distortion occurs when interference in a market that significantly affects prices and, in some cases, risk-taking and asset allocation.
Trade War A trade war arises when one country retaliates against another by raising import tariffs or placing other restrictions on the other country's imports. Anti-Dumping Duty Anti-dumping duty is a protectionist tariff that a government places on imports thought to be significantly underpriced.
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