Implementing Tariffs and Their Implications

The discussion of tariffs has recently become a hot-button issue among policymakers and economists. This article explores the potential impacts of tariffs for the world and the Caribbean region.

Tariffs are essentially taxes imposed by governments on goods that are imported into or even those exported out of a country. They can take various forms, such as ad valorem tariffs (a percentage of the good’s value) or specific tariffs (a fixed amount per unit of goods). Governments impose these taxes for various reasons, some of which can include: fostering and protecting domestic industries and businesses, generating government revenues, and improving trade imbalances.

The most common use of tariffs is to protect the local industry from cheaper foreign competition. Tariffs increase the prices of the affected imports, making domestic consumers more inclined to purchase from local producers. Secondly, governments hope to receive higher revenues, directly from the tariff receipts and indirectly from greater net domestic economic activity. Thirdly, policymakers may also see tariffs as a monetary and political tool to reduce trade imbalances, increase currency value, and leverage in political discussions with other nations. The imposition of tariffs can catalyze conversations on trade agreements, bringing countries together to discuss trade cooperation; however, it can also result in tit-for-tat reactions, provoking a trade war.

The United States’ new administration has threatened or imposed tariffs on China, Canada and Mexico, stating its primary focus in these impositions is to address trade imbalances, intellectual property theft, perceived unfair trade practices, as well as other political objectives. However, this move, by the world’s largest economy on which many smaller states depend on for imports, has raised concerns about the possibility of an escalating trade war causing negative global price and production efficiency implications. The fears are not unfounded as there has been the natural response by the affected countries to impose their own import tariffs as retaliation.

Tariff battles can result in the interconnectedness of global markets regressing and in losses to trade volumes and even affect global economic growth. Tariffs raise the prices of goods and if manufacturing moves to less efficient producers, supply can be reduced as well. In particular, in the Caribbean region, where our consumption is satisfied by imports, these inflationary impacts could be very painful. The rise in popularity of Chinese online retailers such as Temu and Shein creates a more direct channel for inflation to the region. The protectionism by the tariff imposing country could also affect the region’s few goods exports.

Such protectionism has hurt the Caribbean in the past, for example, in the 1990’s to the 2000’s when the banana trade wars between the US and other parties and the European Union (EU) resulted in the erosion of EU market access for Caribbean bananas. Under the Lomé Convention and the Cotonou Agreement, the former colonies of the Caribbean enjoyed preferential access to the EU for their bananas. However, challenges from the World Trade Organization (WTO) and Latin American countries in the 1990s have resulted in the gradual removal of the preferential access. Severe economic disruptions were felt in many Winward islands. With economic activity now transferred to tourism and populations increasingly urbanized. Outside of niche bananas (such as those labeled as organic or free-trade) and supply for the tourism sector, the regional banana market is very much smaller.

Nevertheless, the Caribbean Basin Economic Recovery Act (CBERA) of the US since 1983 has sought to partially cushion these types of impacts and expand the region’s US market access. Under CBERA, the US grants duty-free access, largely for non-textile products, to countries in the Caribbean and Central America. Since 2000, textiles can be exported to the US under CBERA provided they use US-made fabrics, or fabrics from CBERA countries, or are handicrafts. Regardless, footwear, handbags, leather goods, watches, and sugar-containing products are generally excluded. Petroleum products are also limited by volumes. For the English-speaking Caribbean, the US is not the dominant extra-regional export market. For example, Trinidad and Tobago’s gas and petroleum products are sent to many markets, including South America, Eastern Europe and Asia, while the OECS has diversified markets, especially in the UK and Europe. However, should this preferential CBERA access come under review, the Caribbean’s already small goods exports sector could experience an unwelcomed setback.

Renegotiations and concessions, especially in foreign policy are very likely in that scenario. Services, especially tourism, are likely to be more significantly impacted as lowering of source market incomes means there is less ability to consume and travel. Currency values volatility reduces investor confidence and extra-regional capital inflows can be delayed or withdrawn as a result. Additionally, our foreign policies can become fraught with complications. Do we continue to receive aid from China, or will we be targeted as a result? Can we continue to offer financial services to countries embroiled in trade wars or will we find ourselves caught in the crosshairs? Do our current trade agreements run afoul of larger powers’ interests? The implications of the considerations are indeed severe for regional growth and governments’ revenues.

The invisible hand of economics is unmatched in moving production to the most efficient manufacturing hubs and increasing output at the lowest price. Market manipulations such as tariffs distort this ability and the consequences can fall on those who are not the intended targets, especially when they are small and voiceless. The Caribbean region needs to move to secure our ability to produce and trade among ourselves. Deepening our capital markets and assessing credit risks is and will continue to be key to achieving macroeconomic independence, stability and flourishing, tariffs or no tariffs.

.