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The impact of tariff policy on international trade

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Customs Duties, Tariff are taxes levied by the customs set up by the government on the imported exporters when imported export goods pass through a country’s customs territory.
It is common trade barrier in international trade.

There are many types of tariffs and the ways in which they are levied are dizzying. For example, fiscal tariffs are mainly aimed at increasing national fiscal revenue. They are usually levied on products produced in foreign countries and with large domestic consumer demand, and the tax rate is moderate. Mostly used by developing countries, it is no longer important to industrially developed countries. Another example is protective tariffs. In order to safeguard national sovereignty and economic interests, a country or region protects and promotes the development of its own industrial and agricultural production, regulates its national economy and foreign trade, and at the same time raises national fiscal revenue.

Imposing tariffs is one way for a country’s government to increase its fiscal revenue. However, with the continuous development of world trade, the proportion of tariffs in national fiscal revenue is constantly declining. Every country imposes certain taxes on imported and exported goods based on their type and value. Its function is to raise the price of imported goods through tax collection, reduce its market competitiveness, and reduce the negative impact on domestic products in the market. Tariffs play a role in protecting domestic industries, but in the era of economic globalization, their adverse effects are gradually emerging. The main impact is on the employment rate. This is actually a chain effect.

Economic effects of tariffs
Generally speaking, when a country’s economic strength is strong and it is at an advantage in international competition, it often pursues a free trade policy, and tariffs mainly reflect the function of taxation; on the contrary, when a country’s economic development lags behind and its international competitiveness is not strong, , they often pursue trade protectionist policies. At this time, the protective function of tariffs plays an important or even dominant role.

The imposition of tariffs will cause changes in the international and domestic prices of imported goods, thereby affecting the adjustment of production, trade and consumption in exporting and importing countries, and causing the redistribution of income. The multi-faceted impact of tariffs on the economy of importing and exporting countries is called the economic effect of tariffs.

Tariff battle in digital age
In modern times, the main function of tariffs is no longer to increase government tax revenue, but to block the entry of foreign goods and protect the domestic market and related domestic industries. Of course, countries may be large or small, and import tariffs of the same magnitude can have different economic effects on small and large countries.

The recent trade wars carried out in the name of tariffs include a series of high-tech products and industries such as artificial intelligence technology, chips, and new energy. Among these cases, the competition between China and the United States is the most intense and has produced the most cases for discussion. Since the United States positioned China as a strategic competitor, the United States has begun to adopt decoupling policies aimed at severing Sino-US economic relations, such as imposing additional tariffs on products imported from China, exporting its own high-tech products to China, and imposing restrictions on Chinese companies operating in the United States. Strengthening restrictions on direct investment, etc. In August 2018, the United States passed a series of laws aimed at suppressing the development of China’s high-tech industries. In May 2019, the U.S. government issued a policy to completely ban Huawei. It can be seen from these actions that Sino-US friction no longer remains at the level of trade war, but has shown a trend of technological war.

The United States not only implemented a comprehensive ban on Huawei itself, but also asked its allies to participate (Stu Woo and Kate O’ Keeffe, “Washington Asks Allies to Drop Huawei,” The Wall Street Journal, November 23, 2018). At present, countries such as Japan, Australia, and New Zealand have taken measures corresponding to the United States.
From this point of view, the establishment and implementation of tariff policy will never only affect the two countries that are communicating with each other. It will also have a profound impact on the allies, third and fourth related countries. One level down from the national level is. There are large and small entities, and underneath them are thousands of ordinary people who need to work.

If tariffs are reduced
Assume that the importing country is a small trading country, that is, the country’s import volume of a certain commodity accounts for a small part of the world’s import volume. Therefore, changes in the country’s import volume cannot affect the world market price, just like a perfectly competitive enterprise, it is only the acceptance of the price. By. In this way, after the country imposes tariffs, the domestic price of imported goods will increase by an amount equal to the tariff rate, and all tariffs will be borne by consumers in the importing country.

If the importing country is a large trading country, that is, the country’s import volume of a certain commodity accounts for a large share of the world’s import volume, then changes in the country’s import volume will affect world prices. Therefore, although tariffs imposed by large countries also have the above-mentioned economic effects of tariffs on small countries, because large countries can affect world prices, the net effect of the cost and benefit comparison of tariffs based on partial equilibrium analysis is different from that of small countries.

The study found that if importers reduce tariffs by 1%, import freight will increase by about 0.8%, export freight will decrease by about 1.1%, and export volume will increase by 0.6% to 1%. These findings indicate that reducing import tariffs leads to an increase in exports. Many entities regard trade costs caused by the transportation process as exogenous, but the endogenous impact of freight costs on trade flows cannot be ignored. Transportation costs are usually a higher obstacle to international trade than tariffs.

