a brief insight into the concept of protective tariff
A Brief Insight into the Concept of Protective Tariff
Protective tariff is a type of tariff that is imposed on imported goods to increase domestic economy. A brief insight into the concept of protective tariff is provided in the Buzzle write-up below.
Fast Fact
The Tariff of 1789 Bill was the first major Bill to be passed by the United States Congress. It was the first Bill to be considered and passed in the first session itself. This was apparently done due to the increasing number of petitions from the industrial sector.
A tariff is a kind of tax that is imposed on imported goods. By the definition of protective tariff too, it means the same. It is imposed on imported goods to make them more expensive in the market. Countries use tariff in order to restrict trade. The tax varies depending on the item. It mostly depends on the value of the item, and the tax is levied as a percentage of this value. The government uses the concept to increase revenue as well. In fact, it is one of the commonly implemented methods to change trade policies. The paragraphs below elaborate on the concept of protective tariff.
A Background
- The Tariff Act of 1789 was the first Act regarding import duty to be passed in the United States.
- According to the Act, any tax duties could be laid on goods and merchandise for supporting the government or encouraging manufacturers.
- There existed a state of economic ambiguity prior to the American Revolution. This period of financial unrest led to the manufacturing sector requesting to stop the import of European goods.
- The concept has been widely used by the government since those times and is used even now.
- Protective tariff is imposed only on the items that are imported from various countries, for a variety of purposes.
- The tariff may be heavy, depending on the product.
- For instance, the tariff on cars and electronic items may be more than perfumes and cosmetics. Again, this depends a great deal on the country and product quality.
The Purpose of Protective Tariff
Protection of New Industries
- One of the primary purposes of protective tariff is to protect new industries.
- This includes small ventures, small-scale businesses, industries that are at their infancy, etc.
- If imported goods are not taxed, customers will prefer buying them due to the low price.
- Thus, these industries will face losses and might shut down before taking off, since no customer will buy their products.
- By imposing tariff, the government helps these industries to sell their goods.
Internal Trade Strife
- Almost all countries engage in trade activities with each other. These activities are done based on a certain established protocol.
- During a trade activity, if one country, let's say country A, does not follow the stipulated rules and regulations, the other country, let's say, country B, may impose tariff on A. This may sound vengeful and vindictive, but it is something that does take place.
- When B imposes heavy duty on the goods imported from A, the citizens of B might refuse to buy the goods due to the price factor.
- Eventually, A might get back to following the ground rules, or the trade activity may be out to an end.
Consumer Security
- Use of protective tariff to protect consumers is fairly common in many nations.
- The reason for this is that some goods that are imported may or may not be of a high quality.
- Another point is that the goods may be potentially harmful.
- To discourage its citizens from buying cheap or harmful foreign goods, the government may impose a high protective tariff.
Protection of Internal Jobs
- For the same reason as protecting infant industries, protective tariff is used to secure domestic jobs as well.
- Assume that there is a textile manufacturing industry in country A wherein a new brand of clothing is being manufactured.
- At the same time, another country (say, B) manufactures the same brand of clothing and imports the same to A.
- If tariff is not imposed on this product, it will be sold at a reasonable price in the market.
- Generally, the mentality of the public works in favor of imported goods; for several reasons, there is a fascination with foreign products than domestic ones.
- In such a scenario, they will prefer buying the imported cloth brand rather than trust a small industry with no brand awareness as yet.
- Thus, the company might go into a loss. And, when there is no money, the workers and other staff cannot be adequately paid either.
- Thus, not imposing the tax results in unemployment. To protect domestic jobs, the government imposes tariff.
Increase Revenue
- The government may want to increase domestic revenue. This may be a trade policy or any other strategy to combat economic deficiency.
- To do so, it imposes protective tariff.
- This ensures that domestic goods remain within the country and the resultant profit is beneficial to the nation.
- With the imposition of further tax, more and more domestic industries will be able to sell their goods, thus leading to an increase in revenue.
Benefits
- You would be pondering over who gains and loses from protective tariff. Frankly speaking, this could be a matter of perspective.
- Consider the government's point of view. By imposing this monetary duty, it helps protect new industries, domestic jobs, customers, etc.
- However, many experts argue that imposing tariff on imports is unethical. They are of the view that this prevents the practice of free trade.
- Moreover, a customer might actually lose out on the chance of benefiting from a better imported product than a domestic one.
- This practice may lead to trade wars. If country A imposes tax on the goods of country B, B may do so as well. This may cause a problem to A, since the tax will be levied on the goods it exports.
- Experts in favor of tariff state that the practice helps prevent unfair import competition. It helps local producers sell their products at reasonable prices, which would have otherwise been impossible if foreign goods were also priced at the same value.
- Protective tariff supports the idea that revenue earned within the country should go back into the country itself, rather than an expenditure on foreign goods.
- All in all, protective tariff is beneficial to the nation if a fair amount is imposed. However, the government should not refuse to discontinue the practice in case the negative effects of the same are visible.
Example
- One of the most common examples considered by economic experts is the import of citrus fruits.
- Since they do not grow everywhere, they are imported from a certain nation, say A. Let's assume that country B wishes to import these oranges, but it has the capacity to produce its own as well.
- A protective tariff may be applied in this case. The price of the imported oranges will increase, as compared to the price of local oranges.
- This will lead to an increased sale of the local oranges, benefiting the producers and the nation as a whole.