Why Are Tariffs Used?

Importing and exporting takes place in nearly every country across the world. Everything from petroleum products to agriculture can be an import or an export, depending on the resources a country has and the resources it requires. The free trade of goods can be beneficial to consumers, but it can also hurt a nation’s economy.

If a country can undercut wages and prices by exporting cheap goods to a country with higher wages and prices, the country receiving those goods may not be able to compete. The result can be that employers in the country receiving the cheaper goods will go out of business, less tax money is collected and the exporting country grows richer.

Tariffs as a Solution

One way to try to balance this equation is to impose tariffs on imported goods. A tariff is a tax that is paid by the importer of foreign goods. In the United States, this tax is collected by the U.S. Customs and Border Patrol, but in other countries, it will be collected by an equivalent agency.

Export-import (exim) data is used to gauge how a tariff will affect trade. Exim data can also demonstrate the effectiveness of tariffs over time. Consumers generally end up paying more for imported goods that are subject to a tariff. The goal of this approach is to encourage companies to do business domestically instead of importing.

If a company can purchase goods from a domestic producer cheaper than they can from a foreign producer because a tariff pushes the price higher, the expectation is that both consumers and domestic companies will want to do business with domestic producers. This usually plays out when examining exim data.

Escalating a Trade War

Tariffs do have a chance to create a trade war in some cases. This can happen when one country imposes tariffs on certain goods from another country. To retaliate, the country receiving the tariff may introduce equal or more harsh tariffs on the first country. This can go on as both countries attempt to outdo one another, potentially resulting in higher prices for everyone in both countries.

Read a similar article about global import export data here at this page.

How Did the Dollarization of Ecuador Affect Trade?

In 2000, the Ecuadorian Sucre collapsed. The country stopped producing its currency and officially adopted the US dollar. While that did have some positive and negative impacts on the economy, how did the dollarization of Ecuador affect trade?

Transaction Costs

One of the most notable benefits of utilizing the US dollar is decreased transaction costs for international trades. The United States is already Ecuador's largest trade partner. Usually, transaction costs occur when exchanging one currency for another. But because Ecuador now uses USD, that issue is not part of the equation.

The lower transaction costs had a rippling effect throughout Ecuador. The stability encourages long-term investment and trade agreements. According to Ecuador trade intelligence, the lower costs have resulted in more businesses between the United States and Ecuador. Exports have increased significantly since dollarization. Meanwhile, neighboring countries' trade activity remained stagnant.

Inflation

Some experts say that dollarization and its effect on inflation helped boost trade activity, too. By switching to the US dollar, Ecuador enjoys a lower inflation risk. Confidence that inflation of the dollar will remain low provides assurance. Economists predict that long-term inflation will remain consistent with the United States.

There are still risks. Ecuador is a developing country, and the lack of economic stability can cause issues. However, the predictability of inflation helps maintain trade activity and continued economic growth.

Potential Disadvantage

The biggest problem with dollarization is that Ecuador doesn't have its own monetary policy or the means to control the economy. As a result, the Ecuadorian government can't intervene during a recession.

A weaker domestic currency spurs exports, which is why Ecuador saw a significant boom after dollarization. But according to Ecuador trade intelligence, exports were less competitive on a global scale when the US dollar experienced recent appreciation. That resulted in the country's non-oil export value dropping almost six percent.

Assistance for a Developing Economy

Ultimately, Ecuador's dollarization is considered a positive shift. While there are setbacks, the improvements to trade have done a lot to help Ecuador's economy flourish.

Read a similar blog about impex trade data here at this page.