Tariff

For other uses of this word, see tariff (disambiguation).

A tariff is a tax on goods upon importation. When a ship arrives in port a customs officer inspects the contents and charges a tax according to the tariff formula. Since the goods cannot be landed until the tax is paid, it is the easiest tax to collect, and the cost of collection is small. Traders seeking to evade tariffs are known as smugglers.

Tariffs may be of various kinds:

• An "ad valorem tariff" is a percentage of the value of the item, say 10 cents on the dollar
• A "specific tariff" does not relate to the value of the imported goods but to its weight, volume, surface, etc. The specific duty stipulates how many units of currency are to be levied per unit of quantity (e.g. US$2 per kg)

and have various intended purpose:

• A "revenue tariff" is a set of rates designed primarily to raise money for the government. A tariff on coffee imports, for example (imposed by countries where coffee cannot be grown) raises a steady flow of revenue.
• A "protective tariff" is intended to artificially inflate prices of imports and "protect" domestic industries from foreign competition (see also effective rate of protection). For example, a 50% tax on an imported machine raises the price from $100 to $150. Without a tariff, the local manufacturers could only charge $100 for the same machine; now they can charge $149 and make the sale.
• A "prohibitive tariff" is one so high that no one imports any of that item.

The distinction between protective and revenue tariffs is subtle: protective tariffs in addition to protecting local producers also raise revenue; revenue tariffs produce revenue but they also offer some protection to local businessmen.

Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and, according to an agreed formula, the participating countries share the revenues from tariffs on goods entering the customs union.

If a country's major industries lose to foreign competition, the loss of jobs and tax revenue can severely impair parts of that country's economy. Protective tariffs have been used as a measure against this possibility. However, protective tariffs have disadvantages as well. The most notable is that they increase the price of the good subject to the tariff, disadvantaging consumers of that good or manufacturers who use that good to produce something else: for example a tariff on food can increase poverty, while a tariff on steel can make automobile manufacture less competitive. They can also backfire if countries whose trade is disadvantaged by the tariff impose tariffs of their own, resulting in a trade war and, according to free trade theorists, disadvantaging both sides.

There are two main ways of implementing a tariff:

• An ad valorem tariff is a fixed percentage of the value of the good that is being imported. Sometimes these are problematic as when the international price of a good falls, so does the tariff, and domestic industries become more vulnerable to competition. Conversely when the price of a good rises on the international market so does the tariff, but a country is often less interested in protection when the price is higher. They also face the problem of inappropriate transfer pricing where a company declares a value for goods being traded which differs from the market price, aimed at reducing overall taxes due.
• A specific tariff is a tariff of a specific amount of money that does not vary with the price of the good. These tariffs may be harder to decide the amount at which to set them, and they may need to be updated due to changes in the market or inflation.

Adherents of supply-side economics sometimes refer to domestic taxes, such as income taxes, as being a "tariff" affecting inter-household trade.

Economic analysis

Some economic theories hold that tariffs are a harmful interference with the individual freedom and the laws of the free market. They believe that it is unfair toward consumers and generally disadvantageous for a country to artificially maintain an inefficient industry, and that it is better to allow it to collapse and to allow a new one to develop in its place. The opposition to all tariffs is part of the free trade principle; the World Trade Organization aims to reduce tariffs and to avoid countries discriminating between other countries when applying tariffs.

In the following graph we see the effect that an import tariff has on the domestic economy. In a closed economy without trade we would see equilibrium at the intersection of the demand and supply curves (point B), yielding prices of $70 and an output of Y*. In this case the consumer surplus would be equal to the area inside points A, B and K, while producer surplus is given as the area A, B and L. When incorporating free international trade into the model we introduce a new supply curve denoted as S_W. This curve makes the assumption that the international supply of the good or service is perfectly elastic and that the world can produce at a near infinite quantity at the given price. Obviously, in real world conditions this is somewhat unrealistic, but making such assumptions is unlikely to have a material impact on the outcome of the model. In this case the international price of the good is $50 ($20 less than the domestic equilibrium price).

As a result of this price differential we see that domestic consumers will import these cheaper international alternatives, while decreasing consumption of domestic made produce. This reduction in domestic production is equal to Y* minus Y1, thus reducing producer surplus from the area A, B and L to F, G and L. This shows that domestic producers are unambiguously worse off with the introduction of international trade. On the other hand we see that consumers are now paying a lower price for the goods, which increases the consumer surplus from the area A, B and K to a new surplus of F, J and K. From this increase in consumer surplus we see that some of this surplus was, in fact, redistributed from producer surplus, equal to the area A, B, F and G. However, the net societal gains from trade, in terms of net surplus, are equal to the area B, G and J. The level of consumption has increased from Y* to Y2, while imports are now equal to Y2 minus Y1.