The main mechanism for the export-promoting effect of lowering import tariffs is that a country’s lower import tariffs cause transportation companies to increase freight charges for imported goods (thereby partially offsetting the impact of lower tariffs). Import volumes increased as higher freight costs only partially offset lower tariffs. When trade volumes reach equilibrium, shipping companies reduce export freight rates to avoid the “return problem.” Therefore, two hypotheses are proposed: lowering tariffs in a country will tend to reduce shipping costs from that country; lowering tariffs in a country will tend to increase the country’s exports.

Impacts & Cases
On the positive side
, lowering tariffs can promote trade liberalization, lower trade barriers, and expand market access. Tariff reduction can stimulate trade activities, increase the circulation of goods, and promote economic growth. Reducing tariffs can benefit consumers by lowering import costs and making goods more competitively priced.

For example, in Finland, Finnish customs duties generally range between 0% (such as books) and 17% (such as Wellington boots). Certain goods, such as laptops, mobile phones, digital cameras and game consoles, are exempt from tariffs. Specific goods may be subject to additional taxes, which are calculated based on the country of origin. For example, bicycles made in China are subject to an additional 48.5% anti-dumping duty.

A pair of shoe, import from China will have 16.9% more import tariff compare to those country apply to 0 tariff. This part automatically go to consumer, same quality, same everything, in another country is 16.9% lower cost. What if we can reduce this custom tax, imagine how many good quality, high value but low cost commodities can be reachable to common people, not only on saving money perspective but also enhance quality of life and happiness.

Challenge, Tariff policy has a huge and far-reaching impact on the national or regional economy, including industry, employment, economic growth, etc. Short-term strategies may be formulated for political reasons, but policies formulated based on the nature of tariffs need to be adjusted or broken. Reshaping requires a long process and will be full of risks and challenges.

When a country, they will need to reduce tariffs may lead to trade imbalances, affecting the balance of payments.

Tariff reduction may have an impact on the domestic industrial structure, and some industries may face competitive pressure. Especially industries that the country is trying to develop or industries that the national economy relies heavily on.

No policy is completely isolated. They are closely related to the people’s livelihood policies of the country. International trade is an important topic for every country, and reducing tariffs may require adjustments to national trade policies and regulations to adapt to the new trade environment.

Policy suggestions and prospects
I understand there are many cases where raise tariffs caused huge worldwide crisis. Though I also want to avoid the crisis from other way around, such as in the late 19th century, the United States significantly reduced tariffs to promote free trade. This resulted in the collapse of many U.S. manufacturing companies and the loss of a large number of workers. Or in the 1840s, Britain repealed the Corn Laws and eliminated tariffs on grain imports. This resulted in a severe impact on British agricultural production and a large number of farmers went bankrupt. Similar cases from Argentina and India, etc.

Obviously, the implementation of any policy is an experiment, an opportunity for trial and error. However, countries can pre-set some remedial measures in advance, such as providing subsidies and support to affected industries. Strengthen reemployment training for unemployed people. Actively participate in international trade negotiations and safeguard national interests.

Tariff policy itself is a tool used to protect, defend, and even attack. But I think it should not exist only as a political tool. Its promulgation and implementation affect the livelihoods of millions of ordinary people. In addition to the interests themselves, there is also the well-being of the people, the development of society, and the development of civilization. Of course, this article does not simply emphasize that countries around the world should lower tariffs, but hopes that everyone will think about diverse possibilities for common development. Lowering tariffs is a double-edged sword that can have both positive and negative impacts. When formulating tariff policies, countries need to comprehensively consider all factors and make prudent decisions.

As Krugman, Obstfeld, and Melitz discuss in International Trade: Theory and Policy, tariff policy plays a key role in shaping the global economic landscape. These policies, including tariffs and tariffs, are not only tools to generate revenue but also to protect domestic industries and regulate international trade flows. The book illustrates how the imposition of tariffs leads to shifts in domestic and international production, trade patterns, and consumer behavior.

In addition, International Trade: Theory and Policy highlights the intricate relationship between tariff policy and economic development. It emphasized that while tariffs can provide temporary protection for emerging industries, they can also hinder overall economic growth by stifling competition and innovation. This nuanced understanding underscores the importance of carefully crafting tariff policies to balance the interests of domestic producers with the broader goals of economic efficiency and global competitiveness.

From the insights of this authoritative article, it is clear that tariff policy should be approached with caution and foresight. Any changes to tariff rates and trade regulations require a thorough analysis of their potential impact on industry, employment and consumer welfare. By incorporating these considerations into policymaking, countries can work toward sustainable economic development while navigating a complex global trading environment.

Zhixiong Guan. 2019. Expansion and prolongation of Sino-US trade friction. RIETI. “Seek truth from facts” column. Read on 28.2.2024. https://www.rieti.go.jp/users/kan-si-yu/cn/c190626.html

Hayakawa, K. , Ishikawa, J. , & Tarui, N. . (2020). What goes around comes around: export-enhancing effects of import-tariff reductions. Journal of International Economics[J]. Read on 5.3.2024. https://www.sciencedirect.com/science/article/pii/S0022199620300787

Paul Krugman., Maurice Obstfeld., Marc Melitz. International Trade: Theory and Policy”. 2018. Pearson.

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