# Tariff

Average tariff rates for selected countries (1913–2007)
Tariff rates in Japan (1870–1960)
Average tariff rates in Spain and Italy (1860–1910)
Average tariff rates (France, UK, US)
Average tariff rates in US (1821–2016)
Average tariff rates on manufactured products
Average Levels of Duties (1875 and 1913)
Trade Policy, Exports and Growth in European Countries

A tariff is a tax on imports or exports between sovereign states.

## History

### Great Britain

At the beginning of the 19th century, Britain’s average tariff on manufactured goods was roughly 50 percent, the highest of any major nation in Europe. And even after Britain embraced free trade in most goods, it continued to tightly regulate trade in strategic capital goods, such as the machinery for the mass production of textiles [1].

Tariffs were reduced in 1833 and the Corn Law was repealed in 1846, which amounted to free trade in food. (The Corn Laws were passed in 1815 to restrict wheat imports and guarantee British farmers' incomes ).It devastated Britain’s old rural economy and the aristocracy that had lived off its agricultural rents. Tariffs on many manufactured goods have also been abolished (Economics and World History: Myths and Paradoxes, Bairoch). British elites expected that thanks to free trade their lead in shipping, technology, scale economies and financial infrastructure to be self-reinforcing and thus last indefinitely. Britain practiced free trade unilaterally in the vain hope of imitation, but the United States emerged from the Civil War even more explicitly protectionist than before, Germany under Bismarck turned in this direction in 1879, and the rest of Europe followed. During the 1880s and 1890s, tariffs went up in Sweden, Italy, France, Austria-Hungary and Spain [1].

Britain’s economy still grew, but inexorably lagged: from 1870 to 1913, industrial production rose an average of 4.7 percent per year in the U.S., 4.1 percent in Germany, but only 2.1 percent in Britain. It was surpassed economically by the U.S. only around 1880 .Britain’s lead in textiles and steelheld eroded as other nations caught up. Britain then fell behind as new industries, using more advanced technology, emerged after 1870 in states that still practiced protectionism [1].

Fundamentally, the country believed that free trade was optimal as a permanent policy and was satisfied with laissez faire absence of industrial policy . But contrary to British belief, free trade did not improve the economic situation and increased competition from foreign production eventually devastated Britain's old rural economy. But despite the mounting failure of its great strategic gamble, Britain was so committed to free trade that it agreed to pay the price [1].

Britain finally abandoned free trade in 1932.[1]

### United States

According to Paul Bairoch, the United States was "the mother country and bastion of modern protectionism" since the end of the 18th century and until the post-World War II period.[2]

The American Revolution was, to some extent, a rebellion against being forced to play a lesser role in the emerging Atlantic economy. This explains why, after independence, the Tariff Act was the second bill of the Republic signed by President George Washington allowing Congress to impose a fixed tariff of 5% on all imports, with a few exceptions [1].

Alexander Hamilton feared that Britain's policy towards the colonies would condemn the United States to be only producers of agricultural products and raw materials. Washington and Hamilton believed that political independence was predicated upon economic independence. Increasing the domestic supply of manufactured goods, particularly war materials, was seen as an issue of national security. Hamilton called in the Report on Manufactures for customs barriers to allow American industrial development and to help protect infant industries, including bounties (subsidies) derived in part from those tariffs [3]. Hamilton explained that despite an initial “increase of price” caused by regulations that control foreign competition, once a “domestic manufacture has attained to perfection… it invariably becomes cheaper”.

According to Michael Lind, protectionism was America's de facto policy from the passage of the Tariff of 1816 to World War II, "switching to free trade only in 1945" [4]. It has been argued that one of the underlying motivations for the American Revolution itself was a desire to industrialize, and reverse the trade deficit with Britain, which had grown by a factor of ten in the space of a few decades, from £67,000 (1721–30) to £739,000 (1761–70) [5].

There was a brief episode of free trade from 1846. The panic of 1857 eventually led to higher tariff demands than President James Buchanan, signed in 1861 (Morrill Tariff) [1].

In the 19th century, statesmen such as Senator Henry Clay continued Hamilton's themes within the Whig Party under the name "American System (Abraham Lincoln and the Tariff, R. Luthin, 1944)".

The American Civil War (1861-1865) was fought over the issue of tariffs as well as slavery. At the time of independence, the agrarian interests of the South were opposed to any protection, while the manufacturing interests of the North wanted to maintain it. The fledgling Republican Party led by Abraham Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade, and implemented a 44-percent tariff during the Civil War—in part to pay for railroad subsidies and for the war effort, and to protect favored industries.[6]. In 1847, he declared: "Give us a protective tariff, and we shall have the greatest nation on earth".[1]

### Tariff and the Great Depression

Most economists hold the opinion that the tariff act did not greatly worsen the great depression:

Milton Friedman held the opinion that the Smoot–Hawley tariff of 1930 did not cause the Great Depression, instead he blamed the lack of sufficient action on the part of the Federal Reserve. Douglas A. Irwin wrote: "most economists, both liberal and conservative, doubt that Smoot–Hawley played much of a role in the subsequent contraction "[7].

