The Benefits of Tariffs & Quotas

Most economists agree that free trade is the best way to maximize a country’s growth potential, but elected officials may have other goals in mind. Tariffs and quotas protect specific industries from foreign competition, which can meet strategic goals or political objectives. Whether it's domestic needs or foreign policy goals, trade protectionism can be tempting for policymakers.

Tariffs and quotas can protect infant industries from global competition, allowing them to grow without the threat of being snuffed out by more mature or advanced foreign companies. They can also be used to protect areas that countries consider to be strategically important. For example, a country might restrict agricultural imports to bolster its own farmers, not wanting to put itself in a vulnerable position where it has to import all its food. Steel manufacturing and heavy industry also can be the beneficiaries of tariffs and import quotas, as leaders look to keep their capabilities at the ready in case of strategic need.

When industries are protected, the jobs that go along with them also are protected. While economists argue that this keeps workers from taking jobs that are more beneficial to themselves and the country, concentrating labor and capital in inefficient industries, that’s small comfort to workers in an auto company that goes under because it can’t compete with lower-cost foreign rivals. Protecting jobs can be even more of a goal for state and local governments that face losing their tax base when a big employer closes its doors.

Sometimes, tariffs can benefit an economy by ensuring its businesses have an even playing field. For example, some tariffs are implemented as part of anti-dumping laws, as a reaction when a company based overseas sells products below its costs or below what it sells them for less than it does at home, in an effort to eliminate rivals and build its position in the market in order to charge higher prices later. Others are meant to protect when the competition isn’t equal. If one country subsidizes its auto industry and another does not, a tariff can keep that discrepancy from unfairly impacting a domestic industry.

Officials can also use tariffs and quotas to meet foreign policy objectives, whether they’re being used as a carrot or a stick. Trade sanctions often are used as a step short of armed conflict as an attempt to deter unwanted behavior from other countries. If a country depends on grain exports or foreign auto sales as a key driver of its economy, the threat of tariffs or sanctions can be a strong deterrence. Similarly, removing existing trade barriers can help smooth over a tricky negotiation with foreign leaders.