Impact of Tariff: Tariff affects an economy in different ways. An import duty generally has the following effects:
• Protective Effect: An import duty is likely to increase the price of the imported goods. This increase in the price of imports is likely to reduce imports and increase the demand for domestic goods. Import duties may also enable the domestic industries to absorb higher production costs. Thus, as a result of the protection accorded by the tariff. The domestic industries are able to expand their output.
• Consumption Effect: The increase in prices resulting from the import duty usually reduces the consumption capacity of the people.
• Redistribution Effect: If the import duty causes an increase in the price of
domestically produced goods, it amounts to redistribution of income between the consumers and producers in favor of the producers. Further, a part of the consumer income is transferred to the exchequer by means of the tariff.
• Revenue Effect: As mentioned above, a tariff means increased revenue for the government (unless, of course, the rate of tariff is so prohibitive that it completely
stops the import of the commodity subject to the tariff).
• Income and Employment Effect: The tariff may cause a switch over from spending on foreign goods to spending on domestic goods. This higher spending within the country may cause an expansion of domestic income and employment.
• Competitive Effect: The competitive effect of the tariff is, in fact, an anti-competitive effect in the sense that protection of domestic industries from foreign competition may enable the domestic industries to obtain monopoly power with
all its associated evils.
• Terms of Trade Effect: In a bid to maintain the previous level of imports to tariff imposing country, if the exporter reduces the prices, the tariff imposing country is able to get their imports at a cheaper price. This will, ceteris paribus, improve the
terms of trade of the country imposing the tariff.
• Balance of Payments Effect: Tariffs, by reducing the volume of imports, may help the country to improve its Balance of Payments position.