Peter Temin, an economist at the Massachusetts Institute of Technology, explained that a tariff is an expansionary policy, like a devaluation as it diverts demand from foreign to home producers. He noted that exports were 7 percent of GNP in 1929, they fell by 1.5 percent of 1929 GNP in the next two years and the fall was offset by the increase in domestic demand from tariff. He concluded that contrary the popular argument, contractionary effect of the tariff was small.[8]

William Bernstein wrote: "Between 1929 and 1932, real GDP fell 17 percent worldwide, and by 26 percent in the United States, but most economic historians now believe that only a miniscule part of that huge loss of both world GDP and the United States’ GDP can be ascribed to the tariff wars. .. At the time of Smoot-Hawley’s passage, trade volume accounted for only about 9 percent of world economic output. Had all international trade been eliminated, and had no domestic use for the previously exported goods been found, world GDP would have fallen by the same amount — 9 percent. Between 1930 and 1933, worldwide trade volume fell off by one-third to one-half. Depending on how the falloff is measured, this computes to 3 to 5 percent of world GDP, and these losses were partially made up by more expensive domestic goods. Thus, the damage done could not possibly have exceeded 1 or 2 percent of world GDP — nowhere near the 17 percent falloff seen during the Great Depression... The inescapable conclusion: contrary to public perception, Smoot-Hawley did not cause, or even significantly deepen, the Great Depression"(A Splendid Exchange: How Trade Shaped the World)

Nobel laureate Maurice Allais argued that: First, most of the trade contraction occurred between January 1930 and July 1932, before most protectionist measures were introduced, except for the limited measures applied by the United States in the summer of 1930. It was therefore the collapse of international liquidity that caused the contraction of trade[8], not customs tariffs. Second, domestic output in the major industrialized countries fell faster than international trade contracted, so it was not the contraction in foreign trade that caused the depression, but rather the reverse (it was the fall in domestic demand in the countries that caused the contraction in foreign trade). This indicates that it is the domestic growth of countries that generate foreign trade, not the reverse. So protecting domestic production through tariffs is more important than safeguarding foreign trade. Maurice Allais concludes that higher trade barriers were a means of protecting domestic demand from external shocks, deflation, and deregulation of competition in the global labour market.[9]

## Etymology

The small Spanish town of Tarifa is sometimes credited with being the origin of the word "tariff", since it was the first port in history to charge merchants for the use of its docks.[10] The name "Tarifa" itself is derived from the name of the Berber warrior, Tarif ibn Malik. However, other sources assume that the origin of tariff is the Italian word tariffa translated as "list of prices, book of rates", which is derived from the Arabic ta'rif meaning "making known" or "to define".[11]

## Customs duty

A customs duty or due is the indirect tax levied on the import or export of goods in international trade. In economic sense, a duty is also a kind of consumption tax. A duty levied on goods being imported is referred to as an import duty. Similarly, a duty levied on exports is called an export duty. A tariff, which is actually a list of commodities along with the leviable rate (amount) of customs duty, is popularly referred to as a customs duty.

### Calculation of customs duty

Customs duty is calculated on the determination of the assessable value in case of those items for which the duty is levied ad valorem. This is often the transaction value unless a customs officer determines assessable value in accordance with the Harmonized System. For certain items like petroleum and alcohol, customs duty is realized at a specific rate applied to the volume of the import or export consignments.

### Harmonized System of Nomenclature

For the purpose of assessment of customs duty, products are given an identification code that has come to be known as the Harmonized System code. This code was developed by the World Customs Organization based in Brussels. A Harmonized System code may be from four to ten digits. For example, 17.03 is the HS code for molasses from the extraction or refining of sugar. However, within 17.03, the number 17.03.90 stands for "Molasses (Excluding Cane Molasses)".

Introduction of Harmonized System code in 1990s has largely replaced the Standard International Trade Classification (SITC), though SITC remains in use for statistical purposes. In drawing up the national tariff, the revenue departments often specifies the rate of customs duty with reference to the HS code of the product. In some countries and customs unions, 6-digit HS codes are locally extended to 8 digits or 10 digits for further tariff discrimination: for example the European Union uses its 8-digit CN (Combined Nomenclature) and 10-digit TARIC codes.

