"Tariffs restrict trade" Discuss.

“Tariffs restrict trade” Discuss

A tariff is a tax on imported goods. They are most often used in a deliberate attempt to restrict import. A tariff is likely to raise its final price to the consumer, this will lead to a fall in demand and the volume of imports will fall. Tariffs also help domestic producers. Some consumers will switch consumption from imported goods to domestically produced substitutes.

Freeing up trade has led to the world becoming a richer place. This is because everyone gains, in the long run, from the opportunity to sell their products in a freer market. Trade between countries is mutually beneficial if relative costs of production differ. The gains from trade are often most significant in product areas where economies of scale are sizeable and transport costs are relatively low.

The challenge of competition creates a more competitive economy; therefore freer trade keep businesses on their toes. It also leads to companies identifying that it is best to produce in a particular country and concentrate on that field of output.

Specialisation enables total world production to be very much higher than if there were no international trade. However not everyone benefits from free trade.

Arguments used to justify tariffs:

The infant industry argument – Industries just starting up may face much higher costs than foreign competitors. There may be large economies of scale in the industry. A new low volume producer will find it impossible to compete on price against an established foreign high volume producer. Once sufficiently large, tariff barriers can be removed and the industry exposed to the full heat of foreign competition.

Cheaper labour – Countries which have plentiful sources of cheap labour are often accused of ‘unfair competition’. High labour cost countries find it difficult if not impossible to compete against products from these countries.

Job protection – Protectionism can create or at least preserve jobs.

Arguments used against tariffs:

The infant industry argument – Infant industries in general have not grown successfully behind trade barriers. Industries protected by trade barriers lack the competitive pressure to become efficient.

Cheaper labour – There are two major problems with this policy. Firstly, although the policy may benefit manufacturers and their workers, consumers are ...

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Job protection – Protectionism can create or at least preserve jobs.

Arguments used against tariffs:

Cheaper labour – There are two major problems with this policy. Firstly, although the policy may benefit manufacturers and their workers, consumers are likely to have less choice and pay higher prices. Foreign countries could retaliate by imposing trade restrictions on exports, as is the case with the EU agricultural produce tariffs and the US steel tariffs, leading to a loss of jobs in the domestic economy.

Job protection – There are two problems with this policy. Firstly, although the policy may benefit manufacturers and their worker, consumers are likely to have less choice and pay higher prices. Secondly foreign countries could retaliate by imposing trade restrictions on exports, leading to a loss of jobs in the domestic economy. If they do all the countries participating in the trade war will suffer.

I have come to the conclusion that tariffs do restrict trade. It prevents countries which can produce cheaper goods from trading with other less competitive countries. This means consumers have less choice and pay higher prices. And even though tariffs are imposed to protect domestic jobs, it could start a trade war between countries which will result in job losses in all countries involved.

Extra notes:

The EU’s common agricultural tariff saves many EU jobs

Manufacturing tariffs restrict African farmers from importing, prevents EU manufacturers from going out of business.

Supply and demand diagram:

Shift in supply downwards.

Why did the Bush administration impose the tariffs?
The White House said that the duties of up to 30% on imported steel were designed to give the struggling US steel industry a three-year respite from international competition so that it could restructure.

The EU, Japan, Brazil, South Korea, Norway, New Zealand and Switzerland responded by lodging a complaint with the World Trade Organisation. The organisation concluded that the tariffs violated international trade rules allowing countries to protect themselves against sudden surges of imports.

Did political factors come into play in Mr Bush's decision?
Most certainly. The US president, George Bush, needed political support from key states such as Pennsylvania, West Virginia and Ohio, all of which produce steel, in advance of last year's mid-term elections.

He risks alienating steel producers and unions in those states before next year's presidential elections if he stops the tariffs, which were imposed in March. Ironically, Mr Bush's economic team, which was divided on the tariffs last year, is now united on dumping them.

Why the change?
Some of the president's advisers, including his top political strategist, Karl Rove, fear that the tariffs may have backfired politically, costing Mr Bush more support in steel-using states such as Michigan and Tennessee than they won him in West Virginia and Pennsylvania.

US industries that use steel, such as those manufacturing appliances and cars, have been pressing for a repeal of the tariffs, complaining that higher steel prices are eroding their profits in a generally tough environment for US manufacturing. Last but not least, the tariffs make US claims to free trade sound hollow.

What has been the impact of the tariffs in the US?
It has been less than clear cut. In late September, two reports from the US government agency, the international trade commission, said that the case was muddy and that it was difficult to determine whether the tariffs or changing market conditions were responsible for the problems of steel consumers.

What has the US steel industry been up to?
Since the tariffs were imposed, the US steel industry has invested more than $3bn into a restructuring effort. Smaller companies have either gone bankrupt or been absorbed by larger ones. Steel officials say that the restructuring effort would be undermined if the tariffs were lifted, and have accused the EU of trying to blackmail the US. With an election coming up, Mr Bush will be sensitive to accusations that he backed down under pressure from the EU and others.

What is the state of the world steel industry?
The industry has been in a dire state, with too much capacity. That has been a problem for European as well as US companies. Anglo-Dutch firm Corus, for example, has had to lay off thousands of workers. However, with the global economy picking up, trade experts say that steel shortages could emerge next year, boosting prices and providing respite for producers in the US and elsewhere.

Are there other trade disputes between the US and the EU?
This is the problem. It is not just steel that is bedevilling EU-US trade. The most serious row involves US export subsidies, which the WTO found illegal. In that instance, the WTO has authorised the EU to impose up to $4bn worth of sanctions, which would be by far the largest in WTO history. Brussels, however, has held off on the measures, pending passage in Congress of new tax legislation that would eliminate the subsidies.

What did the WTO decide?
The WTO yesterday said that steel tariffs imposed by President Bush in March last year were illegal. The decision, upholding an earlier ruling, came from the WTO's appeals body, the organisation's highest tribunal, meaning that the decision is final.

Where do we go from here?
The EU has threatened to impose sanctions of up to $2.2bn (£1.5bn) on US imports such as citrus, textile products and Harley-Davidson motorbikes. EU officials said they would go ahead with these sanctions if the US steel duties are still in place five days after the appeals ruling has been formally adopted by the WTO, which will probably be on December 1. The EU measures are designed to inflict maximum pain upon US manufacturers based in "swing states" that will be crucial to Mr Bush's re-election campaign.

Are we heading for a trade war?
The ball is now in Washington's court. For the time being, the White House insists that last year's tariffs were perfectly legal, despite the WTO ruling, which it says it will carefully review. While the EU has set a deadline for its own retaliatory measures, other countries have urged caution. Brazil says it is not time to retaliate, but to establish "to establish a climate for negotiation".