IMF: Tariffs Do More Harm Than Good in Local Economies

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Maurice Obstfeld

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ECONOMIC policies aimed at attaining an artificial export advantage through punitive tariffs hurt the countries that levy the penalties. And surprisingly, the self-inflicted harm can be substantial even when trade partners do not retaliate with tariffs of their own, the Chief Economist of the International Monetary Fund, IMF, Maurice Obstfeld has said.

A longstanding challenge for the global economy is the possibility that some countries compete for export markets through artificially low prices, he said. “Political leaders and pundits sometimes propose import tariffs to offset the supposed price advantages and exert pressure for policy changes abroad. What proponents often fail to realize is that such tariff policies, while certainly hurting their targets, can also be very costly at home. And surprisingly, the self-inflicted harm can be substantial even when trade partners do not retaliate with tariffs of their own,” Obstfeld argued.

The World Trade Organisation’s (WTO) Agreement on Subsidies and Countervailing Measures allows a country unilaterally to apply a countervailing duty on imports of a good whose production has been subsidised. Other policies that do not clearly fall under the strict WTO definition of a subsidy, including currency undervaluation and accompanying macroeconomic distortions, could also have a net effect of pushing export prices down, leading trade partners to cry foul.

“Who gains from the tariff? Because the United States is a large country, the tariff, if it does not provoke retaliation, raises the prices of US exports relative to its imports, allowing higher real consumption. These consumer benefits, though, are spread widely and possibly thinly and must be weighed against job losses.

“Producers for the domestic market who compete directly with emerging East Asia also are likely to gain, though all other import-competing industries and exporters lose. Matters are much worse in case of retaliation, because then, everyone loses. Economic policies aimed at attaining an artificial export advantage are a legitimate topic for international consultation and peer pressure. In some cases, unilateral retaliation is sanctioned by WTO rules.

“But those who promote “getting tough” with foreign trade partners through punitive tariffs should think carefully. It may be emotionally gratifying; it may boost specific industries; the threat may even frighten trade partners into changing their policies; but, ultimately, if carried out, such policies cause wider economic damage at home,” he added.

—  Sep 12, 2016 @ 16:00 GMT

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