Improving Economic Activity Through Tariff Reductions

Trade is at the root of economic development. The easy movement of products and services across borders helps create an interconnected world where opportunities for international goods and companies abound. A paper by Dzerniek-Hanouze & Doherty (2013) discussed the significant advantages that can be found by opening trade routes at a national and regional level to ensure that products and services move smoothly to their destinations. 

All trade is based on selling products from one entity to the next. According to Black’s Law Dictionary Trade is ,”The act or business of exchanging commodities by barter; or the business of buying and selling for money; traffic; barter.” A value laden product must transfer hands from one person to the next while a reciprocal value laden item (i.e. money) is exchanged in return. 

Before revenue can be earned through the selling of products these products must be available and present for purchase. This means that the product is available on store shelves, online, or in the locality for customers to purchase. The buyer and seller must be connected together in some way through virtual or physical means to exchange information, items, or financial value. 

The same process must occur when products and services are built. Available items are used to construct higher level products to earn more on the market. Unnecessary tariffs, restrictions, and levies between suppliers and creators directly reduce the possibilities of further growth and development. This means fewer products are shipped out and less revenue gained. 

The supply chain is the vine that is used to move products and services. When tariffs by importing countries are high it impacts the cost and quantity of those products being moved. As costs increase the likelihood that they will be purchased by locals is reduced; it is a customer equity choice. Tariffs are a direct attempt to damage the supply chain mechanisms. 

Improving the flow of products and services is important in speeding up the economy. For example, improving upon inspections, security technology, communications, and transport can also improve upon the costs of moving these products. Lower costs can often result in improved revenue for companies that rely on imported supplies. 

The concept of economic hubs doesn’t make it exclusively into the paper but the author does indicate that reduced borders increase the spillover effects in management, technological know-how, and access to new technologies that move beyond the goods themselves. The production of products and services enhances the skill and abilities of multiple sectors within the economy. 

The authors offered some interesting statistics. For example, the World Economic Forum, The World Bank and Bain & Co. in 2012 indicated that reducing trade barriers could increase global gross domestic product by $2.6 trillion or 5%.  Ebay also indicated in a study that removing virtual barriers improved small business growth by 60-80%. The end result of their analysis is that if countries moved half-way to best practice there would be a 4.7% GDP increase, a moderate reduction of restrictions would improve GDP 2.6%, and a removal of tariffs would result in a .7% increase in GDP. 

Drzeniek-Hanouz, M. & Doherty, S. (2013). Trade facilitation, international supply chains and SME competitiveness. International Trade Forum, 4

American Automakers Win WTO Complaints-Are Tariffs a Wise Chinese Policy?

The economy is a hot topic in today’s society as the American economy starts to show signs of sputtering to life. Recently, American automakers won a significant WTO case concerning Chinese tariffs on American-made cars and sport utility vehicles. According to the complaint, tariffs ranged from 2% to 21.5% on large cars starting in 2011 that impacted nearly two-thirds of $8.5 billion worth of U.S. Auto Exports (1, 2).  American manufacturers and officials lodged the complaint as an unfair practice within the global economy and sought a level trading field.

It is believed that the duties were implemented by China in retaliation for an American 2009 enactment of an anti-dumping duty of up to 35% on imported tires (3). The WTO also backed the U.S. anti-dumping program due to the unfair practice related to pushing cheap Chinese products on the market. Lower than cost products are viewed as an attempt to game the free market and damage American manufacturing capacity.

In the ruling the WTO global trade arbiter found that China’s duties on American made vehicles violated international laws and is in line with other WTO decisions involving steel and chicken broiler parts (4). Tariffs often restrict free trade and countries that effectively negotiate treaties with each other expect relatively transparent trading approaches. 

American automakers are likely toasting to the ruling as an official endorsement of their complaints. The automotive industry will have an easier time improving upon their sales and marketing in the Chinese region of influence. Combining this legal market adjustment with an improving U.S. manufacturing costs there are new opportunities rising (5). 

Countries often engage in tariffs to strengthen domestic markets. Despite this seeming advantage there are long-term risks to the Chinese economy. A paper by Azam Chaudhry highlights some of the tradeoffs that countries face when they use tariffs (2011). Raising tariffs allow for greater rental income and political stability while reducing tariffs increases long-term growth and potential instability. 

Tariffs support emerging economies but damage those same countries when they mature and need advanced knowledge. China is an emerging economy that is maturing and they seek to suck in innovation, knowledge, and production capacity when possible. However, as American markets become more equated in costs those same tariffs lower the desire to invest and share knowledge which has a direct impact on innovative growth. 

The tariffs that were supposed to help China are now contributing to political and financial instability. China is concerned about growing corruption within their society and is trying to curb the loss of intellectual and financial capital to shore up economic waste. According to Rotunno & Vezina (2012), the use of tariffs increases corruption as companies and officials skirt government restrictions in search of greater financial gain. We experienced much of the same thing during the Prohibition Periods. This process of business and government officials bulking national laws for personal interest has increased thereby furthering the strength of the shadow market (6). 

China’s economy isn’t as stable as was once thought. They have reaped the reward of cheaper labor but as the economy globalizes some of these benefits become limited. What once protecting their new industries may have a detrimental flip side of the coin. Multi-national companies are seeking greater mobility, flexibility, and fairness in the transference of goods, services, and information and are not able to get that in difficult import markets.

This ruling not only creates greater opportunities for American businesses to sell in China but also develop their own internal capabilities through better policy, information management, and investment guidance. As Multi-national companies search out innovative enhancements they will naturally seek business friendly and information rich clusters. Semi-closed economies may do better if they open up and reach out to international investment opportunities and improve their financial positions beyond protectionist policies. American clusters combined with progressive trade policies may just further tip the manufacturing balance in favor of the next American transformation.

Chaudhry, A. (2011). Tariffs, trade and economic growth in a model with institutional quality. Lahore School of Economics, 16 (2). 

Rotunno, L. & Vezina, P. (2012). Chinese networks and tariff evasion. World Economy, 35 (12).