### Customs authority

A Customs authority in each country is responsible for collecting taxes on the import into or export of goods out of the country. Normally the Customs authority, operating under national law, is authorized to examine cargo in order to ascertain actual description, specification volume or quantity, so that the assessable value and the rate of duty may be correctly determined and applied.

### Evasion

Evasion of customs duties takes place mainly in two ways. In one, the trader under-declares the value so that the assessable value is lower than actual. In a similar vein, a trader can evade customs duty by understatement of quantity or volume of the product of trade. A trader may also evade duty by misrepresenting traded goods, categorizing goods as items which attract lower customs duties. The evasion of customs duty may take place with or without the collaboration of customs officials. Evasion of customs duty does not necessarily constitute smuggling.[citation needed]

### Duty-free goods

Many countries allow a traveler to bring goods into the country duty-free. These goods may be bought at ports and airports or sometimes within one country without attracting the usual government taxes and then brought into another country duty-free. Some countries impose allowances which limit the number or value of duty-free items that one person can bring into the country. These restrictions often apply to tobacco, wine, spirits, cosmetics, gifts and souvenirs. Often foreign diplomats and UN officials are entitled to duty-free goods. Duty-free goods are imported and stocked in what is called a bonded warehouse.

### Duty calculation for companies in real life

With many methods and regulations, businesses at times struggle to manage the duties. In addition to difficulties in calculations, there are challenges in analyzing duties; and to opt for duty free options like using a bonded warehouse.

Companies use ERP software to calculate duties automatically to, on one hand, avoid error-prone manual work on duty regulations and formulas and on the other hand, manage and analyze the historically paid duties. Moreover, ERP software offers an option for customs warehouse, introduced to save duty and VAT payments. In addition, the duty deferment and suspension is also taken into consideration.

## Economic analysis

Neoclassical economic theorists tend to view tariffs as distortions to the free market. Typical analyses find that tariffs tend to benefit domestic producers and government at the expense of consumers, and that the net welfare effects of a tariff on the importing country are negative. Normative judgements often follow from these findings, namely that it may be disadvantageous for a country to artificially shield an industry from world markets and that it might be better to allow a collapse to take place. Opposition to all tariff aims to reduce tariffs and to avoid countries discriminating between differing countries when applying tariffs. The diagrams above show the costs and benefits of imposing a tariff on a good in the domestic economy.

When incorporating free international trade into the model we use a supply curve denoted as ${\displaystyle P_{tariff}}$ (diagram 1) or ${\displaystyle P_{w}}$ (diagram 2). This curve represents 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 of the good. Before the tariff, there is a quantity demanded of Qc1 (diagram 1) or D (diagram 2). The difference between quantity demanded and quantity supplied (between D and S on diagram 2, respectively) was filled by importing from abroad. This is shown on diagram 1 as Quantity of Imports (without tariff). After the imposition of a tariff, domestic price rises, but foreign export prices fall due to the difference in tax incidence on the consumers (at home) and producers (abroad).

The new price level at Home is Ptariff or Pt, which is higher than the world price. More of the good is now produced at Home – it now makes Qs2 (diagram 1) or S* (diagram 2) of the good. Due to the higher price, only Qc2 or D* of the good is demanded by Home. The difference between the quantity supplied and the quantity demanded is still filled by importing from abroad. However, the imposition of the tariff reduces the quantity of imports from D − S to D* − S* (diagram 2). This is also shown in diagram 1 as Quantity of Imports (with tariff).

Domestic producers enjoy a gain in their surplus. Producer surplus, defined as the difference between what the producers were willing to receive by selling a good and the actual price of the good, expands from the region below Pw to the region below Pt. Therefore, the domestic producers gain an amount shown by the area A.

Domestic consumers face a higher price, reducing their welfare. Consumer surplus is the area between the price line and the demand curve. Therefore, the consumer surplus shrinks from the area above Pw to the area above Pt, i.e. it shrinks by the areas A, B, C and D. This includes the gained producer surplus, the deadweight loss, and the tax revenue.

The government gains from the taxes. It charges an amount Pt − Pt* of tariff for every good imported. Since D* − S* goods are imported, the government gains an area of C and E. However, there is a deadweight loss of the triangles B and D, or in diagram 1, the triangles labeled Societal Loss. Deadweight loss is also called efficiency loss. This cost is incurred because tariffs reduce the incentives for the society to consume and produce.

The net loss to the society due to the tariff would be given by the total costs of the tariff minus its benefits to the society. Therefore, the net welfare loss due to the tariff is equal to:

Consumer Loss − Government Revenue − Producer Gain

or graphically, this gain is given by the areas shown by:

${\displaystyle (A+B+C+D)-(C+E)-A=B+D-E}$

That is, tariffs are beneficial to the society if the area given by the rectangle E is greater than the deadweight loss. Rectangle E is called the terms of trade gain.

