Chapter 19: Problem 21

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 impose trade barriers, such as tariffs on imports, for several reasons. These include protecting domestic industries and fostering their development, generating government revenue to finance public goods and services, and addressing balance of payments issues by reducing the trade deficit. However, policymakers must weigh the advantages and disadvantages of implementing trade barriers, as they can also create economic inefficiencies and distortions.

Step by step solution

Introduction to barriers to trade and low-income countries

Barriers to international trade are government-imposed restrictions on the exchange of goods and services between countries. Tariffs are one of the most common types of trade barriers, which are taxes imposed on imported goods. Low-income countries are those with a lower gross domestic product (GDP) per capita compared to higher-income countries. There are several reasons why a low-income country might put up barriers to trade, such as tariffs on imports. We will discuss these reasons in the following steps.

Protecting domestic industries

One of the main reasons a low-income country might impose tariffs is to protect its domestic industries. Import tariffs raise the cost of imported goods, making domestic products more competitive in the local market. By shielding these industries from international competition, the government can help them develop and become more competitive over time. This protection allows domestic industries to build capacity, skills, and technology necessary for future growth. This strategy is known as "infant industry protection."

Generating government revenue

Another reason for a low-income country to impose tariffs is to generate government revenue. Many low-income countries have limited tax bases and struggle to collect taxes effectively. Tariffs can be an easier way for governments to raise funds needed for public goods and services, such as infrastructure, education, and healthcare. While these benefits should be considered, it's important to note that relying too heavily on tariff revenue can create economic inefficiencies and distortions.

Addressing balance of payments issues

A low-income country might also impose tariffs to address balance of payments (BOP) issues. The BOP is a record of a country's economic transactions with the rest of the world, including trade, financial flows, and investment. When a country imports more than it exports, it experiences a trade deficit, which can create BOP problems. Imposing tariffs can help reduce imports and narrow the trade deficit, which might be particularly important for low-income countries with limited access to international financing.

Conclusion

In conclusion, there are several reasons why a low-income country might put up barriers to trade, such as import tariffs. These may include protecting domestic industries to foster development, generating government revenue to finance critical public goods and services, and addressing balance of payments issues by reducing the trade deficit. However, while tariffs have potential benefits, they can also create economic inefficiencies and distortions. Therefore, policymakers in low-income countries must weigh the advantages and disadvantages of implementing trade barriers to determine the best course of action.