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21 December 2021

Tariffs have become a mainstay of international relations and economics in the 21st-century. They are government-imposed taxes on imported goods, which increases the cost of buying goods from overseas nations. This requires businesses and consumers to look for alternatives, which cost less than the artificially raised prices of imported goods. Although tariffs negatively affect the domestic consumer market, the question is whether there are long-term benefits that outweigh the cost to consumers.

When a government imposes a tariff on imported goods, it artificially raises the price of the goods. Generally, the price of goods is determined naturally by the market. There are various competing theories on how the market determines the price of goods, but, to generalise, prices are determined through negotiation between the consumers and the suppliers. One common economic model that utilises this is the supply and demand theory of economics. Consumers determine which goods they should purchase by weighing up factors like the cost and quality of the goods.1 Producers must make similar decisions. However, when the government intervenes by imposing tariffs, it interrupts the free market. It forces people to purchase alternate goods from other countries, or from the domestic market.

Consumers bear the brunt of the cost of tariffs. Although it costs producers more to import goods affected by the tariff, this cost is recouped by raising the price of the goods sold to consumers. This costs the consumer, and unlike producers, they have no way to pass this burden onto someone else.

When tariffs raise the cost of importing goods, it affects the economic calculations of consumers. Consumers are forced to choose between purchasing the same quality goods at a much higher price or looking elsewhere. Other goods would likely be of lesser quality than the consumer would be happy with, otherwise, those goods would have been used instead of those normally imported from the country that the tariff applies to. There may also be goods of similar or better quality on the market; however, the expense of buying those goods meant that before the tariff a consumer may have determined that they weren’t worth buying. If those goods now cost less than those affected by the tariffs, the consumer may now purchase those goods instead. But the government’s tariff means that the consumer either purchases the lesser quality goods, leaving the consumer unsatisfied, or they purchase the better quality goods, which costs the party more than buying the original goods, without the tariff, would. Either way, the consumer is put in a worse position than they were before the tariff.

Although tariffs affect the domestic market, the government pursues them because they are a source of revenue. As tariffs are a tax, the government benefits from imposing tariffs. In this sense, tariffs are similar to are taxes levied on consumer goods, like a consumption tax. One example of this is Australia’s Goods and Services Tax (GST), which is a 10% tax on most goods and services. This increases the price of goods and services for consumers, with businesses then required to pass that money on to the government. Consumption taxes exist to raise money for the government, at the expense of the consumers, like tariffs.

Not only do tariffs benefit the government, but they also benefit corporations. Economist Thomas Sowell argues that tariffs give an unfair economic advantage to domestic producers, who can raise their prices without being out-priced by the imported goods.2 If a tariff raises the price of an imported product by $20, domestic producers can increase their price by $10 and still retain a competitive advantage.

Corporations benefit the most from tariffs in countries that lack raw resources and materials, which are important for manufactured goods. If tariffs are placed on importing resources that a country has a limited amount of, producers have to look to other countries for those resources. Corporations have the money to allow them to buy more expensive alternatives; however, marginal producers, who are generally small businesses, must choose between buying cheaper goods of inferior quality or more expensive ones. Because marginal producers have narrower profit margins, they have to raise the price of their goods to cover the additional expenses of buying goods of similar or better quality than those originally bought. Corporations have the freedom to offer goods at a lower rate, undercutting the new higher prices of small businesses, forcing them out of the market. The government can choose to intervene in favour of small businesses by subsidising them, giving them the money to buy more expensive materials and goods. But to do so would require the government to raise taxes to afford it. And if the tariffs were imposed to increase government revenue, having to pay subsidies would defeat the purpose of the tariffs.

To prevent domestic businesses from increasing the price of their goods, the government could intervene in the economy and fix a maximum price for those goods. Ludwig von Mises suggests that this appears good at first because instead of forcing consumers to purchase more expensive goods, it grants them easier access to those goods at a more affordable rate. However, without subsidies, which impose another tax burden on the citizenry, those marginal producers, with narrower profit margins are forced to sell their goods at a loss. Von Mises argues that because private businesses cannot run at a loss in the long term, those marginal producers will use their resources in more profitable endeavours, thus reducing the supply of the goods. As a result, there are more consumers willing to buy the goods, but fewer goods are available. This ultimately leads to rationing and government intervention in related industries to try and increase the supply, compounding the problem.

