Final answer:
Value added taxes (VAT) and tariffs in countries like China can encourage domestic consumption by making imported goods more expensive, but they can also lead to cross-border shopping, smuggling, and a corrupt system of permits and bribes.
Step-by-step explanation:
Value added taxes (VAT) in countries like China encourage several responses from both consumers and producers. Tariffs and VAT can raise the cost of imported goods, leading to an environment where consumers may turn to domestic products, which seem relatively cheaper. However, this also has the potential to encourage cross-border shopping and smuggling as individuals and businesses attempt to circumvent the higher costs associated with these taxes. This behavior may arise because of the disparities in price created by the VAT, driving people to seek more affordable options abroad or through illicit means. Furthermore, complex permit systems required to import essential goods can lead to a highly corrupt system where firms may attempt to bribe officials for favorable treatment, thereby reducing competition.
It's important to note that tariffs are a tool governments have traditionally used to protect emerging domestic industries from international competition by making imported goods more expensive. However, excessive protection can lead to domestic industries becoming complacent and uncompetitive internationally. The balance between protecting certain industries and encouraging them to innovate and stay competitive is a delicate one for governments to manage.