Tariffs have been part of the United States economic history. Alexander Hamilton who was the country’s first treasury secretary was the one who initiated the tariff issue. According to Hamilton, tariffs were necessary and were aimed at protecting the American manufacturer and they have been instrumental in the America’s trade policy up to date (Bloomberg 1).
The American government can impose trade tariffs in the following situations;
The first reason for imposing tariffs is to protect domestic industries from competition emanating from foreign firms; secondly tariffs are imposed in order to safeguard old and inefficient industries from any external competition, consequently tariffs are imposed as a measure for protecting consumers from dumping by foreign companies or foreign governments; dumping only happens when a foreign firm levies a cheap price in a domestic market, a low price is understood as one that is lower in a foreign market than the one charged in domestic market, in this case the producer might lose money since they might charge prices that are below the costs.
According a World Bank report, tariffs are considered an impediment to the economy and if they are eliminated in trade transactions then the world economy could sporadically grow.
In the United States, for example, tariffs are imposed on sugar which is a necessity and an important commodity; Tariff on sugar implies that importing sugar will be costly and this has the advantage in form of price support to the sugar farmers in the US and this has the net effect or disadvantage to the consumer since it will result to higher price of sugar.
If the sugar market could be free, the high price of sugar which in this case is artificial might attract low-priced imported sugar; it is due to this that the government is forced to intervene in the market by implementing trade tariffs.
The main reason for imposing tariffs is to put a ceiling on the supply of foreign sugar from the United States’ market which causes the domestic price of sugar to rise, the tariff effect has let to the doubling of sugar price as compared to the US market and this has attracted extra spending by the American consumers (Carbaugh 156).
The US government prefers tariffs as compared to quotas because quota is more restrictive than tariff; this is because a tariff results in the increase in domestic price but has the effect of limiting the quantity of goods imported into a country and only those importers who are in a position to pay the tariffs manage to get the product. Consequently, tariffs have the effect of offsetting price reduction of foreign producer hence slashing profit margins.
A quota is prohibited by the government due to the fact that it is more restrictive than a tariff and has the effect of preventing any competition. Whereas a tariff is determined by the market mechanism, a quota forecloses market mechanism. The government of the United States also prefer tariff to quota not as a matter of principle but due to the fact that it is a requirement of the World Trade Organization (WTO) (Carbaugh 154).
The government of the USA should not impose tariffs instead they should allow market liberalization. This is because tariffs result in the transferring of price burden to the consumer. Also by insulating domestic companies from external competition, the government will be opening an avenue for poor and substandard quality of goods.
The three most protected goods in America are tobacco, unshelled peanuts and French jam. Tobacco is protected at 350% tariff, unshelled peanuts at 163% and French jam at 100% tariff. This has largely contributed to the survival of these products in the market (Business 1).
Bloomberg. The US tariffs. Bloomberg business week, n.d. Web. July 2, 2011.
Business. 25 American products that rely on huge protective tariffs to survive. Busness Insider, n.d. Web. July 2, 2011.
Carbaugh, Robert. International Economics. New York: Cengage Learning, 2008. Print.