The US’s new administration is making some headlines recently, with some accusing them of instigating trade wars with foreign allies to the US (allies and trade partners, to be clear) and others calling actions like tariffs a substantial step toward an “America First” policy. I wanted to look at these issues further, specifically tariffs and their cousins, quotas, and to find out what kind of effect such policies actually can have on
The idea behind these policies is called protectionism because they are theoretically meant to “protect” domestic business interests.
Tariffs are taxes levied on goods exported from other countries and imported into the US, and they are enacted in the hopes of motivating domestic production and minimizing our nation’s spending on foreign products. If we buy less foreign goods, theoretically we’ll be buying more domestic ones. Additionally, the government profits off of the taxes levied against foreign imports. Quotas are limitations placed on the number of products which can be imported into the country from other nations. So far, from what I’ve seen this administration is focusing on tariff’s mostly; but, conceptually the two go hand in hand, so I wanted to look at them both. Quotas can be enacted based on percentages regarding the amount of money made off of certain products, or the number of individual items sold, or even by volume of items sold.
Quotas are touted as being particularly beneficial to smaller businesses because they encourage the purchase of domestic products which theoretically makes it easier for small and new businesses to get a leg up in their industry/market. Of the two, quotas seem to be better at protecting domestic interests; but, they tend to mean that consumers pay the price. With quotas, there is less importing/exporting overall and higher prices that the consumer absorbs more often than not. They also require a lot of extra work for businesses and the agencies overseeing the quotas, and their results are difficult to measure.
Tariffs add a tax to imported products, substantially raising the price a company pays for products coming in from a foreign country. This also results in higher prices for consumers as well as higher initial costs for the businesses, though that is absorbed by the consumer in most cases they are the end-user. One of the biggest risks when it comes to enacting tariffs is that foreign businesses or governments will adopt their own tariffs vengefully, which impacts domestic businesses who make money by exporting; it raises the costs of transporting. Additionally, some studies have shown that tariffs tend to result in lower quality products because businesses often attempt to offset the tariff costs.
Tariffs and quotas can both negatively affect businesses if they lead to international “trade wars” causing bad feelings between international trading partners, and repercussions such as refusal to do future business or revenge with excess prices, et cetera. Further, tariffs and quotas have historically both been known to delay trade agreements which negatively affect the overall income of the countries in question.
If you are a business that does not sell internationally, tariffs can be beneficial in that they can raise the demand for your product if it is no longer readily or affordably available from foreign imports. You could benefit from increased business, and you could benefit by being able to raise your prices, which you previously would have had to keep small to compete with cheaper international products, for example. Quotas can have a similar effect on domestic businesses, though, again, consumers do not generally benefit in either one of these situations.
Overall, quotas cause the most damage to a nation’s economy because there is no extra income to make up for the loss of imports/exports. In that vein, however, quotas are harder to enact and oversee depending on the types of goods being affected because goods have to be counted. Further, quotas is especially subject to political manipulation because there has to be a decision as to which companies are allowed quotas and what amount they’re allowed, and some companies may not receive a comparable amount based on political/governmental influence or may lose out entirely to other, more influential companies.
In an interesting twist, tariffs or bans can lead to an unexpected boom in previously nonexistent domestic industries. When the US enforced taxes and bans on Russian goods, Russia’s government shut down all trade with the US, minimizing the types of food that were allowed into the country. People had just gotten used to imported goods when they were finally allowed back into the country after years of Cold War and other politics. Now, they know what they are missing, and a bit of independent farming and farmer’s marketing has, pardon the pun, cropped up where it never was before. That being said, not all countries are capable of producing all products their citizens might need, and tariffs and quotas can prove detrimental or at least highly inconvenient if they affect products that are otherwise unobtainable domestically.