The Impact of Tariffs and Quotas on Global Trade:
A Tariff is essentially a tax on a particular class of imported goods. Governments generally impose tariffs in an effort to reduce imports into their country, protect domestic production, and increase jobs. Prior to 1915, tariffs were the primary source of US federal revenue, but over the course of the last century that has changed dramatically. Globally, the trend has been toward lower tariff rates and reduced trade barriers through free trade agreements. Currently, tariff rates are at their lowest levels ever according to data from The World Bank (around 3%). The new primary sources of federal revenue are individual income taxes, payroll taxes, and corporate income taxes.
In addition to tariffs, governments can also impose quotas. While tariffs increase the price of an import, quotas cap how much of a good can be imported. Governments can also attempt to restrict access to certain markets even further by making it difficult for foreign companies to obtain licensure to do business. Limiting imports via tariffs, quotas, and difficult/confusing regulatory procedures allows domestic companies to charge higher prices due to reduced competition. There are, however, instances where tariffs can potentially be harmful to the domestic economy. For example, tariffs on steel and aluminum can protect US steel and aluminum manufacturers, resulting in less competition, increased demand, and higher profits. But it’s unclear what the ultimate impact will be on downstream manufacturers like Ford, General Motors, and Boeing. Rising steel and aluminum prices will undoubtedly increase their cost of raw materials, resulting in some combination of higher prices and/or lower profits. The impact of that could mean less factories and jobs for those particular companies. Overall, it’s easy to see how tariffs and trade wars can greatly influence global market movements.