What’s it: An import tariff is a tax imposed on the price of imported goods. The government usually charges tariffs as a percentage of the price of imported goods. Alternatively, the tariff is levied as a fixed cost for each unit of goods imported, for example, $500 per tonne of imported steel.
The main reasons for charging a tariff include:
- Limiting imports of goods and services by raising prices
- Protecting domestic producers
- In retaliation for unfair trade practices by partner countries.
Import tariffs have pros and cons. They benefit importing countries because they generate revenue for the government. Tariffs can also be an opening point for negotiations between two countries and an instrument for creating a friendly competitive environment for domestic companies.
However, tariffs reduce the benefits for domestic consumers as the price of imported goods becomes more expensive.
Import tariff purposes
The purpose of tariffs is to increase import costs for certain goods. For domestic consumers, this reduces the demand for imported goods because they are more expensive. For exporters, tariffs make their products uncompetitive in the markets of the destination country.
The government also imposed higher tariffs as a retaliatory reaction. Trading partners may try to use unfair competitive practices, such as dumping, to the detriment of domestic producers.
Tariffs increase the price of imported goods. That makes it less attractive to domestic consumers. For domestic producers, tariffs reduce competitive pressures on the market. The hope is that consumers will switch to domestic products.
A switch from imported products to domestic products should spur domestic industries to expand. This would benefit the economy as a whole by creating more jobs and income.
Well, I’ll explain in detail some of the reasons or goals for the government to impose higher import tariffs.
- Protecting domestic consumers. Some imported goods are cheap but may be harmful to consumers and the environment. By making goods more expensive, the government tries to reduce the consumption of such goods.
- Protecting domestic producers. Increased imports have increased pressure on domestic producers. The pressure will be more significant if imported products are priced lower than the domestic market prices. By raising import duties, the government is trying to reduce such pressure. That should spur the domestic industry to expand and create more jobs.
- Protecting national security. Some products may be considered threatening national security because they are a way to obtain political and military information. For example, the Donald Trump administration began an investigation into the grid’s import, suspected of endangering national security in early 2020.
- Protecting infant industries. Tariffs can protect infant industries. The government may have relaxed tariffs if the industry had grown and was more competitive. This kind of reason is known as the infant industry argument.
- Retaliation. The government imposes tariffs on partner countries for engaging in unfair trade practices, such as dumping. Foreign producers deliberately sell at a lower price than in their markets. Such practices are, of course, detrimental to domestic producers because they violate fair competition principles.
Import tariff vs. import quota
Tariffs limit imports by increasing the price of imported goods. Say, if the government sets a 10% tariff, the price of imported goods will increase by 10% than the original price when they enter the domestic market.
Meanwhile, quotas limit the quantity of goods imported. For example, the government reduced the import quantity from 400 tonnes to 300 tonnes. This reduces supply in the domestic market, thereby pushing domestic prices up unless domestic producers can supply the difference that was lost due to quotas (100 tons = 400 tons – 300 tons).
Unlike tariffs, import quotas don’t generate revenue for the government. However, it can be effective because it is not affected by exchange rate movements.
For example, suppose the exchange rate has appreciated by about 10%. That makes imported goods cheaper. And, if the government increases the import tariff by 10%, it will not affect the selling price of imported products in the domestic market.
Furthermore, the government might combine tariffs and quotas to limit imports (tariff-rate quota). In that case, the government sets a limit on the quantity of goods imported. The government still allows a higher import quantity but imposes a higher tariff for each additional import.
Types of import tariffs
Two types of import tariffs:
- Ad valorem tariff – the calculation is based on a fixed percentage of the imported product’s price. Therefore, the nominal tariffs paid will vary according to the trend of prices for imported products on the international market.
- Specific rates – the calculation is based on a fixed amount of money and does not vary with the goods’ price.
For example, ABC Company imports soybean oil from China and buys it at $100 per tonne. Say, the Indonesian government sets an ad valorem rate of around 20%. In that case, the company must pay the government $20 per tonne. If the price drops to $80 per tonne, the company will pay a lower nominal value, $16 per tonne.
Meanwhile, specific rates involve a fixed nominal value. Say the government imposes an import tariff of $25 per tonne. Regardless of the price of soybean oil, $100 or $80 per tonne, the company will still pay the government $25 per tonne.
Impacts of import tariffs (pros and cons)
Import tariffs can significantly influence international trade, impacting governments and consumers. Let’s explore the potential advantages and disadvantages of import tariffs.
Advantages of import tariffs
Government revenue: Import tariffs generate income for the government, adding to the national treasury. This revenue can be used to fund various government programs and initiatives, such as infrastructure development, social welfare programs, or education.
Promoting fair competition: Import tariffs can help level the playing field for domestic producers facing competition from foreign companies that may benefit from lower production costs or government subsidies in their home countries. By raising the price of imported goods, tariffs can make domestically produced goods more competitive.
Encouraging domestic production growth: Import tariffs can incentivize domestic production by making imported goods more expensive. This can stimulate domestic businesses to expand production to meet consumer demand, potentially creating jobs and boosting economic growth within the country. The government may target strategic or emerging industries for such support to foster a stronger domestic industrial base.
Disadvantages of import tariffs
Higher prices for consumers: One of the most direct consequences of import tariffs is an increase in the price of imported goods for consumers. Since tariffs raise the cost of imports, consumers end up paying more for these products. This can reduce their purchasing power and limit their access to a wider variety of goods.
Reduced consumer choice and innovation: Import tariffs can restrict the variety of goods available to consumers. With fewer imported options, consumers may have a limited selection and potentially lower-quality products to choose from. Additionally, reduced competition from foreign producers can stifle innovation among domestic companies, as they face less pressure to improve efficiency and develop new products.
Deadweight loss: Economists use the term “deadweight loss” to describe the overall inefficiency created by import tariffs. Tariffs distort market forces by making imported goods artificially expensive. This can lead to situations where resources are misallocated, and consumers and producers are worse off compared to a free-trade scenario.
Real example: US-China trade war
Attempts to pressure partner countries through tariffs can turn into a cycle of unproductive retaliation, commonly known as a trade war.
The recent trade war between the United States and China is a good example. President Donald Trump, in 2018, began imposing tariffs and other trade barriers on China to force it to make fundamental changes to what the US says are unfair trade practices.
In January 2018, Trump announced tariffs on solar panels and washing machines. Furthermore, in March 2018, Trump announced tariffs on steel and aluminum for imports from all countries.
Trump stated that the United States would charge a 25% tariff on $50 billion of Chinese exports. A total of $34 billion will begin on July 6, 2018, with the remaining $16 billion starting later.
China then became inflamed. In August 2018, in response to US policy, China announced 25% tariffs on $16 billion in US goods, including vehicles and crude oil.
