Tariffs and quotas – are they good or bad?

EACH time a household goes shopping, there is a tendency for the household to pay more for the goods purchased owing to tariffs and quotas.

Sometimes, it can be really tough to accept that the prices of the goods the household plans to purchase costs them twice as much or even more. This is largely due to the imposition of tariffs and quotas. Goods like dairy products, vegetables, tobacco, clothes, auto parts, leather items, shoes, peanuts and chocolates are some of the common items we pay more due to the effects from tariffs or quotas.

What are tariffs and quotas for? How will they impact prices of imports and consumers?

In simple terms, a tariff is actually a form of tax which is being imposed on those goods that are imported from other countries into the home country, for instance into Malaysia. These goods are generally purchased and consumed by the home country.

Import tariffs can range from as low as a few percent of the cost of the imported goods to well over 100% of the cost. Much will depend on the nature and classification of the goods imported. When the import tariffs are introduced, the price of the imported goods goes up and it will eventually be passed on to the households.

Those households who then purchase these imported goods will now have to pay a higher price.

Meanwhile, a quota sets a numerical limit on how much a product a country, say for example Malaysia, can import. For example, a home country may limit the amount of a specific model and make of import cars per year to one million.

The idea of introducing quotas is to protect the local producers of domestic products from experiencing strong competition from foreign players who tend to be more cost efficient and may cause local producers to be out of business. Hence, the quota will reduce imports and assist domestic business.

However, this policy does not leave the households pocket with a hole. With quotas, the households will have to pay more to buy imported goods as opposed to buying the locally produced goods. Such scenario will lower the ability of the household to buy other goods.

Why does a country impose tariffs and quotas?

The most common reasons are often to protect their new domestic business or inefficient domestic industries which are seen as important in driving the overall economy, job creation and higher tax revenue collection.

If the country fails to protect its key domestic producers, the risk is that other countries may start throwing in thousands of their products at a cheaper price or what is commonly called “dumping” into the home country. Such risk cannot be ruled out.

Consequences from such behaviour by the other countries will eventually hurt many of the domestic businesses in the home country. This in turn will have a negative ripple effect on the economy as well as on the households that could potentially lose their jobs if these businesses go out of operation or experience salary cut if the businesses they work for perform poorly.

Introducing import tariffs will discourage foreign countries from trying to sell their products to the home country at a cheaper price and steal the market share of the home country. The reason being that additional taxes will make foreign products more expensive and not as competitive with the locally produced goods in terms of pricing. Hence, the amount of imported goods households can buy will all be subjected to the effects of tariffs.

And domestic producers will ultimately benefit from the imposition of tariffs. It will reduce competition in the home country with foreign products. Possibilities for a drop in supply of foreign products cannot be ruled out owing to a higher price tag households will have to pay. When the households decide to purchase the foreign imported goods which are being tagged at a higher price following the imposition of tariff, they will have less money to spend on other items.

As a result, they will be forced to buy fewer foreign goods. At the end of the day, the households’ ability to buy goods will drop simply because their purchasing power fell when they decided to buy imported goods subject to tariff or quota.

So, are tariffs and quotas good or bad?

There are some who are of the view that tariffs and quotas are good. They feel both help shape trade policy by promoting home-grown products; reduce outsourcing of jobs to other countries that will benefit from the home country’s imports of their goods; create more jobs locally; and reduce over-reliance on foreign markets.

The counter argument is that tariffs and quotas will destroy the ability of the global market system to effectively allocate resources efficiently; will reduce the income of exporting countries and in turn will reduce their imports, thus causing a negative vicious cycle; potentially slow down the process of innovation and drive up productivity; and risk of protecting inefficient businesses that may benefit from nepotism and cronyism.

In all aspects, one needs to remember that although consumers may have to pay higher prices for the imported goods due to the imposition of tariffs and in turn have limited options to purchase other goods as a result of constraints in their income, the potential benefit is that the sales of domestic goods will increase.

It in turn will create more job opportunities and there are possibilities for innovation to come into force and local businesses emphasising productivity growth.

However, the positive impact from import tariffs is unlikely to be felt any time soon by consumers. In fact, it may even worsen their position in the near term.

The reason being import demand tends to be less price sensitive in the short term or from the first round effect of the tariff. As such, demand will remain the same or drop marginally while prices paid for imports will rise, thus hurting consumers’ standard of living.

Anthony Dass is chief economist/head of AmBank Group Research.

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