Impact of Trade Tariffs and Trade Agreements

Trade Insights

24 April 2023 • 11 min read

Impact of Trade Tariffs and Trade Agreements

Raghav Sand

Tariffs may provide some short-term protection for domestic industries that make the regulated and taxed items by eliminating competition, but they do so at the expense of consumers and other sectors of the economy.

Tariffs and trade agreements can have a significant impact on importers and exporters. Tariffs are taxes imposed on imported goods, while trade agreements are agreements between countries that set rules and regulations for international trade.

For importers, tariffs can increase the cost of imported goods, making them more expensive to sell to consumers. This can lead to reduced demand and lower profits for importers. In some cases, importers may need to pass on the cost of the tariffs to consumers, which can lead to higher prices for goods.

Since consumers spend more on the products for which the tariff is paid, they have less money left over for other purchases, supporting one industry at the expense of all others. Due to the inefficient distribution of resources, economic growth may be constrained. Tariffs frequently have a regressive aspect and disproportionately harm low-income consumers.

Trade Tariffs Reduce Economic Output and Incomes

Tariffs and other trade restrictions by some nations raise costs and divert money from relatively efficient economic activities to less efficient ones, which raises prices. Such activities lead to higher costs for businesses than they otherwise would, higher prices for items than they otherwise would, and a general loss in output and employment.

The results of previous protectionist regimes show that protectionism is ineffective. The implications of implementing protectionist measures to safeguard native industries from foreign competition are higher prices, less effective resource allocation, job losses throughout other sectors of the economy, and in the long run, failure to assist the intended beneficiaries.

Aim of Trade Tariffs

Certain tariffs are put in place to respond to specific actions made by foreign nations or businesses. For instance, when another nation subsidises a domestic industry, enabling its exporters to sell goods at a cheaper price than they would otherwise be able to in a free market, and therefore undercutting domestic producers, the countries impose "countervailing duties." For example, when a U.S. company can demonstrate that a foreign company is selling goods in the country at a lower price than they do at home, "antidumping duties" are imposed, frequently to drive out rivals before raising prices.

Reducing the Impact of Tariffs

There are several strategies that importers and exporters can use to reduce the impact of tariffs:

  • Diversify their supply chain: Importers can reduce the impact of tariffs by diversifying their supply chain and sourcing goods from different countries. This can help them avoid tariffs imposed on goods from a particular country and reduce their dependence on a single source.
  • Use tariff classification and valuation tools: Importers can use tariff classification and valuation tools to accurately classify their goods and ensure that they are paying the correct amount of tariffs. This can help them avoid overpaying tariffs and reduce their costs.
  • Negotiate with suppliers: Importers can negotiate with their suppliers to reduce the cost of goods to offset the impact of tariffs. This can include negotiating lower prices, longer payment terms, or free shipping.
  • Take advantage of trade agreements: Exporters can take advantage of trade agreements toeduce the impact of tariffs on their goods. Trade agreements often provide reduced or eliminated tariffs on goods that meet certain requirements.

  • Explore alternative markets: Exporters can explore alternative markets to reduce their dependence on a single market that may be impacted by tariffs. This can include targeting new markets or expanding their presence in existing markets.

Overall, reducing the impact of tariffs on importers and exporters requires a combination of strategic planning and proactive measures. By diversifying their supply chain, using tariff classification and valuation tools, negotiating with suppliers, taking advantage of trade agreements, and exploring alternative markets, importers and exporters can reduce their costs and stay competitive in the global market.

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