Tariff effects Economy - Proposal on Solution

Tariff is known as an import tax imposed by a Government on imported goods paid by the importer. It serves as a revenue source and regulate foreign trade protecting domestic industry by increasing cost of foreign products. This concept dates back to ancient civilizations when traders were taxed on goods when they entered city/states. Most countries are limited by their natural resources and ability to produce goods and services effecting trade with other countries to get what their population needs. 

Trade isn't always conducted in an amicable manner as the competition, policies. geopolitics and other factors can make trading partners unhappy. One of the ways Goverments deal with trading partners they disagree is through tariffs. Mostly tariffs are imposed to reduce the value of imports and increase Govt. revenue  In addition, there are variety of other reasons as well like to balance the trade and of payments to the rest of world, stimulate slow in domestic employment, restrict consumption of certain items which the Govt. feels harmful to the economy, to protect domestic industries from competition in the international market or to support certain segments of the economy to merit it either militarily, politically or economically.  A tariff on imports appreciates the home currency and on exports depreciates it. History shows a repeated meddling or even a modest adjustments has consistently backfired. They can have unintended side effects e.g.

1. They can hurt local consumers due to lack of competition which tends to increase in prices.

2. Domestic industries less efficient and innovative by reducing competition.

3. Supply chain disruptions, potential decline in GDP growth.

There are four types of tariffs on which they are calculated -

1. Specific -  Fixed fee per item.

2. Advalorem - A percentage of the item's value.

3. Compound - A mix of both the above types.

4.  Tariff Rate Quota - Applies to only after a certain quantity is imported.

Tariffs can effect the cost of capital but working capital solutions e.g. supply chain finance, receivables finance and dyamic discounting can help mitigate these effects. Tariffs can be absorbed by Govt. by price cutting subsidies and/or currency devaluation. Even without subsidies, economies of scale can make it possible for producers to cut prices in response to tariff. 

 Absolute quotas are a firm limit on imports set in volume. They can offer greater certainty and predictability to greater domestic investment than tariffs can. Be it a Absolute, Tariff rate or Voluntary because they avoid all these problems by setting a firm limit on value of imports.           

In conclusion, three basics namely efficiency, economy and effectiveness are a must for any business heading for success.      

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