Circumstances under which Tariffs are Justifiable from Economic Point of View. A tariff can be defined as a fee imposed on the exported and imported goods that are transferred either from or outside a given country. It can also be considered as a schedule or list of prices for things such as bus routes, railway services as well as electrical usage. There are various economic views that have been developed by a number of economists concerning the issue of tariffs.
According to the neoclassical economic theory tariffs tend to distort the running of a free market. They argue that tariffs usually generate benefits for the government and domestic producers while they are not beneficial for consumers at all and the net welfare impacts of a tariff tend to be negative on the importing country. The neoclassical economists are opposed to imposing tariffs in the international trade since they find tariffs to be prohibitive for the free running of the market system. In the framework of the neoclassical economic theory, the forces of demand and supply are the major determinants of the market equilibrium and not tariffs. The neoclassical economists are supporting the idea of the free trade system where international trade is allowed to take place without imposition of any form of regulation or duty that hinder the free market principle (Naito 2006).
There are various reasons why government in different parts of the world has to impose tariffs on exports and imports. Economists do argue that most of the reasons behind imposition of tariffs are not justifiable and there is need for policy makers to be careful before imposing tariffs on exports and imports as they have a negative impact on the balance of payment of the country. On the other hand, under certain conditions tariffs are justifiable from the economic point of view.
This paper seeks to discuss various circumstances under which usage of tariffs is justifiable from the economic point of view. In order to accomplish this discussion, Â the essay will look into various economic theories that have been developed on the subject of tariffs and analyze in detail the argument that have been put across by the various theorists on the usage of tariffs.
Types of Tariffs. There are three min types of tariffs that are imposed on exports and imports in international trade. The most favoured national tariff is a type of tariff that is imposed by the countries-members of the World Trade Organization for other countries-members of this organization, unless the country is a part of an existing preferential trade agreements, for example, custom unions or free trade area. This type of tariff is considered to be the highest that a member of the World Trade Organization can impose on goods from another membering country and it tends to be very restrictive. Studies have revealed that some countries tend to impose even higher rates of tariff on the goods from countries which are not members of the World Trade Organization (Michael, Panos & Miller 1993).
Preferential tariff is another type of tariffs that are imposed on exports and imports by countries. They are imposed when a country has entered into a preferential trade agreement with another country, according to which it is obliged to impose lower tariffs on products from a certain country which is a party to the contract/agreement compared to tariffs that it impose on products from countries that are not part of the preferential trade agreement. This type of tariff tends to be zero for all products that are essential to survival of human beings.
Finally, bound tariff is another type of tariffs that can be imposed on exports or imports of a certain country. These types of tariffs are usually specific commitments made by individual governments of the membering countries of the World Trade Organization make. Bound tariff is that maximum MFN tariffs that can be imposed on a particular types of commodities. Members who are party to the negotiations of bound tariffs have the freedom to decrease as well as increase their individual tariffs as long as they do not raise the tariffs above the agreed bounds.
General Reasons for Imposing Tariffs. There are a number of reasons why countries impose tariffs on imports. First individual governments do impose tariffs as a mean of protecting domestic industries from competition of foreign products. In developing countries the cost of producing products tend to be extremely high due to high cost of capital and labour, thereby making the final produced products to be very expensive in the market. On the other hand, products from developed countries tend to be very cheap because the cost of producing them is very low.  In order to protect infant industries from collapsing individual governments tends to impose tariffs on all imports as a mechanism of shielding their local industries from foreign products.
Secondly, tariffs are imposed as a mean of protecting employment by individual government. This is done to support inefficient and aging local industries from competition brought in by cheap foreign products. Unless local governments come up with mechanisms of ensuring that all local industries are running many citizens may end losing their employments creating social problems in the individual countries. One of such protective mechanism is imposing tariffs on imports as a mean of ensuring products produced by local industries are marketable there by enhancing their survival.
