Having intensified trade tensions and exchange rate volatilities in most quarters of late, the global economy has long been in rapid evolution. In the face of these evolving challenges, the tariffs that countries place on imported goods from other countries has arisen as one of the key macroeconomic and geopolitical issues of the day. Tariffs are taxes that countries levy on goods entering their borders, and these fees are primarily used for two reasons. Firstly, tariffs provide governments with direct revenues, which can be deployed for various uses. Secondly, tariffs are tools used by governments to protect domestic industries and grants them a temporary advantage over their foreign counterparts in the domestic market. As a result, countries have recently been engaging in tariff escalations, adding more and more duties to goods crossing their borders, leading to significantly blunted cross-border trade.
The purpose of this essay is to discuss the impacts of tariff escalations, and why these trends are of great concern for the well-being of most advanced economies, developed and developing alike. It is our thesis that implementing tariffs have prohibitively costly effects on the global economy, and that these costs may become too much for many advanced economies to bear in the long-run. We will outline each of the economic impacts below.
To begin, tariffs result in price increases for goods that must be imported for domestic consumption. This provides a financial advantage for domestic producers, who no longer need to compete with imported goods of the same category as heavily. It also ensures that domestic producers won’t be overburdened by excessively low import prices to remain competitive on the domestic scene. However, this protection from international competition also results in a net transfer of capital from consumers in the form of higher prices. These higher prices thus act as a tax on those who are not protected by the tariff, resulting in reduced consumption and an overall reduction in economic efficiency.
In addition to higher prices, the implementation of new tariffs also creates uncertainty in the marketplace, making business decision-making more difficult to plan and budget for. This is due to the fact that tariffs are typically implemented or increased on short notice, leaving producers and businesses struggling to adjust based on shifting winds. This uncertainty results in decreased investments, higher risk associated with trading, and a general decrease in efficiency.
Furthermore, tariff escalation can also affect internal policy. As illustrated above, producers who are protected from import competition generally benefit from tariffs. However, while this result mainly positive at first, these domestic producers may become increasingly more dependent on external protection and less competitive without it. This in turn may lead to an over-reliance on tarifs and other tools of protectionism at the expense of industry adaptation and innovation. This may lead to further losses in economic efficiency and hinder countries abilities to adjust and evolve in the face of ever-changing markets.
Finally, tariff escalation can have geopolitical implications, as countries may use tariffs as a means of retaliating against countries whose regulations are seen as being unfair or overly restrictive. This in turn can lead to a decrease in transit of goods between countries, resulting in a decrease in international trade. This can have a deleterious effect on the global economy as the cost of goods and services increases, curbing consumption and investment.
It is clear that the consequences of tariff escalation can be far-reaching and detrimental to economic growth. In light of this fact, countries should be cognizant of the harms that may arise from these practices and take steps to put in place stricter regulations to ensure fair competition and an effective international trading system. Countries should also work together to limit retaliatory tariffs, as these usually result in a net loss of economic growth and activity. Further international cooperation is essential to ensure that the global supply chain remains functional, and that countries can continue to benefit from the advantages of a global economy.
