In light of the article by Anna Wiener published on September, 15, 2021, the matter of tariffs deserves a special notion. As Mrs. Wiener (2021) points out, “steel tariffs imposed by the U.S. in 2018 led to a shortage of steel sheets”, which led to the increase in production costs of food in cans (para. 13). This move was heavily criticized and continues to be relevant even after the end of Trump’s term, as “the US is in no rush to agree a deal to ease tariffs on British steel” (“US will remove UK steel tariffs,” 2022). Considering the negative impact of tariffs both on domestic and foreign producers, it might be appropriate to reassess the policy of tariffs and present a more critical viewpoint.
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Effect on Producer and Consumers
Tariffs are used to protect the national economy by enacting charges on the imported goods. The absence of trade barriers allows foreign producers to easily outcompete domestic producers because of lower prices. When faced with cheaper alternatives, consumers are likely to choose seller with the lowest prices. However, at the same time, domestic producers are at risk of losing their customer base as well as their business.
In order to support domestic producers, governments implement trade barriers, the most common of which are tariffs. Tariffs force exporters to increase their prices, which allows domestic businesses to compete. Furthermore, governments benefit because tariffs generate revenue, which finances the budget. However, consumers are faced with equally expensive alternatives, neither of which is preferable. What is more important, the number of goods on the market does not increase, while prices do increase, which harms consumers.
Tariff Effect on Global Supply Chain
The aforementioned explanation is applicable to goods that are manufactured entirely by one producer. However, many products are so sophisticated that they have to be assembled in parts. What is more, many manufacturers actually import components or materials, such as steel. This implies that domestic producers have contracts with foreign exporters, where a certain price is fixed (Grossman & Helpman, 2020). Tariffs compromise such arrangements because exporters can no longer supply components at a negotiated cost.
Subsequently, not only is the global supply chain harmed, but the cost of materials also rises. For instance, metal-intensive industries may lose exporters of steel cords for tires for vehicles. Unable to import from the same partner, tire manufacturers have to either find a new exporter or turn to domestic steel producers, who may take advantage of the lack of alternative because tariffs are implemented.
Well-Being of the Nation in Home Country
It may seem that the only beneficiary is the government that generates revenue from tariffs. Yet, tariff policy has two inevitable risks – deadweight loss and retaliatory measures. Deadweight loss is the result of the reduction of total surplus due to foreign exporters having to pay tariff charges, which could instead go into exporting more goods (Amiti et al., 2019). Not only does the deadweight loss signify market inefficiency, but it also reduces the overall surplus of goods.
Retaliatory measures are counteractions of governments, the producers of which were harmed. Once the government realizes that its exporters have to pay tariff chargers, it will be incentivized to compensate for the resulting loss by instituting corresponding or surpassing tariffs. The weak points of the economy are the most likely target. In the short term, such measures will reduce trade surplus between countries, while in the long-term perspective, they may even precipitate a trade war.
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Altogether, it should be evident that tariffs have negative consequences for all parties involved. Consumers lose because they are forced to choose between vendors who sell at equally high prices. Domestic producers have to find more expensive exporters of components. Foreign producers pay additional charges in order to be able to export into a specific market. Finally, governments run the risk of retaliatory measures in the form of tariffs and deadweight losses, which decrease the overall number of goods on the market. It is reasonable to suggest that tariff policies are self-destructive, which can be accentuated in future publications.
Amiti, M., Redding, S. J., & Weinstein, D. E. (2019). The impact of the 2018 tariffs on prices and welfare. Journal of Economic Perspectives, 33(4), 187-210. Web.
Grossman, G. M., & Helpman, E. (2020). When tariffs disturb global supply chains (No. w27722). National Bureau of Economic Research. Web.
US will remove UK steel tariffs ‘when the time is right’. (2022). BBC News. Web.
Wiener, A. (2021). Growing uncertainty in the Central Valley. The New Yorker. Web.