Along with the globalisation of the world economy, governments around the world have used variety of policy instruments to intervene in international trade which protects domestic jobs, industries, and national security. According to Gans, King and Mankiw (1999, 178), tariff is the oldest and simplest instrument of trade policy. It is also a form of tax that imposes on imported goods in order to increase the price of goods and generate the government’s revenue. One of the major purposes of tariff is to protect and enhance the domestic producers from international producers (Frijters, Dulleck and Torgler 2010, 300). In Australia, tariff has been added in every imported car and component. This has taken away billion of dollar from consumers and taxpayers. Therefore, this essay will explain how tariff impact on the car industry as well as who lose and benefit in the situation. It will also examine who lose and benefit if the tariff was abolished.
The impact of tariff is shown below: In figure 1, it shows that before tariff there was a world price for the market. It is presumed that the world price is lower than equilibrium price. Hence there were imports for this market which is from Q51 to QD1 (Gans, King and Mankiw1999, 300).
Figure 1. A market without tariff
Figure 2. After tariff
When the tariff imposed, it causes the price increasing as shown in figure 2 (price with tariff). This is because the importers have to pay the world price plus the tax on the goods. This action decreases the volume of imports. However, the domestic producers can now sell their goods at the same prices the importers sell. As a result, the domestic supplier increases from Q51 to Q52. Domestic customer has to pay a higher price, therefore, the amount of customer decreases from QD1 to QD2. The total quantity traded has reduced (Gans, King and Mankiw1999, 300).
After the tariff, the market reallocated. The initial customer surplus was A, B, C, D, E, and F. After the imposition of the tariff, the new customer surplus is A and B. As for producer surplus, it had only G and the area C has been added after the tariff. Area E donated to the government revenue. However, the total quantity traded has reduced which reflected by the deadweight loss D and F (Gans, King and Mankiw1999, 300).
In Australian car industry, the tariff contributes to the increasing car price; reduce the quantity of imported cars available in order to boost the domestic car producers. The tariff has not only brought many benefit to domestic manufacturers, and the Australian Government, but also brought many drawbacks to consumers and importers. First of all, the domestic producers can sell car at higher price than the world price as the tariff has increased the price of imported cars. Therefore, they can control the price and quality of productions. According to Katharine (2008), the tariff has helped Holden (an Australian car manufacturer) become the bestselling car company in Australia. Secondly, the government has generated huge revenue from tariff, it was about $17 billion in 2000 (Tim 2000). On the other hand, consumers and importers have to buy and sell at very high costs comparing to the world prices. This has limited the demand on imported cars, and therefore the imported cars availability. Consequently, domestic manufacturers and the Australian Government gain benefit from tariff when consumers and importers have to suffer from the disadvantages.
In another case, if the tariff was abolished, the positions would completely change as the government, domestic producers would lose and consumers and importers would gain the benefit. This would also reduce domestic manufacturing producers’ ability to compete with international producers and they may lose their position in the market (Vanessa 2006). This would make the international producers gain the market share intensively, and may dominate the whole national market although customers may have many benefits regarding of the decreasing in car price.
As this essay has showed, the tariff has been used to protect national industry, particularly car industry. It has enhanced domestic car industry compete with international industry within nation. Moreover, the Australian Government has generated billions of dollars from this policy. However, consumers and importers have faced the increasing price made by tariff. Although tariff can protect the domestic industries, domestic firms should improve their technique in economic perspectives in order to improve the industry and the nation as a whole.
Reference list
Gans, J.S. S.P. King and N. G. Mankiw. 1999. Principles of microeconomics. Sydney: Harcourt Publishers.
Frijters, P. U. Dulleck and B. Torgler. 2010. Introductory Economics for Decision Makers. Australia: South Melbourne.
Katharine, M. C. 2008. Car industry tariff to stay. Age. June 7.
TIM, C. E. 2000. Zero tariff rate to cost government $17 billion: report. Age. August 1.
VANESSA, B. 2006. Resource boom is beating domestic producers. Age. November 23
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