Tariffs are also used by the government as a tool of diplomacy. One poignant example of this is the US government under Donald Trump. Trump promoted the idea of a ‘trade deficit,’ where a country imports more goods from a country than it exports to that country. Under Trump, America’s tariffs rose rapidly, focusing on China and metals like steel and aluminum. The US government then selectively lowered tariffs with some of its allies, through free trade agreements, to improve the relationship between America and its allies. These tariffs on China were part of a larger trade war between the American and Chinese governments, as the two countries compete for economic dominance. America has taken a carrot-and-stick approach to international relations, with tariffs serving as the stick and free trade agreements as the carrot. This approach is derived from the protectionist understanding of economic development and growth as a means to further a state’s national interest and power, rather than an end unto itself.3

Trade wars and tariffs are increasingly becoming the most popular tool in a government’s toolbox on the international stage. China, in particular, seems fond of them. Most recently, China outlawed all trade with Lithuania, in response to Lithuania improving relations with Taiwan. China is also waging a trade war with Australia, with a working paper from the Australia-China Relations Institute finding that tariffs have cost Australian exporters billions of dollars. In twelve key export commodities, Australia’s exports dropped by $17.3 billion in the first three quarters of 2021. Many Chinese businesses have instead looked to other markets, while the Chinese government benefited from the taxes levied on the remaining goods being imported that were affected by the tariffs. This has hurt the Australian economy, as China is its biggest export market, with its share of the market at 35.3% in the 2019-2020 financial year.

The producers in the country whose goods are being affected by the tariff have fewer sales, despite the fact that they haven’t changed their prices, because their exports have fallen. And depending upon the cost of the tariff, the number of nations enforcing the same tariff, and the number of consumers affected by it, those producers become marginal producers, and begin to suffer losses (Mises, 42-3). A report from Australia’s Department of Foreign Affairs and Trade found that if tariffs caused a 10% rise in the price of “manufactured goods” throughout the world, the GDP of Australia would drop by 1.8%, with the global GDP falling by almost twice that, at 3.5%.

Tariffs are one of the many tools available for states to use to protect their domestic market from foreign competition and to promote domestic industries. In an economic system based on free trade and open markets, countries export resources that they possess in abundance and the consumer goods that they are best at producing. In return, they import resources that they lack and goods that they produce poorly. Every country determines what it does best, and base their economy around that, in a process referred to as ‘specialisation.’4 Economist Milton Friedman warned that to do otherwise, and produce things that a country is not the best at producing, instead of producing what they are best at, prevents the standard of living from being a high as it could be, because less profitable endeavors are being pursued.5 However, authors Shannon Blanton and Charles Kegley claim that a problem for advocates of the free market is that its benefits, like cheaper prices of goods, are less pronounced than the loss of jobs and industries that result from a country abandoning less profitable economic endeavours. Thus, even though free markets are better for the nation as a whole, politicians instead tend to take a more protectionist stance, to protect those less profitable industries and maintain the status quo, because they can win votes and public support by claiming to want to defend domestic industries and jobs from being outsourced to cheaper foreign competitors.6

Politicians claim that protectionist tariffs prevent unemployment. Therefore, any cost incurred by the consumers is offset by stopping unemployment. Sowell argues that when tariffs were implemented by governments all around the world during the Great Depression, exports reduced by two-thirds between 1929 and 1933. Rather than raising employment, decreased trade made every country poorer, leading to higher poverty rates and lower GDPs.7

Producers in foreign countries lose sales because of tariffs, as demonstrated with Australia’s decreased exports that were the result of Chinese tariffs. So tariffs affect consumers in the country enforcing the tariffs, and producers in other countries, especially if those producers are not able to find a market to make up for the lost sales. And even if the producers are able to find another market where they can sell the same quantity of goods, it is unlikely that they will receive as much profit for those goods, because if that market was more profitable, those producers would likely already be selling there.

