Thursday, May 29, 2014

Improving Economic Activity Through Tariff Reductions

Trade is at the root of economic development. The easy movement of products and services across borders helps create an interconnected world where opportunities for international goods and companies abound. A paper by Dzerniek-Hanouze & Doherty (2013) discussed the significant advantages that can be found by opening trade routes at a national and regional level to ensure that products and services move smoothly to their destinations. 

All trade is based on selling products from one entity to the next. According to Black’s Law Dictionary Trade is ,”The act or business of exchanging commodities by barter; or the business of buying and selling for money; traffic; barter.” A value laden product must transfer hands from one person to the next while a reciprocal value laden item (i.e. money) is exchanged in return. 

Before revenue can be earned through the selling of products these products must be available and present for purchase. This means that the product is available on store shelves, online, or in the locality for customers to purchase. The buyer and seller must be connected together in some way through virtual or physical means to exchange information, items, or financial value. 

The same process must occur when products and services are built. Available items are used to construct higher level products to earn more on the market. Unnecessary tariffs, restrictions, and levies between suppliers and creators directly reduce the possibilities of further growth and development. This means fewer products are shipped out and less revenue gained. 

The supply chain is the vine that is used to move products and services. When tariffs by importing countries are high it impacts the cost and quantity of those products being moved. As costs increase the likelihood that they will be purchased by locals is reduced; it is a customer equity choice. Tariffs are a direct attempt to damage the supply chain mechanisms. 

Improving the flow of products and services is important in speeding up the economy. For example, improving upon inspections, security technology, communications, and transport can also improve upon the costs of moving these products. Lower costs can often result in improved revenue for companies that rely on imported supplies. 

The concept of economic hubs doesn’t make it exclusively into the paper but the author does indicate that reduced borders increase the spillover effects in management, technological know-how, and access to new technologies that move beyond the goods themselves. The production of products and services enhances the skill and abilities of multiple sectors within the economy. 

The authors offered some interesting statistics. For example, the World Economic Forum, The World Bank and Bain & Co. in 2012 indicated that reducing trade barriers could increase global gross domestic product by $2.6 trillion or 5%.  Ebay also indicated in a study that removing virtual barriers improved small business growth by 60-80%. The end result of their analysis is that if countries moved half-way to best practice there would be a 4.7% GDP increase, a moderate reduction of restrictions would improve GDP 2.6%, and a removal of tariffs would result in a .7% increase in GDP. 

Drzeniek-Hanouz, M. & Doherty, S. (2013). Trade facilitation, international supply chains and SME competitiveness. International Trade Forum, 4

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