How Do Tariffs Influence International Trade Balance?

International trade ranks among the most important features of the global economy. Countries exchange goods, services, and other resources for domestic consumption and growth while maintaining diplomatic relations. Trade, however, is not fluid since it is often interfered with by governments through the use of tariffs. Tariffs refer to a tax on imported goods and services. While meant to protect and generate revenue for domestic industries, permit government revenue collection, and sometimes correct trade deficits, the repercussions of such taxes on the balance of international trade are much broader and intricate than simply protective.

Studying tariffs requires a focus on the balance and short-term benefits and long-term structural shifts to a country’s trade network.

What Are Tariffs?

Tariffs are government taxes on imports. Per-country tax is designed to protect domestic products. Per-country tax is levied with the hope that it would encourage buying products that are produced locally.

Tariffs are Ad Valorem and Specific Tariffs. 

• Ad Valorem tariffs are taxes that are levied on a set of imported goods. For example, goods can be imported at a 10% fee of the price.
• Specific tariffs are charged on exported products based on the amount produced. For instance, exported steel can be taxed at $50 for each ton.

Even though tariffs might seem simple, they can have a profound impact on a country's trade balance. 

Tariffs and the Trade Balance

A trade balance is the difference between a nation’s exports and imports. A nation has a trade surplus when exports exceed imports, while a trade deficit occurs when imports exceed exports.

Tariffs impact the trade balance in the following ways.

Reduction of Imports

Tariffs reduce the imports of goods and 

 from other countries. This might help to control a trade deficit for a country that imports excessively. For example, India imposed high tariffs on foreign textiles, resulting in lower imports of textiles as consumers shifted to domestic producers.

Impact on Exports

Tariffs reduce imports, but exports can suffer as well. Countries that export to the tariff-imposing country can suffer from a loss in demand. Such countries retaliate in one way or another. A prime example would be the U. S. imposed tariffs on Chinese goods in 2018, and as expected, China placed tariffs on American agricultural goods, resulting in a loss for the American agricultural sector. The impact of the tariff on the supply chain management decides the fate of suppliers and industries. 

How do Tariff Taxes Affect Government Revenue and the Growth of a Country's Economic Industry?

Tariff taxes impose a fee on specific foreign goods entering the country. A country can use the money collected from these taxes for the public's economic development. This action simultaneously helps the country's domestic businesses to develop due to the lack of competition from foreign businesses. When domestic industries grow, they can also boost exports, which improves a country's balance of trade.

Increased Costs and Growth of Inflation

Tariff taxes influence the economy, which isn't considered. To neglect the effects of foreign goods on the economy, past domestic goods, and vice versa, they will rise in price and thus result in consumer inflation. Although these effects will reduce imports and the country's demand for goods, domestic producers will at the same time be making extreme goods. Therefore, the consequences will have an effect on imports and domestic demand.

Change of Trade Imbalance in the Short-Term and Long-Term periods

Tariffs are a tool in establishing a country's trade balance. They help in import reduction and domestic industry support, but simultaneously provoke retaliation, increase long-run consumer pricing, and spur economic inefficiency. Countries are better off trying to strike a balance between trade, innovation, and protective policies instead of solely relying on protective tariffs.

 

Short-Term Effects:

• Imports of goods will reduce in the short run. Foreign products will be purchased at a higher price.
• Imports of goods will be purchased at a higher price.
• Revenue collected from tariff fees will increase.

 Long-Term Effects:

• Restrictions on exports could be caused by retaliatory taxes of other countries.
•  A country might have a lackadaisical attitude toward foreign competition.
•  The lack of foreign exports will also hinder the domestic economy.
•  The country might reduce foreign investments due to viewing taxes as a hindrance.
•  Economically speaking, tariff fees balance exports for a time, and in the long run, the consequences will be diverse.

Case Studies on the Trade & Tariff Relationship 

Although tariffs can be a useful tool to facilitate the growth of domestic trade and business, it’s counterproductive to rely on them too heavily. Trade balance can be strategically maintained by restricting trade from other nations while encouraging domestic industries to compete.

The Trade War Between The U.S. And China : 

The U.S. implemented tariffs on China in 2018, sparking the U.S.-China trade war. In an attempt to alleviate the trade deficit, the U.S. placed tariffs on more than $360 billion of Chinese goods. Imports from China did reduce; however, American exporters suffered from counter tariffs. U.S. farmers, for example, lost a significant market as China stopped buying their goods. In the end, the trade deficit persisted.

India’s Electronics Import Tariff:

In an attempt to foster domestic manufacturing, the “Make in India” program in India has placed a tariff on the import of electronics. This initiative has increased the manufacturing of smartphones and electronics. However, the consumption of global technologies has slowed as the prices for smartphones and gadgets have skyrocketed.

 

Did You Know? In 1930, the Smoot-Hawley Tariff Act placed tariffs on 20,000 imported goods, hoping to improve the economy. The act did the opposite. Countries retaliated by putting tariffs of their own, which ultimately deepened the Great Depression and decreased global trade by 65%.

 

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Frequently Asked Questions (FAQs) 

Do tariffs always reduce a trade deficit?

No, not always. Try as they might to reduce imports, a trade partner's retaliation could end up lowering a country's exports, resulting in the deficit remaining unchanged or getting worse.

Who benefits most from tariffs?

In the short run, they tend to be beneficial to domestic industries, as well as to the government (through some revenue). However, consumers are at a loss due to the high prices. Similarly, exporters also tend to suffer in the long run.

Can tariffs strengthen the economy permanently?

Only if they are used strategically. They can aid in protecting emerging industries for some time, while a tariff over-dependence in the long run can lead to inefficient industries in domestic markets and a decrease in international competitiveness.