Dr Christopher Hubbard argued that Australia has a competitive advantage in minerals and some grains, due to the natural environment, but high wages and a small population means that it is unable to compete with regional neighbours like China and India in the production of consumer goods. Therefore, Australia uses the profits from exporting the goods where it has a competitive advantage to import consumer goods.8 Under the Labor governments of Bob Hawke and Paul Keating, Australia abandoned its tariffs, something it had relied on since Federation in 1901. These tariffs had kept Australia’s manufacturing industry on life-support, but by lifting tariffs and using its competitive advantages, Australia found that it had a much more efficient and versatile economy, one that allowed for 15 years of uninterrupted economic development and growth.9

When tariffs are applied for domestic purposes, they can cause significant damage to the domestic economy. The only parties that benefit are the government and large corporations. The government benefits from the revenue raised from tariffs, unless it then decides to subsidise small businesses, effectively negating any financial benefit that tariffs provide the government with. Furthermore, the government would be helping small businesses compete against corporations in a domestic environment that was artificially implemented by the government. Therefore, the government would be better off not implementing the tariffs. Corporations also benefit from being able to undercut the prices of their competition, as the government gives them a comparative advantage, and ultimately these corporations could secure an oligarchy on the affected industry. And in every situation, the consumers suffer the most.

Because tariffs seek to protect inefficient and less profitable industries from better competition, the government effectively holds back the economy. Tariffs prevent the economy from becoming as efficient as possible. As resources are finite, tariffs divert resources into less efficient industries, instead of investing them into industries where the country has a comparative advantage. This limits economic growth and puts an artificial limit on the standard of living.10 The only benefit that tariffs bring is allowing people to stay in their current job, rather than moving them onto jobs that would be more profitable to them. However, this merely delays the inevitable, as even in a protectionist economy obsolete jobs are eventually abandoned, and by delaying the process, protectionism makes retraining and retooling harder.

Finally, tariffs are not a necessary evil in international affairs. When one country imposes tariffs on another, citizens in both countries are negatively affected. And if the tariffs are reciprocated, the damage they do is even worse. The government continues to benefit from the increased revenue caused by tariffs, while the citizens bear the negative consequences of it. When tariffs are used against other governments, they effectively punish the citizens for any wrongdoing committed by the government. The possibility of winning a dispute with another country is not worth the cost to the general public, which can be devastating if the tariffs are severe enough, or are in place for a prolonged period of time. For example, Trump’s trade war with China saw countless American farmers go bankrupt and the manufacturing sector take its biggest hit in a decade. Tariffs are not a necessary evil; they are an economic wrecking ball.

Trade wars often accompany worsening relations between nations, as seen with China implementing a trade ban with Lithuania as an economic element of their diplomatic dispute with Lithuania. When tariffs are imposed to rectify a trade deficit, which Trump sought to do, they can often have the opposite result, increasing the trade deficit. The idea that there are winners and losers in the economy, with winners being countries that export more goods than they import, and losers importing more than they export, is a distinctly protectionist worldview.

Any benefit that could be gained from tariffs is vastly outweighed by its negative consequences. The only people who benefit are the government and corporations, while the public suffers. The government and corporations get rich at the expense of the public. Therefore, all tariffs should be opposed, because if they are implemented they will do serious harm to the economy.

References:

  1. Sowell, T 2014, Basic economics: A common sense guide to the economy, 5th edn, Basic Books, New York, p. 13.
  2. Sowell, T 2014, Basic economics: A common sense guide to the economy, 5th edn, Basic Books, New York, p. 495.
  3. Blanton, SL & Kegley, CW 2017, World politics: Trend and transformation, 16th edn, Cengage Learning, Boston, p. 367.
  4. Blanton, SL & Kegley, CW 2017, World politics: Trend and transformation, 16th edn, Cengage Learning, Boston, p. 366.
  5. Friedman, M 2002, Capitalism and freedom, University of Chicago Press, Chicago, pp. 72-3.
  6. Blanton, SL & Kegley, CW 2017, World politics: Trend and transformation, 16th edn, Cengage Learning, Boston, p. 375.
  7. Sowell, T 2014, Basic economics: A common sense guide to the economy, 5th edn, Basic Books, New York, p. 489.
  8. Hubbard, C 2007, An Australian introduction to international relations, Pearson Australia, Sydney, p. 32.
  9. Hubbard, C 2007, An Australian introldiction to international relations, Pearson Australia, Sydney, p. 215.
  10. Friedman, M 2002, Capitalism and freedom, University of Chicago Press, Chicago, p. 73.
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Stuart Jeffery, aka LibertyDownUnder, is the founder of the Australian Liberty Network. He is also the host of the Gumtree of Liberty and Gumtree of Liberty Live podcasts, and is editor of the Liberty Review. Stuart is currently studying a Bachelor of Laws and Bachelor of Arts, majoring in international relations, at the University of Southern Queensland.

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