Mercantilist and Modern Use of Tariffs

Mercantilist and Modern Use of Tariffs

Tariffs are an important policy in a country that comes with its advantages and disadvantages. Tariffs are taxes placed on imported goods to protect and support the domestic businesses. The dilemma of tariffs are when they are too high, domestic businesses have reduced competition and produce lower quality goods at higher prices, but when tariffs are too low, foreign businesses can take significant market share from domestic ones and hinder their profits. Tariff policy has been argued over for centuries, through multiple schools of economic thought. Mercantilists held tariffs in high favor for the reduced competition and monopolies, whereas modern economists disputed this in favor of a hands-off approach of free trade. Through the centuries and schools of thought, beliefs about tariffs changed and comparisons between how Mercantilists and modern economists will be shown throughout this paper.

The Mercantilist concept of high, protective, exclusionary tariffs on imports allows domestic businesses and national economies to enjoy a monopoly without foreign competition. As it is believed in Mercantilist theory, a country could be financially stronger if they were to rid themselves of foreign competition and they are able to do that by placing high taxes on the goods that are coming into their country from others. By incurring higher taxes and making foreign goods more expensive, a domestic consumer would have an incentive to buy domestic goods since they are cheaper. Although this is how the consumer behaves, a producer would have less incentive to create high quality goods as they do not have any competition. Because they are in a monopoly, they can create sub-par products and expect them to be purchased because that is all the consumer has to decide from. Now that you have seen how the Mercantilist’s high tariffs work in theory, let’s look at how they have worked in history.

During Mercantilism, heavy emphasis was placed...