How does a high tariff affect an economy?

Answer 1

Tariff is tax levied on imports and exports and it is a form of protectionist measure. High tariff on imports would have an expenditure switching effect where residents would switch from purchasing imports to goods and services produced domestically. This could also raise tax revenues of government which can be spent back on the economy in terms of unemployment benefits etc. All in all, it will raise the National Income of the economy as consumption and government spending are likely to rise (Components of Aggregate Demand).

Tariff on exports would hurt export competitiveness as prices of these goods will generally rise, especially when exports are generally price elastic. This would also deter firms firm from exporting to avoid being taxed. Exports in this case will fall which affects the GDP of an economy.

However for countries (eg. China) where their exports are considered cheap and is hurting bilateral ties, an increased tariff on exports could not only solve the problem but also raise tax revenue for the government.