INSIGHTS BLOG

TARIFFS - WHAT ARE THEY GOOD FOR?

Roy Davidson, 20 November 2019

Over the past few decades tariffs have gone one way; down. Economies have opened themselves up to trade and consumers the world over have reaped the benefits. However, with the US-China trade war taking centre stage, this trend is being threatened.

What are tariffs?

A tariff is a tax levied by a government on goods imported into a country. The aim of a tariff is to protect local producers. For example, a government might place tariffs on imported steel in order to protect the local steel industry from cheaper imports.


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Tariffs are counter-productive

While tariffs might appear to be a good measure to protect local industries, they have deeply negative impacts. Consumers bear the bulk of the brunt, having to pay more for goods subject to the tariffs, imported or not. Meanwhile, tariffs actually hurt a country’s productive base, incentivising industry to continue producing goods it is not as well suited to making, while stifling innovation and investment.

Imagine how much less productive the New Zealand economy would be if we had a make our own cars, shoes and smartphones domestically, and how expensive and inferior those products would be. We are much better off focusing on what we are good at, and importing those things that we are not. In economics, this is called comparative advantage - allowing countries to produce what they are best at benefits everyone and raises living standards the world-over.

The world has benefitted from lower tariffs and freer trade

Over the past few decades, countries around the world have increasingly lowered tariffs across the vast majority of goods. New Zealand, which historically had quite high tariffs, has been at the forefront of this. We were the first country to sign a free trade agreement with China and today our tariffs are amongst the lowest in the world.

The reduction in tariffs across the world has enabled countries to specialise in what they’re good at, boosting trade volumes and raising global living standards. It is no coincidence that poorer countries tend to have higher tariffs and more protectionist policies. Nonetheless, tariffs do remain. For example, New Zealand agricultural exports run into relatively high tariffs from the likes of the United States and the European Union.

Tariff rates have steadily fallen (global weighted average tariff rate)

tariffs world bank

Have we reached peak globalisation?

The opening up of the world to ever more trade, while on the whole a positive, has resulted in significant change for many industries and people. It has seen the death of a large number of industries and upheaval for workers. The US automotive sector, and the city and people of Detroit (dubbed Motor City) are prime examples.

It is against this backdrop that some politicians have found support for protectionist and nationalist policies, including raising tariffs and ‘bringing manufacturing back home’. This rhetoric has manifested itself in the US-China trade war with both superpowers imposing tit-for-tat tariffs against each other. With China being our largest trading partner, rapidly increasing in importance in recent years, we should sit up and take note.

Such developments threaten the progress made over recent decades and have some asking whether we’ve reached peak globalisation. As a small trading nation, access to global markets remain critical to our economic well-being. A retrenchment in the progress made in recent decades is therefore a very real risk.

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