Tariffs are taxes that government imposes on commodities, one of the methods that governments used to control economic activity. There are two identified reasons why would government impose tariffs to imported goods. Firstly, they are an important source of income for the government. Secondly, tariffs can protect the local industries that face competition from imported goods by imposing tariffs on imported goods.
Tariffs are effective and widely used to protect the local industries from foreign competition (Sumner, et. al., 2002). However, this protection comes with an economic cost, where consumers have to pay a higher price to imported goods, which effectively lowering their buying power and leads to inefficient allocation of resources.
Quota is another form of tariffs where the government restricts the quantity of goods that can be imported into the country. It is usually combine with the use of import taxes, whenever a firm imports a certain goods and it exceed the quota amount, higher tax will be imposed on the remaining goods.
Non-Tariff Barriers to Trade
Non-tariff trade barriers are other mechanism that is used by the government to further protect the domestic industries. One of the examples of Non-tariff trade barrier is domestic content requirement. The regulations specify that should a MNC wish to sell the products in the domestic market, certain percentage of the product’s value must be produced locally. Domestic content requirement not only protect the local industries, it also helps the supporting industries to prosper and gain a larger market share due to MNC has to obtain the supplies domestically and produce them. Other examples of domestic content requirement would be the automobile industry in Malaysia. While the tariffs for imported vehicles are high, foreign firms that assembly their vehicles locally would not have to pay for such high tariffs, if they meet the domestic content requirement that the...