Tariffs have long been marketed as an economic powerhouse, that is, they coerce foreign exporting countries to reduce their prices by safeguarding their own economy. However, new studies have emerged that postulate that this concept seems to be incorrect. Tariffs have been doing more harm to the economy that imposes these charges rather than to countries such as India.
An extensive analysis conducted by Kiel Institute in Germany disproves a widely-held assumption that the impact of US tariffs is borne by the exporting countries. Analyzing 25 million records of US-bound maritime shipments, the analysis showed that the entire amount of tariffs is actually paid in the US, with 96% of costs borne by US businessmen and only 4% of costs borne by exporters in exporting nations.
Julian Hinz, an author of the report as well as the research director, defined tariffs as an "own goal" from an economics perspective. Julian believed that the assertion that foreign nations essentially pay tariffs is "a mere myth" as it tends to stay completely inside America's economy.
Other key implicit premises in tariffs include that foreign firms will lower their prices to stay competitive on the market. However, what the data shows goes contrary to this supposed premise. Foreign suppliers do not lower prices much even when a 25% tariff has been placed on a particular item; on average, prices fall by less than 1%.
Over time, these higher costs are essentially imposition upon American consumers as the result of higher prices, leading to inflation rather than the alleviation of it.
In this regard, the Indian experience presents a clear picture of what happens in reality due to tariffs. With the US levying tariffs of up to 50% on Indian exports, the effect was that the exports going to the US reduced significantly, by as much as 24%. Nonetheless, the export price did not change significantly in any manner.
This means that the tariffs did not force the Indian exports to sell at lower prices. Rather, the trade levels fell as the cost of the transactions became less feasible. This led to lower levels of trade activity, rather than correcting prices.
The article draws attention to the fact that tariffs mainly affect trade volumes rather than competitiveness. Tariffs mean that for US businesses, there will be decreased profitability, increased costs of production, as well as decreased efficiency. It means that consumers also have to pay a higher price for products.
In the long run, these impacts might dampen economic expansion, the original purpose for which the tariffs were presumably implemented.
But in fact, a tariff-supported economy and lowered prices do not exist in reality. World trade is shrinking due to tariffs instead of bringing relief to economies; on the contrary, it has imposed a huge burden on the US economy itself. World trade dynamics are changing day by day, making realities clearer behind protectionism in terms of actual costs.
