State government levy tariffs on imports

¶ … Government Levy Tariffs on Imports

The contemporary world is in general a mixed market economy system that works on the lines of a free market economy system. In a free market system the control generally lies with the private sector. All pricing decisions and profits are owned and controlled by the private sector. The government who acts as a regulatory authority for the welfare of public, funds its operations through taxation. However, the direct and indirect tax revenues that are generated from domestic economic activities are alone not enough to fund the government budgetary expenses. For this purpose, the government is generally dependent on foreign exchange. There are two major sources of earning foreign exchange. One way is to generate foreign exchange from the remittances sent in by the states ex-patriots. Another way is to tax other states. Generally it is done by imposing import tariffs.

Imports are commodities that are bought in and arrive in a country from another country. A state might impose taxes in the form of tariffs on commodities that are imported in from another state. These tariffs are imposed as a percentage of the monetary value of the imported commodity. The ultimate result of imposing a tax on a foreign commodity is that it increases the final price of the commodity at which it will be bought by the consumers. This means that imposing a tariff makes a commodity more expensive for the consumer to buy. For this reason Import tariffs are considered as a barrier to international trade as it discourages consumers from buying foreign goods (Lipsey & Chrystal, 1997).

Advantages and Disadvantages of Imposing Tariffs

Ever since the concept of free trade has evolved in the contemporary economic system, it has triggered a heated debate on whether it is sensible to impose barriers on international trade or free trade among various countries should be allowed. Imposition of tariffs as a barrier on trade has both merits and demerits.

Firstly, imposition of import tariffs on foreign goods is a good way to generate foreign exchange and is a great source of funds for the government of any state. Apart from that, imposition of import tariffs offsets the negative effects of exceeding imports on the Balance of Payments and Balance of Trade of the state. This is essentially good for the countries that have less developed economies and produce little industrialized goods to export to other countries. Influx of foreign commodities in less developed states poses an economic threat to their domestic industries. Such states can protect their domestic industries by imposing import tariffs on foreign goods and making them more expensive for consumers to buy them. As a result consumers will stick to buying domestically produced goods (Stanlake & Grant, 1997).

While imposing tariffs might seem a lucrative idea to many states, it brings with it a lot of demerits as well. Since international trade works on two way lines, imposition of import tariffs by one country's government on another country's good may provoke other countries to put trade barriers on that country. As a result, the country might lose important export markets which may affect its balance of payments and might reduce its foreign exchange. This may further result in depreciation of exchange rates. Economists also argue that if all states will start imposing import tariffs, international trade in all the countries will be hindered. These mean consumers in all the countries will have less freedom of choice and standards of living will be low.