Global Financing and Exchange Rate Mechanisms

Running head: Global Financing and Exchange Rate Mechanisms

Global Financing and Exchange Rate Mechanisms

Global Financing and Exchange Rate Mechanisms

Who really benefits from tariffs? “A tariff is a tax on foreign goods upon importation.” (Wikipeidia, 2007) When a ship arrives in port a customs officer inspects the contents and charges a tax according to a tariff formula. Since the goods cannot be unloaded until the tax is paid, it is the easiest tax to collect. Though this is the easiest tax to collect, who benefits from the tax. This essay will discuss tariff and non-tariff barriers, how they are used in global financing operations, and the importance of managing risks associated with tariff barriers.

Tariff and Non-tariff Barriers

Tariffs are taxes on imports or goods into a country or region. This is one of the oldest forms of government involvement in trading activities. Tariffs are implemented for two clear economic purposes. They provide revenue for the government and they improve economic returns for firms and suppliers of domestic industries that face competition from foreign imports. This protection comes at an economic cost to consumers who pay higher prices for imported goods and to the economy as a whole through the unproductive allocation of resources to the import competing domestic industry. Therefore, “since 1948, when average tariffs on manufactured goods exceeded 30 percent in most developed economies, those economies have sought to reduce tariffs on manufactured goods through several rounds of negotiations under the General Agreement on Tariffs Trade (GATT).” (Carbaugh, 2000) When coupled with other barriers to trade they have often constituted formidable barriers to market access from foreign producers. Tariffs, that are set high enough, can block all trade and act just like import bans. Non-Tariff Barriers (NTB) are also a tactics that are used to regulate the amounts of imports. Voluntary export restraint (VER) “allows governments to strictly limit the amount of imports and exports of certain commodities which exporting countries would agree to limit shipments of a commodity to the importing country.” (Worldbank, 2007) Exporters were willing to comply with a VER because they were able to obtain economic benefits through higher prices for their exports in the importing country’s market.

Use of Tariff and Non-tariff Barriers in Global Financing Operations

Global financing can be a risky venture. Whether providing or obtaining financing, it can be a huge risk for all parties involved. Tariff can make it very difficult to acurately judge whether or not to approve a risky venture. A financing institution must take a thourough look at all sides of the puzzle. If the financing institution is expecting a certain amount of goods to exported or imported, it must take into consideration that tariffs can oftentimes caused those numbers to flucuate.

Importance of Managing the Risks Associated with