Every country tries as much as possible to promote trade both domestically and internationally. In this regard, governments are sometimes forced to implement different policies either to prohibit or enhance foreign trade. Among the measures that governments take is the implementation of trade tariffs as well as import quotas. A tariff is a fee imposed on imports or exports, and it increases the cost of commodities (Carbaugh, 2010). In the United States, tariffs on agricultural goods are far much higher than those on manufactured goods.
The government of the United States of America imposes heavy tariffs on agricultural goods to protect the sector from foreign competition. Without trade tariffs, many foreign agricultural goods could be imported, thus interfering with local production. Therefore, higher tariffs are necessary to protect local agricultural producers and increase the demand for local products (Cherunilam, 2008). On the same note, tariffs have proved to help in stabilizing the economy of a country when well managed, thus making them preferable for the agricultural sector of the United States.
However, tariffs distort the prices of both domestic and imported commodities. When tariffs are imposed on imported goods, they increase the cost of those goods, thus increasing the prices (Mukherjee, 2007). In the short-run, this reduces the demand for imported goods, thus increasing the demand for local, relatively cheap products. As a result, local producers increase not only the quantity but also the prices of their commodities in the long-run. Therefore, the result of tariffs is the general increase in the prices of both domestic and imported goods.
Local producers usually benefit from tariffs because the demand for their goods is enhanced, thus increasing their sales (Dee & Ferrantino, 2005). However, consumers are negatively impacted because they have to pay more for goods due to the increased prices. The low-income earners whose expense on food commodities accounts for a larger part of their incomes are hit the most. Unfortunately, the demand for commodities of international businesses is decreased while local producers are encouraged. Consequently, tariffs interfere with the invisible hand of the market (Mukherjee, 2007).
It should be noted that though tariffs go against the principles of free trade, they are essential to a certain extent. In order to protect the local infant industries, the external competition must be limited (Carbaugh, 2010). On the same note, governments usually make a lot of income from tariffs, thus increasing their revenue, which is used to offer services to citizens. Lastly, tariffs assist in stabilizing the economy, which makes them necessary to a certain extent, though (Dee & Ferrantino, 2005).
Hi Tony, I slightly disagree with your point that agricultural products have higher tariffs due to the higher protection internationally. There are several countries which do not protect their agricultural sector that much. However, I agree with you that tariffs are necessary, though their effects should be put into check so that negative effects do not exceed the positive ones. I also concur with you that tariffs send wrong market signals, which interfere with the process of resource allocation.
Hi Kelly, I do not agree that agricultural products have high tariffs because of the high risk involved in exporting or importing them. It is clear that there are several products which are riskier to transport than agricultural goods, yet they are not as protected as such. On the same note, it is not obvious that the change in demand due to tariffs on imported goods will be huge to cause a significant increase in national income.
Carbaugh, R. (2010). International Economics. Stanford: Cengage Learning.
Cherunilam, C. (2008). International Economics. New York: McGraw-Hill.
Dee, P. S., & Ferrantino, M. J. (2005). Quantitative Methods for Assessing the Effects of Non-Tariff Measure and Trade Facilitation. London: World Scientific.
Mukherjee, S. (2007). Modern Economic Theory. New Delhi: New Age International.