Tariffs, taxes levied by governments on imported goods and services, continue to shape the landscape of international trade and economic growth. Countries are taking a pro-active approach to economic pressure. As they take root, policymakers and investors are rightly concentrating on the impact of these tariffs. As you know, the rhetoric surrounding tariffs has really heated up in recent days, particularly given the ever-escalating trade spat between the U.S. and Chinese governments.
To benefit special interests, governments impose tariffs primarily to protect domestic industries from foreign competition. By making imported goods more expensive, tariffs protect local consumers from costly foreign competition and force them to buy local products, thus benefiting the national economy. Unfortunately, these protective measures come at a high cost to consumers. Like all businesses, they have little choice but to pass the higher costs on to their consumers.
On top of economic damage to specific affected markets, the impacts of tariffs can fundamentally reshape global trade trends. And as many economists do, we know that higher tariffs will cause trade volumes to plummet, killing economic growth in the process. Those that are particularly export-dependent may pay a steep price. If their products are made uncompetitive in global markets due to non-reciprocal tariffs, they will face an impossible situation.
Since the recent years’ use of tariffs as a political tool, tariffs have become a charged issue even among economists themselves. The ongoing trade tensions between the United States and China have highlighted the complexities involved in tariff implementation and enforcement. Though there are markets where signs of stability are emerging, experts warn not to take a victory lap just yet.
“Markets may be breathing easier, but investors should not mistake easing conditions for resolution.” – Source: “Has the tariff pain peaked?” on FXStreet
Even with some relief from constrictive market conditions, analysts caution that many of the underlying problems caused by tariffs are untouched. Because trade policies can be sudden and changeable, this is a very significant risk that companies and investors face. Consequently, they frequently struggle to adapt in anticipation of future economic trends.
A second fear expressed in the debate over tariffs, transparency might lead to long-term uncertainty over policy. The federal international trade agenda is in constant transition. Even when headline tariff rates remain low, companies need to manage the risk introduced by unpredictable policy changes.
“Even if headline tariff rates stay put, the real risk lies in prolonged policy unpredictability.”
Nations around the globe are still wrangling with their new trade policies today. Economists will be watching the consequences of such a tariff with eagle eyes. Knowing how to balance the scales between protecting emerging/critical domestic industries and fostering robust international trade opportunities will be the key to sustainable economic growth.