So what is a Tariff anyway?

There is a lot of talk about the US and China and other countries raising Tariffs against each other. So what is a Tariff anyway?

A tariff is a kind of tax placed on imports, sometimes from all countries and sometimes just from one country.  Usually trade arrangements are made between two countries so the tariffs will be at a country level.

In the past most countries had a lot of tariffs, sometimes really high ones.  These taxes encouraged people to buy goods made in their home country rather than imports with expensive taxes on them.  In Australia this system propped up the Textiles, Clothing and Footware industry until reforms were made and the tariffs reduced to almost zero, and in some cases zero.

Tariffs fall under an economic strategy called trade-barriers or protectionism. Protectionism aims to protect the home countries industries, even if they are not competitive and would not survive without the taxes on their competitors.

While tariffs are perhaps good for companies that are in protected industries, and they can continue to employ people, protectionism is bad for consumers and often forces them to pay more for the things they want to buy. In the 1980’s the cost of a T-shirt was much more expensive than the cost of a T-Shirt today.  Wages of factory workers in Australia were and still are much higher than wages in China and other manufacturing competitors, and so consumers in Australia were forced to pay more for their T-Shirts.

If you only have $100 to spend and a T-Shirt is $50 it only leaves you with $50 to spend on other things.  If there are no Tariffs and the T-Shirt is now $40 you have $60 left to spend on other things you want.  Basically you can’t buy as much under protectionism.  In Australia the price of a T-Shirt got much cheaper than $40, because eventually the foreign goods were so much cheaper and more competitive than the local goods. This soon put most of the Textiles, Clothing and Footware industry out of business.  That isn’t necessarily a bad thing,  it’s bad for a while for the people who loose their jobs, the factory owners and their investors. But remember, those factory workers were also having to buy a $50 T-shirt under protectionism, and now they don’t have to spend as much either.  The businesses were not competitive and were being propped up by an artificial advantage.  Generally the standard of living of people increases as protectionism is removed.

However like all things, it’s not black and white and not all people benefit equally from removal of trade barriers. Governments role in this type of situation where there is a massive restructure of the workforce due to change of government policy is to help affected workers find new jobs.  A task government doesn’t always get right.  It is also the responsibility of Industry to be open to employ people from declining industries and to the workers themselves to retrain or gain new skills.

These kinds of changes are worse when they are implemented too quickly, without time for people to adjust and find new work.  Another thing that can exacerbate the situation is when protectionism is removed when there is no other work around.  This can turn structural unemployment, as it is called, into long term unemployment.  This makes life very difficult for workers in affected industries. They may never find employment again. Due to unemployment they do not benefit as much from the rising living standards as people who remain in work gain from removing tariffs.

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