Macro-focus: The Impacts of Tariff Escalation
On understanding the political impact of economic decisions and being caught in a primary trap.
Have you ever wondered why some countries always export “manufactured goods” (like laptops, phones, and cars) while others export “primary goods” (like crops, natural resources, and oil)? This is due to many factors within international trade, but protectionism has one of the largest roles to play in the story. Protectionism is, essentially, when countries place tariffs or put barriers against imports in order to “protect” their domestic industries by making the foreign competition more expensive. One form of protectionism is tariff escalation, where the more processed an exported good is, the higher the tariffs (taxes imposed on imported goods) an importing country would impose on it. For example, tariffs on primary goods would be considerably less than that of secondary goods (cocoa beans vs Coca powder, butter, paste and chocolate). While this “protects” the processing sector within the importing country’s domestic economy*, it also significantly demotivates exporters from producing processed goods and thus develop value-adding, processing industries (Cheng, 1970). This is especially problematic for developing nations both on an economic as well as a political level.
Barriers to Growth and Development
Tariff escalation creates a significant disincentive for developing nations to export and produce processed goods, particularly in relation to developed nations. This is problematic for various reasons. For one, tariff escalation on developing nations’ processed exports would have the potential to hinder the growth of their agricultural processing. Demand for processed agricultural imports would be reduced, so the expansion of their processing industries will also fall. This would negatively impact the means of accumulating skills and capital for the developing country (Cheng, 1970). An under-developed processing industry would lead to the majority of a given developing country’s exports to be concentrated around primary/less-processed goods. This results in slower export growth as commodity (a physical good that can be bought and sold, rather than a service) prices go down year after year**. A focus on primary good exports also exposes developing nations to the risk of fluctuating and unreliable commodity prices on the international market***.
“Tariff escalation creates a significant disincentive for developing nations to export and produce processed goods, particularly in relation to developed nations. “
This is especially relevant within our Middle Eastern context, as the main export within the Middle East continues to be primary/ less-produced goods in the form of mineral fuels. Forty percent of the world’s crude exports in 2015 (US$325 billion) came from the Middle East, and it continues to be a significant cornerstone of most Middle Eastern economies, including Saudi Arabi, Yemen, Iraq, Kuwait, Syria, Bahrain, Iran, Oman, United Arab Emirates and Qatar. We have seen the detriments of heavily relying on commodities of oil coupled with little export diversity in the case study of Egypt in the early 1980s, as falling petroleum export prices between 1981 and 1987 by 57.47% resulted in a significant decline of Egypt’s foreign exchange earnings as well as a deterioration of its terms of trade**** by about 40% (Ikram).
Political Subordination
In addition to the negative economic effects, tariff escalation also leads to significant political downfalls for developing nations. Tariff escalation traps developing nations into a perpetual cycle of under-development as they are further excluded from being able to enter international secondary and manufactured markets, which creates an unequal distribution of capital and technology between the developed and the developing nations. As other countries continue developing their technology to further process goods, developing countries continue to rely on primary goods without being able to seek a way out. Essentially, surplus – or, the economic benefit/ welfare added - would be transferred from the developing to the highly industrialized, high-tech developing nations as the developed nations exclusively give themselves the right to create surplus value through manufacturing, processing, and then reselling the raw, primary imports of developing nations- leading to a process of capital accumulation at a global scale (Wallerstein, 2010)
The issue of tariff escalation continues to be a significant issue in today’s economic climate. While efforts have been made in its reduction through ongoing trade negotiations and conferences within the WTO (World Trade Organization), there is still ways to go before we level the playfield on both the economic as well as the political fronts.
Notes for Further Understanding
* by making domestic processed goods cheaper than imported ones
**As the years progress, commodity prices go down due to improvements in technology that increase the supply of commodities, reduced demand for commodities as manufactured goods become more and more “compact”, and because individuals in the developed world aren’t increasing their purchasing habits towards commodities as their incomes rise.
***Commodity prices on the international market face an issue of fluctuation, as they can rise significantly on one year then fall significantly the next. This is due to both their supply and demand having inelastic natures.
**** A country’s Terms of Trade is how much goods a country can import relative to its export revenues.
Citations and sources for further reading
Cheng, and Fuzhi. “Tariff Escalation in World Agricultural Trade.” Home, CUL Initiatives in Publishing (CIP), 1 Jan. 1970, ecommons.cornell.edu/handle/1813/55744.
Cosma Sorinel, 2010, Immanuel Wallerstein’s World System Theory, Annals of the University of Oradea: Economic Science, 19.2: 220-224.
"IB Economics Course Book: Oxford IB Diploma Programme," OUP Catalogue, Oxford University Press, edition 2, number 9780198390008.
“The Top 10 Middle Eastern Exports.” Middle East, 1 Aug. 2017, middleeast.businesschief.com/top10/1036/The-top-10-Middle-Eastern-exports.
Khalid Ikram, “The Egyptian Economy, 1952–2000: Performance, policies, and issues”, Routledge studies in Middle Eastern economies, 2006, Chapter 2.
