It’s been a few weeks of mayhem in the world of trade – and it’s probably best you get up to speed before your Economics Paper 2…
You see, politics is complicated; more often than not, there’s a lot more that meets the eye. Amongst all of the speculation and market turmoil, let’s take some time to take a step back and do what we know best: Economic Evaluation! We can’t get ahead of ourselves, though, so onto the foundations.
Foundations
Tariffs, as you may have come across in Theme 4, refer to a particular example of a restriction on the principle of free trade. This strategic approach to international trade policy is commonly known as ‘Protectionism.’ But what is protectionism, and what exactly needs protecting?
A tariff, in essence, serves as a tax on selected imports – goods being purchased from abroad – thereby increasing their price and creating an opportunity for domestic firms to compete more effectively against their international rivals. Governments may opt towards using barriers to free trade, like tariffs, in order to tackle some key issues:
- Job Losses
If constantly being outperformed by their international counterparts, domestic firms will be forced into taking action in order to salvage their revenues – the easiest way of achieving this is through cutting their labour costs. In the case of domestic firms leaving the industry altogether, this means even further job losses!
- Infant Industries
Seen prominently in developing countries, entire industries on a domestic scale struggle to compete with the likes of those established international giants. By imposing trade barriers like tariffs, consumers are disincentivised to continue their spending on imports given their now higher prices. The aim here is that those domestic firms build up the strength and courage one day to take on the big boys.
- Government Revenue Generation
Tariffs aren’t just about blocking imports – they provide a solid pathway for the government to raise their revenues too. As those infant industries grow, under the shelter of protectionism, they’ll hire more workers, leading to more income tax payments and higher corporation tax revenues. It’s a knock-on effect: more jobs, more spending, more tax revenue for the government – and don’t forget the direct tariff revenue collected each time an import is taxed too. These avenues of finance could be reinvested towards supporting infant industries, be it through subsidies, infrastructure investments and so on. Of course, whether that money is spent responsibly in practice is a whole other story…
