The problem with import tariffs associated with foreign direct investment can be illustrated by a scenario within the United States. In 2002, the US government imposed tariffs on imported steel between 15 and 30 percent as a means to avoid steel products from flooding the US market from foreign producers (Blecker 2002). The imposition of these taxations was to drive more export-led growth in the steel industry. The tariffs were in response to a depreciating dollar. However, this had a trickle-down effect in the long-run. A depreciated dollar makes it more costly for tourists to travel overseas and also imposes higher inflation in the country.
By adding tariffs to imported steel, it did not change the tangible demand levels for steel in other countries, thus foreign exporters simply moved their product to new markets to avoid the higher surcharges. Ultimately, the imposition of import tariffs on foreign merchandise impacted the tourist industry revenues and the short-term potential for export-led growth that led to a trade imbalance between exports and imports that still continues today. When a foreign currency appreciates due to economic conditions or monetary policy, foreign firms have a difficult time selling their products in the foreign market (Carbaugh).
Thus, imposing tariffs on exporting goods or foreign imports to foreign investor have long-run consequences economically and can impact multiple industries in terms of revenue production. If foreign goods are being distributed by the foreign investor into the host country with tariff impositions, it alters the demand factors of domestic consumers that can impact political revenues as well as domestic firm strength and competitiveness. Export tariffs as a strategy to gain additional income from the foreign investor can also impact the pricing strategies of domestic firms, thus removing their competitive pricing advantages in the long-term.
Thus, one of the controversies is whether or not foreign direct investment can have long-run consequences regardless of the type of revenue-building strategy imposed by the host country government.
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