Trade tariffs

Lessons from the past

In 1930, the USA enacted the Smoot-Hawley tariff, which raised tariffs on imported goods to record levels.  These tariffs reduced demand for foreign goods.  Foreign countries retaliated by imposing their own tariffs.  The result was a collapse in world trade that worsened the effects of the Depression.  It took decades to rebuild the world economy.

The costs of tariffs

Why politicians continue to impose policies that are likely to damage the overall economy, even though the costs are widely known?

A small number of large domestic producers and their workers - suffer a visible impact from cheap imports.

However, the potentially larger number of consumers who have to pay higher prices because of tariffs, and those workers in affiliated industries who might lose their jobs through knock-on impacts, are dispersed around the economy.

The future of globalization

Today, markets are more integrated than ever as transport costs have continued to fall and most tariffs have been scrapped altogether.  

One vision of the future of globalization involves the elimination of other kind of barriers to trade caused by institutional differences between countries.  Markets are embedded in institutions - in property rights, legal systems and regulatory regimes.  Differences in institutions between countries create trading costs in the same way that tariffs or distance do.  

Despite the removal of tariffs the world is far from being a single market.  Borders still matter because of these kinds of institutional incompatibilities.  Complete integration requires the ironing out of legal and regulatory differences to create a single institutional space.

Examples:

US tariffs on Chinese care tyres in 2009

 In 2009, China accused the USA of "rampant protectionism", for imposing heavy tariffs (taxes) on imported Chinese car tyres.  The decision to increase tariffs came after pressure from US workers who had seen tyre imports grow from 14 to 46 million from 2004 - 08, reducing US tyre output, causing factory closure and creating unemployment.  

However, the USA had previously accused China of unfairly subsdising its own tyre industry, so tensions mounted.  China's response was to threaten retaliatory increases in import taxes on US cars and poultry. 

Tariffs produce effects that ripple through economies.  Any protection gained for US tyre producers from  the tariffs on tyres, for example was counteracted by other negative impacts.  Higher tyre prices increased the costs of US cars, making them less competitive and reducing the numbers bought by US consumers.  The retaliation by China also damaged US export industries.  The jobs of some US tyre workers may have been saved, but in the wider economy, many more jobs were lost.

India removed tariffs on cheap Indonesian palm oil imports

When the government of India removed tariffs on imports of cheap palm oil from Indonesia, it had the positive effect of raising the living standards of hundreds of millions of Indians, but it destroyed the livelihoods of 1,000,000 farmers who grew peanuts for oil, which was now passed over for palm oil.  The peanut farmers cannot simply transfer into the production of other goods, because their investment in capital is immobile - a machine that processes peanuts has no other use.