Do Tariffs Really Work In A Globalized Economy?
The Trump administration has introduced a series of trade tariffs against China to punish the second-largest global economy for its “unfair trade practices,” according to the BBC. China, in turn, imposed tariffs on U.S. imports, especially on agricultural products.
The U.S. and China are the world’s largest economies with huge demand and supply potential for each other. China exports 70% of the footwear sold in the U.S., and according to the Office of the United States Trade Representative, in 2018, the U.S. exported more than $9 billion worth of agricultural products. The U.S.TR also reported the U.S. trade deficit with China was approximately $419 billion that same year.
In a more connected, post-Cold War world, countries have been increasingly relying on one another for products and services. Laws of economies of scale are sinking into the architecture of global trade, with the World Trade Organization functioning as a trading watchdog, protecting countries’ interests within the international laws. In addition to the World Trade Organization, sovereign countries have been using regional trade agreements to either extend or protect their economic interests outside their borders.
Different trade strategies are adopted by countries to extend their economic interests.
Small businesses are directly impacted by any growth or shrinkage in export volume as they form the supporting body in the domestic manufacturing and service sectors. In the post-Cold War world, tariffs have been reduced or eliminated to help create an easy flow of goods and services across borders. Countries, however, still use tariffs to either protect their local industry or punish their target country.
Since my early career in international trade, I have been studying international trade dynamics, especially in the light of international relations. Through this experience, I’ve seen that there are several ways small businesses you can avoid a tariff’s impact, some of which I would like to discuss here:
Value-Addition Through A Neutral Country
One of the tactics most commonly used by businesses impacted by the tariffs against their products is to take partial manufacturing into a third, more favorable and neutral country that isn’t impacted by the trade restrictions. This helps keep the costs low with little or no impact on the businesses’ exports while evading the tariffs against the country.
China’s apparel and footwear businesses, for instance, can seek out manufacturing partnerships in Pakistan, Bangladesh and even in India, all three countries with established textiles infrastructure, while keeping their exports at previous levels to the U.S. I’ve seen similar strategies adopted by other countries when they faced either higher tariffs or outright sanctions from the importing country.
Many prudent businesses spring into action by establishing their value-added facilities outside their native countries’ boundaries to minimize the impact of tariffs on their businesses.
Increasing The Public Pressure
Tariffs create a significant pressure on the exporting country’s businesses as their exports slow down and importers look for alternatives elsewhere if suitable and quick alternatives are available. Small businesses can form unionized bodies with ample budgets to initiate lobbying and public relations campaigns overseas that might reverse the adverse actions by the importing country.