Although restrictive trade policies such as tariffs or quotas on imports are sometimes advocated as a way to alter the trade balance, they do not necessarily have that effect. A trade restriction increases net exports for a given exchange rate and, therefore, increases the demand for [domestic] currency in the market for foreign-currency exchange. As a result, the [domestic currency] appreciates in value, making domestic goods more expensive relative to foreign goods. This appreciation offsets the initial impact of the trade restriction on net exports.This tariff evidently won't have a significant effect on Brazil's trade balance, but tells us a lot about the Brazilian government's economic ineptitude, and also about the country's middle class passivity when facing targeted aggressions by the federal government.
Wednesday, April 6, 2011
Dilma's Import Tax: What It Tells You About the Government is More Important than What It Does to the Economy
My latest Ordem Livre article (in Portuguese) is about the silly rate increase of the Brazilian tax on foreign purchases with credit cards, which I called the "Dilma tax." One of the goals of the policy is to reduce the country's trade balance deficit. Credit card foreign transactions in Brazil represent however only 5% of the country's imports, and, to make things worse, the base of this tax is obviously highly elastic due to its narrowness, or, in other words, consumers will just find other ways to pay for their purchases. Besides, let's look at what Greg Mankiw has to say in his introductory textbook about the effects of tariffs (import taxes) on the trade balance: