Eli5: how does increasing or decreasing tarrifs affect a country’s growth?
In: Economics
Tarrifs are a tax on imports. All else being equal, increasing tarrifs increases the price of those imports to the buyer. When prices increase, consumers typically respond by buying less. Let’s use steel as an example since it is in the headlines. At the individual consumer level, the consumer is either buying the same quantity of steel (paying more for it and cutting back elsewhere) or cutting back on steel itself, or some combination of the two.
This has knock-on effects down the supply chain. The cost of items that use steel, whether cars, warehouses, etc. are now more expensive to make, and will likely see price increases. Those price increases in-turn will lead customers to cut back on their purchases in those areas.
Within the steel industry, sales will shift away from Canadian manufacturers in favor of American producers (who’s products do not have to pay the tarrif and are now more competitively priced). American firms will enjoy higher profits (the firms may have even been loss-making prior to this) and workers in that industry will fare better – perhaps the firm will expand and hire more workers, or perhaps the firm was on the verge of failure and now won’t have to lay its employees off.
Tarrifs are a political exercise in tradeoffs between different groups in an economy. Consumers in the example above are unambiguously worse off, but the effect is very small for individuals. Domestic firms and employees are better off, but the effect for individuals is large. You can guess who is more energized when it comes to voting and political donations.
In the long run, tarrifs tend to make an economy less productive. There is a benefit to specialization in the form of increased quality and productivity. Imagine if every state had their own film and computer industries. 50 mini-hollywoods and 50 mini-silicon valleys would create a lot of jobs, but the Nebraska iPhone and the West Virginia produced Avenger’s Endgame doesn’t sound ideal. Keeping the West Virginia film industry in business just to create jobs, is (from an economic perspective) not much different than bailing out typewriter manufacturers. Sorry to pick on the Mountaineers, I’m a fellow Appalachian American.
The same is generally true for international trade. There are other complications around capital controls, exchange rates, and the national debt, but this post is already too long.
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