Finally, a government may impose tariffs as a mean of protecting local industries from impact of dumping by foreign governments and companies. Dumping does occur when foreign firms tend to charge prices that are too low in domestic markets, thereby, making their products have a competitive advantage over those ones that are produced by local industries. Dumping has a negative impact on domestic industries, therefore, there is need to come up with mechanism that will ensure that domestic industries are protected from these negative adverse effects. Many governments in developing countries have been using tariffs as means of achieving this goal of protecting their economies from impacts of dumping.
Impacts of Tariffs. Economic effects of tariffs can be subdivided into two parts; the effect of the tariffs on the country in which that tariff is imposed and the effect of the tariff on the country on which the tariff is imposed.
Considering the country on which the tariff is imposed, it tends to hurt the economy of that country. A tariff imposed by foreign government usually raises the production cost for domestic producers and this in turn results in lower sales in the foreign market of the local producers. For instance, company may be forced to cut production cost by laying off workers in order to keep their products competitive in foreign markets. The loss of employment has a direct impact on other forms of industries in the economy, whereby, demand for products produced by these tends to go down especially if they are consumer products. This is usually the case because the laid off workers provide market for consumer products. Therefore, imposition of foreign tariffs as well as other market barriers tend to cause a decline in growth of a given country (Kimball & Shapiro 2008).
On the other hand, tariffs tend to hurt the economy of the country that is imposing them. The costs of tariffs in most cases tend to outweigh the benefits realized from them. They tend to be beneficial for domestic producers who tend to enjoy reduced competition in the domestic market. Due to reduced competition the prices of goods and services increase. Rise of prices as well as production results into local industries hiring more workers and this in turn results in increased consumer spending. Tariffs also result in the larger government revenues which can be used to bring some positive impacts on the domestic economy. Despite these benefits there are costs that are attached to the tariffs. When tariffs are imposed on the products consumer tends to buy less or go for other cheaper substitutes. Increase in prices of goods as a result of imposition of a tariff reduces the purchasing power of the consumer and this is felt in the economy where by domestic industries usually sell less, thereby causing a decrease in economic growth (Markusen, Melvin, Kaempfer & Maskus 1995).
Economic Theories on Tariffs. There are a number of economic theories that try to explain and justify why tariffs should be imposed on imports. There are three theories that are the most common. These theories include political theories, policy theories and finally the conditions of trade theories. According to policy theories, imposition of tariffs is done with an aim of achieving existing policy goals and objectives. For example, a tariff may be imposed with an aim of protecting infant industry, raising government revenue, protection of employment and maintaining industrial output (Mourmouras 1991). This theory became unpopular when economists led by Bhagwati proved that tariffs are usually inefficient in achievement of most of the policy goals and tend to be conquered by other forms of policies.
On the other hand, trade theories argue that tariffs are used as tool of enhancing international redistribution. The countries imposing them are able to increase their welfare by exploiting other countries. The optimum literature on tariffs usually tends to use the theories on terms of trade, when it comes to calculating the optimum tariff rate which can lead to an increment in terms of trade of the country in question in order to ensure its welfare is maximized. The optimal tariff theory has one common empirical problem on the implications that smaller traders will end up having zero tariffs. This observation conflicts with observation made in developing countries where the tariffs tend to be different for smaller traders.
Finally, the other economic theory on tariffs tends to consider the domestic political situation of the imposing country. The political theories argue that tariff rates tend to be determined exogenously through various political processes that are beyond understanding of many economists (Krugman & Obstfeld 2011). For instance, a policy is usually endogenous if it can be explained through rational maximum behaviour. There are a number of variables that usually explain the tariff, these variables are that tend to affect the overall decisions of the one interested in ripping maximum benefits from them. Endogenous lobbying can be said to be that level of lobbying that contributes to the maximization of benefits to members of the lobby group. Endogenous policy can be said to be that level of policy variable which tends to maximize the votes of the party that is sponsoring the policy in question (Ligthart & Meijden, 2011).
When Tariffs are Justifiable Economically. Many economists have been opposed to imposition of tariffs as they usually have a negative impact on the growth of the economy. However, despite this opposition to imposing tariffs on imports economists are in agreement that some circumstances in the economy permits the usage of tariffs in the international trade.
