Question:
Hi, quick question: can a tariff be counted as a fiscal policy measure? Currently studying the great depression and curious to know if the Smoot-Hawley act which raised US tariff on 20,000 imports counts as a contractionary Policy fiscal policy. My thinking behind this is it did involve the raising of taxes on imported goods,and increasing taxes are usually considered a contractionary fiscal policy measure. Please help. Thanks.Answer:
In discussing the impact of economic policy on aggregate demand and the balance of trade in open economies, international economists often talk about two types of (non-monetary) policies: “expenditure reduction policies” and “expenditure switching policies”. An expenditure reduction policy is something like a tax increase or a reduction in government spending, whereas the classic example of an expenditure switching policy, which switches demand from foreign to domestic goods, are tariffs (and perhaps exchange rate changes if there is price rigidity). The tariff switches demand from foreign to domestic goods because of its impact on relative prices. It is true the tariff may generate additional tax revenue, though it is by no means certain that an increase in tariffs will increase tax revenue, as the volume of trade falls. Thus, most economists would not classify tariffs as fiscal policy measures though they will have a secondary, and potentially ambiguous, impact on government tax revenue.
