Abolishing all tariffs without reciprocity

Question

Is a policy of abolishing tariffs without expecting other countries do so a sustainable economic policy? What are the arguments for or against it?

Fear of imports is very common among people. Money going out and products coming in is not a loss of anything, since products and services are just as valuable as fiat money, or any medium of exchange.

In a country with trade deficit, I should expect depreciation of the domestic currency in short term. Devaluing currency is supposed to encourage exports, and exporters but things they need for cheaper too, so it should cause some growth in exports.

If abolishing tariffs is "such a good idea", why do politicians try to push for trade agreements instead of abolishing tariffs within their countries and benefit from the results?

Answer 1

You get cheaper access to inputs. For a large advanced economy that is relatively diversified, it is possible that unilateral tariff reductions across many or all sectors can be good for the economy by freeing up resources presently occupied in low-value activities with few prospects to contribute to technological progress. The additional ease of doing business in that country may also attract additional financial investments and human resources talent from abroad, which would tend to increase technological progress and productivity at the same time.

For a small economy that specializes in some specific sector (e.g., tourism, finance), a unilateral tariff reduction may improve the competitiveness of the sector they specialize in, and therefore be good for the economy and/or technological progress over both short and long time frames.

These are somewhat special conditions, and most often countries do not see benefit in unilateral tariff reductions.

As for what politicians do, this is a somewhat different question and should be considered separately from the economics argumentation about unilateral tariff reduction. It is very straightforward to argue that some concentrated interest(s) in just one or two industries could be major campaign contributors in a winning campaign, leading the politician to try to impose tariffs which benefit specific industries while causing overall negative impacts across the entire economy.

Theoretically, it would be possible to be in a situation where both a) unilateral tariff reductions could benefit the economy and b) at the same time concentrated interests could legally and/or illegally obtain political influence which resulted in an increase in their own profits at a cost to the overall economy.

Answer 2

It could be a sustainable economic policy. It depends.

Assuming your government doesn't have a big budget surplus, it will have to replace revenue lost from tariffs -- i.e. raise other taxes. Most taxes are distortionary, i.e. discourage productive economic behaviour. Especially for less developed countries and countries with weaker international transport links (including islands), tariffs tend to be cheaper and easier to collect than a lot of other taxes. They also have an implicit progressive bias towards taxing luxuries, and can be given a more explicit one quite easily. So the main and most obvious reason not to abolish tariffs is the difficulty of finding something better to replace them with.

As you say, there are benefits too: the inherent benefits of greater trade volumes, and the competitive benefit of cheaper imported inputs.

When you ask your final question, this is really about the game theory of tariff reductions. I'd suggest modelling the situation like this:

Your country gains a small amount from abolishing its own tariffs (this is arguable but assume it for now). It gains a lot from your next door neighbour abolishing theirs, because that would help your export industries (this is not controversial). You don't know whether your neighbour would gain or lose from abolishing its own tariffs, but you know they would benefit from you ditching yours.

What would you do in this situation? Your main objective is to get your neighbour to get rid of their tariffs, and you know that their main objective is to persuade you to get rid of yours.

You could unilaterally abolish your tariffs, but there goes all your bargaining power. You have no idea whether your neighbour will want to reciprocate.

A better strategy is to offer to abolish your tariffs in exchange for your neighbour doing the same. That's the history of bilateral trade agreements. In a world with lots of countries, you might find this ends up being a lot of work, and wish there was some way of simplifying things. That's GATT and the WTO.