Let’s say we now introduce a tariff of $10/unit on imports. This has the effect of shifting the world supply curve vertically by $10 to S_W + Tariff. Again, this will create a redistribution of surplus within the model. We see that consumer surplus will decrease to the area C, E and K, which is a net loss of the area C, E, F and J. This now makes consumers unambiguously worse off than under a free trade regime, but still better off than under a system without trade. Producer surplus has increased, as they are now receiving an extra $10 per sale, to the area C, D and L. This is a net gain of the area C, D, F and G. With this increase in price the level of domestic production has increased from Y1 to Y3, while the level of imports has reduced to Y4 minus Y3.

The government also receives an increase in revenues as a result of the tariff equal to the area D, E, H and I. In dollar terms this figure is essentially $10*(Y4-Y3). However, with this redistribution of surplus we do see that some of the redistributed consumer surplus is lost. This loss of surplus is known as a deadweight loss, and is essentially the loss to society from the introduction of the tariff. The deadweight loss is equal to the areas E, I and J plus D, G and H. The area D, G and H represents a loss in efficiency as domestic consumers end up with too little of the good. The area E, I and J represents a loss in efficiency as too much of the good is being supplied by the less efficient, domestic producers

The model above is only completely accurate in the extreme case where none of the consumers belong to the producers group and the cost of the product is a fraction of their wages. If instead, we take the opposite extreme, and assume all consumers come from the producers group, and also assume their only purchasing power comes from the wages earned in production and the product costs their whole wage, then the graph looks radically different. Without tariffs, only those producers/consumers able to produce the product at the world price will have the money to purchase it at that price. The small FGL triangle will be matched by an equally small mirror image triangle of consumers still able to buy. With tariffs, a larger CDL triangle and its mirror will survive.

Note also, that with or without tariffs, there is no incentive to buy the imported goods over the domestic, as the price of each is the same. Only by altering available purchasing power through debt, selling off assets, or new wages from new forms of domestic production, will the imported goods be purchased. Or, of course, if its price were only a fraction of wages.

In the real world, as more imports replace domestic goods, they consume a larger fraction of available domestic wages, moving the graph towards this view of the model. If new forms of production are not found in time, the nation will go bankrupt, and internal political pressures will lead to debt default, extreme tariffs, or worse.

Moderate tariffs would slow down this process, allowing more time for new forms of production to be developed.

Infant industry argument

Main article: Infant industry argument

Some proponents of protectionism claim that imposing tariffs that help protect newly founded infant industries allows those domestic industries to grow and become self sufficient within the international economy once they reach a reasonable size.

In a free market economic system, the tariff establishes the borders or boundaries of the system, because as defined by free market economics, the absence of tariffs is a requirement of a free market economic system. The establishment of tariffs create a border of protection around the free market economy, and within that free market area, no tariffs can be established.

The four requirements of a free market economic system, as defined by Ludwig Von Mises, are private property, a coercive government, the absence of institutional interferences within the system, and the division of labor.

Political analysis

The tariff has been used as a political tool to establish an independent nation; for example, the Tariff Act of 1789, signed specifically on July 4th, was called the "Second Declaration of Independence" by newspapers because it was intended to be the economic means to achieve the political goal of a sovereign and independent United States.

In modern times, the political impact of tariffs has been seen in a positive and negative sense. The 2002 United States steel tariff imposed a 30% tariff on a variety of imported steel products for a period of three years. American steel producers supported the tariff, but the move was criticised by the Cato Institute.

Tariffs can occasionally emerge as a political issue prior to an election. In the leadup to the 2007 Australian Federal election, the Australian Labor Party announced it would undertake a review of Australian car tarrifs if elected. The Liberal Party made a similar commitment, while independent candidate Nick Xenophon announced his intention to introduce tariff-based legislation as "a matter of urgency"

Revenue argument

Critics of free trade have argued that tariffs are especially important to developing countries as a source of revenue. Developing nations do not have the institutional capacity to effectively levy income and sales taxes. In comparison with other forms of taxation, tariffs are relatively easy to collect. The trend of lifting tariffs and promoting free trade has been argued to have had disproportionately negative effects on the governments of developing nations who have greater difficulty than developed nations in replacing tariffs as a revenue source.[1]

United States

Main article: Tariff in American history

See also

General Agreement on Tariffs and Trade GATT

• List of tariffs
• Market Access Map Tarriff and Import Duty Calculator
• List of international trade topics
• Import quota
• Trade barrier
• Embargo
• Excise duty
• Effective rate of protection
• Tariffing
• Swiss Formula

References

• Dominick Salvatore, Introduction to International Economics (2004)
• Taussig, F.W. "Tariff," Encyclopedia Britannica (11th edition, 1911) vol 26 pp. 422-27.
• Free Markets And Tariffs

External links

• UN's ITC website for accessible tariff information
• India Import Tariff information
• An article from the SourceJuice website detailing essential information to help assist United States importers calculate duty rates for their goods. Site is complete with links to federal databases, guides and knowledge from industry insiders.
• The Jacobs Elements of Sovereignty