What Does Tariffs Mean? Everything You Need to Know
If you’re like me, you might be wondering “what does tariffs mean?” I didn’t really know much about tariffs until recently, when I started hearing more and more about them in the news. Turns out, they can have a big impact on the economy! Here’s everything you need to know about tariffs:
What DoesTariffs Mean?
The government’s goal is to make imported goods less desirable through tariffs in order to encourage the purchase of domestic alternatives.
Tariffs can have a negative impact on exporters, as higher purchase prices can deter customers from buying their products.
By choosing the imported product, the domestic consumer is essentially paying the tariff. This raises the cost of the product for the consumer.
Why Governments Impose Tariffs
Tariffs can be used to raise revenue and protect against competition from foreign countries. By raising the price of imported products, the tariff makes locally made items more appealing.
Governments may impose tariffs to increase revenue, protect domestic industries, or as an extension of foreign policy. By increasing the cost of imported products, tariffs on those imports can push consumers toward domestic substitutes.
The use of tariffs can be used to protect certain industries and companies from competition from foreign countries. It can also be used as a bargaining chip in trade agreements by restricting the imports of a country’s major export.
If a nation imports more than it exports, then its resource, usually in the form of money, will leave the country. A country’s wealth and economy in medieval and early modern Europe was believed to be largely dependent on its natural resources. If the country was importing more than it was exporting, then it was believed that its valuable, finite, and non-renewable natural resource, such as gold or silver, would leave the nation.
If a country imported more than it exported, it would lose gold and other resources, making it poorer.
Cross-border trade was often seen as suspicious and many countries preferred to establish exclusive trading partnership with colonies, rather than trade with other countries. This system, known as mercantilism, relied heavily on tariffs and even outright bans on trade.
This system of mercantilism relied heavily on tariffs to restrict trade and promote the colonies as a source of raw materials.
The colonized countries were only allowed to sell raw goods to the colonial power, which prevented them from selling to other nations.
The colonized countries would buy their raw resources from the colonial power, who would then convert these into finished goods and sell them back to them at a higher price. To ensure the colonists only bought their finished products, the colonist imposed heavy tariffs on imported products.
New Economic Theories
Adam Smith was one of the first economists to question the wisdom of this arrangement.
In 1776, the year that America gained its independence, the influential book, The Wealth Of Nations, was published. This was in response to the oppressive taxes that the British imposed on their colonists.
Later economists, such as Adam Smith and David Ricardo, built on Smith’s ideas to develop the concept of Comparative Advantage.
According to the theory of comparative advantage, if a country is better at producing a particular product than another country, each should focus on the activity in which it excels. By trading with each other, rather than putting trade barriers, both countries can benefit. This theory suggests that tariffs can be detrimental to economic growth, even if they may help some industries in specific circumstances.
Tariffs can have a negative impact on economic growth, even if they may provide some benefits to specific sectors. This is because tariffs can distort market signals and lead to inefficiencies.
The theory of free international trade, where countries specialize in producing goods in which they have a comparative advantage over other countries, has been widely accepted for decades. However, there has been a rise in popularity recently of the theory of limited or protectionist trade, where a country’s wealth is gained at the expense of others.
Late 19th and Early 20th Centuries
International trade was at its strongest during the late 19 th and 20 th century. During this time, the idea that international trade made large scale war between countries so costly and unproductive that they no longer made sense, became widely accepted.
World War I was the turning point that led to nationalist approaches to trade, including high tariffs, dominating until the end of World War II. This was due to the fact that WWI showed how expensive and counterproductive large-scale wars between nations could be.
After WWII, trade flourished. This was culminating with the creation of the World Trade Organization in 1995. The WTO acts as a forum for settling international trade disputes and laying down the ground rules for global trade. Free trade agreements such as the North American Free Trade Agreement (NAFTA) and the European Economic Community (EEC) were also proliferating at this time.
The neoliberal model, which favors free markets and minimal government intervention, was called into question in 2016 when the United Kingdom voted for Brexit and Trump won the United States presidential election.
In 2016, businessman and reality TV star, Donald J Trump, was elected President of the United States. His platform included a pledge to implement protectionist trade policies, including heavy taxes on imported goods. He enacted these when he assumed office in 2017.
Critics of multilateral trade agreements, who come from all sides of the ideological and political spectra, claim that these agreements are detrimental to workers, who suffer lower wages and reduced labor rights. They also believe that these trade pacts lead to lower quality products and safety standards.
The proponents of free trade agreements argue that tariffs lead to trade wars, which in turn hurt consumers and hamper innovation. They also claim that protectionism encourages xenophobia.
So what does tariffs mean? A tariff is simply a tax that is placed on imported goods. The purpose of this tax is to make foreign products more expensive than domestic ones, thus protecting businesses and jobs within the country.