One the goal of tariffs is protecting local industries from competition of foreign companies. One economic question do arises on this goal, whether the usage of tariffs as protective mechanism is of any advantage to the country implementing it and, thereby, inquiring whether there is a need to have tariffs been imposed on imports. These two arguments have been put across by economists with an aim of answering this important question. One of the argument focuses on the let-alone principle while the another focuses on the special interest of the public policy.
From the perspective of the policy as mean of courses of action, imposition of tariffs denies the customers’ freedom to secure goods on terms which are more beneficial to them. Therefore, the proponents of this argument are considering that imposition of tariffs tends to violate the let-alone policy. Hence, if this policy is applied in any given country there will be no need of imposing tariffs on imports as a mechanism of shielding local producers/industries from competition by foreign firms.
Ignoring the let-alone principle economists argues that imposition of tariffs on imports is justifiable when a country wants to pursue a public interest. The main question that one should answer is when it is justifiable to pursue public interests by means of discouraging importation of a number of goods produced in foreign countries by usage of tariffs as a mechanism of achieving this goal. There is no need to focus on the aspect of whether all parties involved in international trade do benefit from imposition of tariffs.
Tariffs may be justifiable when they are meant to reflect cost causality in the economy. Cost causality can be one adequate mean of bringing into light cost effectiveness; it argues that a customer should be charged the cost that arises as their cause. Cost causality is used as means of satisfying a number of regulatory objectives. Studies have shown that cost causality tends to be stronger than but at the same time it’s fully compatible with the principle of non-discrimination. Cost causality tariffs usually leads to economic efficiency. The principle of economic efficiency argues that optimal prices are established in a way that they maximize global excess of the various market agents both in the long term and in the short term by sending suitable related economic signals. Going by the standard economic assumption of the lack of perfect information as well as market power, the intended objective of achieving economic efficiency can be realized through using a tariff that will reflect cost causality. Therefore, cost causality tariff is a mean of achieving economic efficiency in a given country. The major problem associated with cost causality is that it fails to satisfy mechanism of cost recovery in a given system.
Many economists argue that trade liberalization should be allowed in all countries in the world as it usually enhances economic competence as well as accelerating growth in the economy. Many developing countries are reluctant to implementing the principle of economic liberalization in their economy because of the fear of loss of much need revenue to run government activities, thereby, they have continued to impose tariffs on imports as mean of raising revenue. From an economic point of view tariffs are justifiable if they are meant to protect the government from losing revenue. If a country do not have a well developed system of collecting revenue from different sources, it would be difficult for it to fully implement the principle of trade liberalization because this will result in the revenue loses that is much needed in running of the economy. Tariffs as mean of raising government revenue in developing countries are justifiable in the short run but these governments need to come up with other mechanisms of raising revenue without interfering with free flow of goods and services in the economy (Keen & Simone 2004).
Tariffs are justifiable economically as a tool of protecting various economic sectors from breakdown as a result of free market system which allows dumping and unfair competition. This is especially more justifiable in developing countries which are usually at the losing end by fully implementing the principle of trade liberalization in international trade. Sharp decrease may be protected by not fully lifting tariffs, employment at the same time will be protected for the locals and, finally, domestic industries are protected from adverse effects of competition from foreign companies. It is not justifiable that developing countries should allow free flow of goods and services from foreign markets in their economies because produced goods will have a competitive disadvantage due to high cost of production in comparison with low cost of production in developed countries. Therefore, in order to ensure that a country is in a position to create employment opportunities for her citizens it is important to impose tariffs on imports as this will ensure that goods produced by local firms are marketable.
Conclusion
Tariffs in the modern world international trade may be unjustifiable as they hinder free flow of goods and services in the world, thereby, denying the consumers’ opportunity to consume what satisfies their needs. Despite this fact there are circumstances when taffies are justifiable economically especially if they are used as a protective tool of protecting the economy from adverse affects of trade liberalization such as dumping.