International trade isn’t only a means to meeting consumer demand, but a political tool. Every country depends on the others to provide what resources they lack in order to grow and thrive. When a product is withheld or is attached to exorbitant fees, even for a short period of time, both the importing and exporting country’s economies can experience negative repercussions, forcing their governments to either heel to the demands of the opposing party or leave the burden of recovery to their domestic corporations and consumers.
Let’s go “Back to the Basics” and discuss a cornerstone of international trade: tariffs.
Types of Tariffs1
- Protective Tariffs
Tariffs were initially designed to give domestic products a competitive edge over foreign products. Protective tariffs force foreign producers to pay more to export their products, which typically results in them raising their shelf prices to compensate. Consumers then turn to purchasing the cheaper domestic products, encouraging upward national business progression.
However, protective tariffs can still harm the businesses they’re meant to help. Manufacturers often import certain parts or components they can’t make themselves. If these components are subject to tariffs, it raises production costs, which can then be passed down to consumers. This can make domestic products less competitive overall, especially in industries that rely heavily on global supply chains.
- Revenue Tariffs
Unlike protective tariffs, revenue tariffs are implemented primarily to generate income for the government rather than shield domestic industries. These tariffs are usually lower, allowing foreign products to remain competitive while still contributing to national revenue. Many developing nations rely on revenue tariffs as a significant source of funding for public services and infrastructure.
- Retaliatory Tariffs
Governments may impose retaliatory tariffs in response to another country’s trade restrictions or economic policies. These tariffs are designed to pressure the offending country into reversing policies deemed harmful to the retaliating nation’s economy. While they can be an effective diplomatic tool, retaliatory tariffs can also escalate into trade wars, leading to economic slowdowns and higher prices for consumers.
- Specific & Ad Valorem Tariffs
Tariffs can be structured in different ways:
- Specific tariffs impose a fixed fee on a particular quantity of an imported good, such as a set dollar amount per ton of steel or per barrel of oil.
- Ad valorem tariffs are calculated as a percentage of the value of the imported good, meaning that the total tariff cost fluctuates with the price of the product.
Advantages & Disadvantages2
Tariffs come with both benefits and drawbacks that affect economies, businesses, and consumers in various ways.
Advantages:
- Protection for Domestic Industries: Tariffs help local businesses compete with foreign competitors by making imported goods more expensive.
- Revenue Generation: Governments collect tariff revenues, which can be used to fund infrastructure, public services, and other economic initiatives.
- Encourages Local Production: Higher import costs may encourage domestic manufacturers to expand production and create jobs.
- National Security: Some tariffs protect key industries, such as defense or technology, reducing dependence on foreign suppliers.
Disadvantages:
- Higher Consumer Prices: Tariffs often lead to increased prices for goods, affecting consumers and businesses that rely on imports.
- Retaliation and Trade Wars: Countries may impose retaliatory tariffs, negatively impacting exports and overall economic growth.
- Reduced Market Access: Domestic businesses that rely on exports may struggle when foreign markets impose tariffs on their products.
- Inefficiency and Complacency: Protectionist policies can lead to inefficiency, as domestic companies may lack incentives to innovate and improve competitiveness.
The Impact of Tariffs on Trade and Economy
Tariffs influence international trade in several ways. While they can protect domestic industries from foreign competition, they often lead to higher prices for consumers and businesses that rely on imported goods. Moreover, tariffs can trigger retaliatory measures from trading partners, reducing export opportunities and stifling economic growth.
North Dakota exporters are not immune to these outcomes. Many of the state’s key industries, such as agriculture and manufacturing, depend on access to foreign markets. When other countries impose tariffs on U.S. goods, it can make North Dakota products less competitive internationally. Conversely, when the U.S. imposes tariffs on imported raw materials, it can increase costs for local producers, affecting their bottom line.
For businesses involved in international trade, understanding tariffs is crucial for strategic planning. Companies can explore trade agreements, tariff exemptions, and alternative markets to mitigate the impact of tariffs. Additionally, working with trade organizations and staying informed on policy changes can help businesses adapt to the evolving trade landscape.
Tariffs are a fundamental aspect of global trade, influencing economies, business strategies, and international relations. While they can serve as protective measures and revenue sources, their broader economic effects must be carefully considered. For North Dakota exporters and businesses, staying informed about tariff policies and their potential impact is key to maintaining competitiveness in the global marketplace.
Contact the NDTO with your tariff questions at (701) 231-4323!
1 Tariffs: Meaning and Types | International Trade | Economics