Understanding Tariffs and Their Impact on Global Trade

Containers go around the world and they also make the world go round as consumers buy products made thousands of miles away. Photo by CHUTTERSNAP on UnSplash.

In recent months, the word “tariff” has moved from business news into global headlines. Countries are using or threatening tariffs during international disputes. But tariffs aren’t just for political power struggles. If used wisely, they can help poorer countries grow their economies.

Each month, the UN trade and development agency (UNCTAD) releases a report on world trade. In March, the focus was on tariffs. It showed that world trade hit a record $33 trillion last year. But the future looks shaky, with rising tensions, protectionism, and trade conflicts that could hurt global trade in 2025.

Luz Maria de la Mora, who leads UNCTAD’s International Trade Division, creates these reports. She once helped negotiate the North American Free Trade Agreement (NAFTA) for Mexico in 1992. People still argue about its effects.

She said the problem isn’t tariffs themselves, but the uncertainty caused when powerful countries stop following global trade rules.

Tariffs and Global Trade Rules

Tariffs are taxes on imports and have been part of global trade for nearly 80 years. First came the General Agreement on Tariffs and Trade (GATT) in 1948, and later the World Trade Organization (WTO) in 1995. These systems gave stability so producers and exporters wouldn’t worry about tariffs changing all the time.

Tariffs are used by countries, but usually within agreed rules through the WTO or regional deals.

Why Developing Countries Use Tariffs More

De la Mora said developing countries often have higher tariffs to protect industries like car-making or chemicals. Tariffs make imported items more expensive, helping local businesses grow. But this also means higher prices for consumers and less competition.

Another reason for tariffs is that they bring in money for governments. These taxes can be used to pay for services like health, education, or roads.

What NAFTA Did

De la Mora said NAFTA was groundbreaking. It was the first deal between rich and developing countries that got rid of most tariffs. It changed Mexico’s economy, creating jobs and attracting investment. Mexico is now the fourth biggest car maker in the world. The deal made the economy more efficient and opened new doors.

Some critics say NAFTA hurt certain workers when their industries lost protection. De la Mora agrees there were winners and losers. Some jobs disappeared, but many areas that joined North America’s supply chains improved. She said trade agreements must come with policies to help affected workers learn new skills.

In Mexico, farming support programs helped people compete with U.S. and Canadian farmers. Mexico also started growing and exporting more fruits and vegetables. Now, it leads in tomato, avocado, and berry exports to the U.S., helping American diets too. In return, Mexico imports U.S. grains and meats.

Will a Trade War Happen?

Today, big economies like the U.S., the EU, and China are adding tariffs or breaking WTO rules. This causes uncertainty for businesses. When powerful countries ignore global rules, others wonder why they should follow them.

There have always been disagreements, but if countries make decisions alone, without global talks, it leads to confusion. This can scare off investors and slow economic growth and job creation.

Why Poor Countries Suffer More

Developing nations, like Madagascar, depend heavily on exports. They are very vulnerable to changes in global markets. These countries need stable trade rules, clear regulations, and systems that don’t suddenly change.

This is why de la Mora says it’s so important to protect international cooperation and multilateral trade systems.

Quick Facts on Tariffs:

Tariffs are taxes on imported goods, based on value or weight.
They can make local goods more competitive and give money to governments.
Rich countries use tariffs to protect certain industries or respond to trade challenges.
Poorer countries often rely on tariffs to grow industries and develop.
Rich countries have more trade deals that reduce tariffs, while poorer ones may use tariffs to push for better trade terms.

Source: United Nations.

Conclusion

In conclusion, tariffs are a crucial aspect of global trade, and their use can have significant impacts on economies around the world. While they can be used as a tool for protectionism and political power struggles, they can also be used to promote economic growth and development in poorer countries. It is essential to understand the complexities of tariffs and their effects on global trade to navigate the ever-changing landscape of international trade.

Frequently Asked Questions

What are tariffs?

Tariffs are taxes on imported goods, based on value or weight.

Why do countries use tariffs?

Countries use tariffs to protect certain industries, respond to trade challenges, and generate revenue for governments.

How do tariffs affect global trade?

Tariffs can make local goods more competitive, but they can also lead to higher prices for consumers and less competition. They can also cause uncertainty and slow economic growth and job creation.

What is the impact of tariffs on developing countries?

Developing countries often rely on tariffs to grow industries and develop, but they are also vulnerable to changes in global markets and need stable trade rules and clear regulations.