Chapter 19: Problem 27

Why might a low-income country put up barriers to trade, such as tariffs on imports?

Short Answer

Expert verified

A low-income country might put up barriers to trade, such as tariffs on imports, for the following reasons: to promote and protect domestic industries, encourage local consumption, and support economic development; to protect infant industries and allow them to become more competitive; to diversify the economy and reduce vulnerability to price fluctuations; to increase government revenue for funding public services; and to address trade deficits and maintain a sustainable balance of trade. These measures can contribute to economic development, job creation, and a more resilient economy.

Step by step solution

Understanding tariffs and trade barriers

Tariffs are taxes imposed on imported goods, making them more expensive for domestic consumers. Trade barriers, on the other hand, are measures that governments implement to restrict the volume of imported goods and services. These measures protect domestic industries from foreign competition.

Promoting domestic industries

A low-income country might put up barriers to trade to promote and protect its local industries. By making imported goods more expensive through tariffs, the government encourages domestic consumers to buy locally-produced goods instead. This would help local businesses grow, increase employment and contribute to the nation's overall economic development.

Protecting infant industries

Infant industries are new or developing industries that may not yet be competitive on the international market. A low-income country might implement trade barriers to protect these industries and allow them time to grow, become more efficient and competitive. This would enable them to survive in the face of competition from established, more efficient foreign businesses.

Diversifying the economy

Low-income countries often rely on the export of primary commodities, which can lead to economic vulnerability due to price fluctuations and export dependence. By imposing tariffs and trade barriers, a country can encourage domestic producers to shift their focus from primary commodities to more diverse and value-added products. This diversification can contribute to a more stable and resilient economy.

Increasing government revenue

Another reason a low-income country may implement tariffs on imports is to increase government revenue. Tariffs generate revenue for the government when they are collected at the border. This extra revenue can be crucial for a low-income country with limited resources and help fund public services such as education, healthcare, and infrastructure.

Addressing trade deficits

A trade deficit occurs when a country imports more goods and services than it exports. A low-income country might impose tariffs to reduce its trade deficit by encouraging domestic production and reducing the demand for imported goods. This would help to narrow the trade deficit and maintain a more sustainable balance of trade. In conclusion, a low-income country might put up barriers to trade, such as tariffs on imports, to promote domestic industries, protect infant industries, diversify the economy, increase government revenue, and address trade deficits. These measures can contribute to economic development, job creation, and a more resilient economy.

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