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Pros and Cons of Tariffs (2023)

If you’ve ever bought imported products directly from an overseas manufacturer, you may have noticed additional taxes. Often, these are a result of protective tariffs imposed on goods and services from overseas manufacturers and merchants.

Protective tariffs are a result of international trade policy that gives domestic companies a competitive edge, at least in the short term. However, they can hurt domestic consumers and economies in the long run by shielding inefficient businesses that charge too much. It’s necessary to understand how protective tariffs can impact your business or industry.

What is a protective tariff?

A protective tariff, also known as a duty, is a tax on a product or service imported from another country. Protective tariffs can improve sales for domestic industries and limit foreign competition by forcing imports to raise prices to compensate for the tariff. By creating a market where imported goods come at a higher price than equivalent domestic products, protective tariffs attempt to strengthen and protect local economies.

A brief history of protective tariffs

Founding Father Alexander Hamilton was one of the first proponents of imposing tariffs on goods imported to America to spur growth of nascent domestic manufacturers. President George Washington signed the Tariff Act of 1789, one of the first pieces of legislation that Congress passed after the ratification of the Constitution in 1788. High tariffs were one of the main sources of revenue for the US government during the late 19th century and early 20th century, until the adoption of the federal income tax in 1913.

In an attempt to offset the economic downturn of the Great Depression, US Congress passed the Tariff Act of 1930, also known as the Smoot-Hawley Tariff. However, the act backfired because other countries retaliated with their own tariffs, which choked off international trade and deepened the Great Depression. 

Since then, the US has used tariffs less often, with a few notable exceptions, including the 2002 and 2018 tariffs on steel.

What are the benefits of protective tariffs?

Governments that implement protective tariffs can benefit from them in a handful of ways: 

Protects emerging industries

Protective tariffs increase the amount of taxes overseas manufacturers and merchants must pay to export their products to a specific region or country. Ultimately, consumers pay these additional taxes, making imported products more expensive than domestic goods. By giving domestic manufacturers and merchants a competitive pricing advantage, protective tariffs can help domestic nascent industries grow. 

Discourages dumping

Protective tariffs can deter dumping, which occurs when manufacturers or merchants export products to another country at a lower price than they sell in their home markets or below production cost. Companies that dump products in foreign markets sell them at a loss to eliminate competition and gain a foothold in the market. 

One example of how protective tariffs discourage dumping is with the paperclip industry in the American market during the mid-1990s. The US imposed a 127% tariff on Chinese-manufactured paper clips to support domestic paperclip manufacturers.

Increases domestic tax revenue

Although the primary goal of protective tariffs is to shield domestic manufacturers and merchants from overseas competition, they can also generate tax revenue for the government. 

What are the drawbacks of protective tariffs?

Protective tariffs also have several drawbacks: 

Raises prices for consumers

Consumers end up paying the additional cost that results from protective tariffs on imported products and services. These extra costs can add up for customers, ecommerce entrepreneurs, and small businesses that rely on imports. 

One example of tariffs costing consumers money is the 2018 tariffs placed on washing machines, which resulted in the median price of washing machines increasing by $86 a unit, according to a study in the American Economic Review.

Hurts international trade relations

Protective tariffs can inspire retaliatory tariffs that end up costing consumers more money in regions or countries on both sides of the trade. Raising prices on imports and exports through protective tariffs can limit cross-border ecommerce sales, which accounted for 22% of ecommerce product shipments in 2022.

Can reduce economic growth

By raising prices and creating international trade barriers, protective tariffs can slow economic growth and harm companies that import and export. Although the goal of protective tariffs is to help domestic companies, the long-term impacts of protective tariffs have the potential to hurt consumers and small business owners, although the additional tax revenue generated may itself be put to work in the economy.

Protective tariff FAQ

What are protective tariffs?

Protective tariffs are taxes imposed on products imported from an overseas manufacturer or merchant. Protective tariffs intend to protect domestic companies from international competition by creating market conditions where imported products ultimately cost more than similar domestic goods or services.

What is an example of a protective tariff?

An example of the US implementing a protective tariff is the antidumping duty order placed on certain paper clip products imported from China.

What are the implications of a protective tariff?

There are several implications of protective tariffs, namely higher prices on imported products. Other potential implications of protective tariffs include a decline in trade and increased tax revenue, at least in the short term.

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