Imposing Tariffs Tariff: A Tax Term Paper

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If a country has a small share of the market of a product its demands for imports has little effect worldwide, but it lowers national well-being. If Costa Rica imposed a tariff, for example, the impact would be minimal. However, if a country has a large enough share of the market for one of its imports, it can affect the world price; this is called monopsony power. If the U.S. imposed a stiff tariff on imported automobiles, the reduction of foreign-bought cars would have a noticeable impact on foreign exporters. Due to the lower demand, the exporting countries would fight to reduce their export prices. For a large country, a small tariff could be beneficial and raise national well-being. Yet raising these tariffs even further could be detrimental. If the tariff is so high that all imports are unprofitable, the United States could have major loss of gains.

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This is especially true of other countries retaliate. The objective is to have an "optimal" tariff where gains are made not lost.

The present situation with China is a prime example. At the end of February, the Retail Industry Leaders Association (RILA) announced its opposition to legislation that would place a 27.5% tariff on Chinese imports unless China agrees to float its currency within 180 days of passage. In a letter sent to members of the Senate, RILA stated that this could significantly raise prices for U.S. consumers and importers, adversely impact U.S. exports to China and undermine ongoing currency negotiations between the United States and China. A similar bill was proposed in 2003 and did not get far. The same will probably occur this year, but the idea is to raise awareness......

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