## Political analysis

The tariff has been used as a political tool to establish an independent nation; for example, the United States Tariff Act of 1789, signed specifically on July 4, 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.[12]

The political impact of tariffs is judged depending on the political perspective; for example the 2002 United States steel tariff imposed a 30% tariff on a variety of imported steel products for a period of three years and American steel producers supported the tariff.[13]

Tariffs can 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 tariffs if elected.[14] 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".[15]

Unpopular tariffs are known to have ignited social unrest, for example the 1905 meat riots in Chile that developed in protest against tariffs applied to the cattle imports from Argentina.[16][17]

## Within technology strategies

When tariffs are an integral element of a country's technology strategy, some economists believe that such tariffs can be highly effective in helping to increase and maintain the country's economic health. Other economists might be less enthusiastic, as tariffs may reduce trade and there may be many spillovers and externalities involved with trade and tariffs. The existence of these externalities makes the imposition of tariffs a rather ambiguous strategy. As an integral part of the technology strategy, tariffs are effective in supporting the technology strategy's function of enabling the country to outmaneuver the competition in the acquisition and utilization of technology in order to produce products and provide services that excel at satisfying the customer needs for a competitive advantage in domestic and foreign markets. The notion that government and policy would be effective at finding new and infant technologies, rather than supporting existing politically motivated industry, rather than, say, international technology venture specialists, is however, unproven.

This is related to the infant industry argument.

In contrast, in economic theory tariffs are viewed as a primary element in international trade with the function of the tariff being to influence the flow of trade by lowering or raising the price of targeted goods to create what amounts to an artificial competitive advantage. When tariffs are viewed and used in this fashion, they are addressing the country's and the competitors' respective economic healths in terms of maximizing or minimizing revenue flow rather than in terms of the ability to generate and maintain a competitive advantage which is the source of the revenue. As a result, the impact of the tariffs on the economic health of the country are at best minimal but often are counter-productive.

A program within the US intelligence community, Project Socrates, that was tasked with addressing America's declining economic competitiveness, determined that countries like China and India were using tariffs as an integral element of their respective technology strategies to rapidly build their countries into economic superpowers. However, the US intelligence community tends to have limited inputs into developing US trade policy. It was also determined that the US, in its early years, had also used tariffs as an integral part of what amounted to technology strategies to transform the country into a superpower.[18]

## References

1. Fletcher, Ian (2011). Free trade doesn't work.
2. ^ Chang, Ha-Joon; Gershman, John. "Kicking Away the Ladder: The "Real" History of Free Trade". ips-dc.org. Institute for Policy Studies. Retrieved 1 September 2017.
3. ^ Morrison, Spencer P. (December 23, 2016). "America's Protectionist Past: The Hidden History Of Trade". National Economics Editorial. Retrieved December 30, 2016.
4. ^ Michael Lind, "Free Trade Fallacy",New America Foundation, January 1, 2003.
5. ^ Morrison, Spencer P (2016). America Betrayed. Edmonton: Outremer Publishing Ltd. p. 67.
6. ^ Lind, Matthew. "Free Trade Fallacy". Prospect. Archived from the original on January 6, 2006. Retrieved January 3, 2011.
7. ^ Irwin, Douglas A. (2011). Peddling Protectionism: Smoot-Hawley and the Great Depression. p. 116.
8. ^ Temin, P. (1989). Lessons from the Great Depression. MIT Press.
9. ^ Maurice Allais (December 5–11, 2009). "Lettre aux français : contre les tabous indiscutés" (pdf). Marianne (in French). p. 38.
10. ^ Chambers Dictionary of Etymology, New York, 1997, ISBN 0-550-14230-4
11. ^ The Online Etymology Dictionary: tariff. The 2nd edition of the Oxford English Dictionary gives the same etymology, with a reference dating to 1591.
12. ^ "Thomas Jefferson – under George Washington by America's History". americashistory.org.
13. ^ "Behind the Steel-Tariff Curtain". Business Week Online. March 8, 2002.
14. ^ Sid Marris and Dennis Shanahan (November 9, 2007). "PM rulses out more help for car firms". The Australian.
15. ^ "Candidate wants car tariff cuts halted". Melbourne: theage.com.au. October 29, 2007.
16. ^ (in Spanish) Primeros movimientos sociales chileno (1890–1920). Memoria Chilena.
17. ^ Benjamin S. 1997. Meat and Strength: The Moral Economy of a Chilean Food Riot. Cultural Anthropology, 12, pp. 234–268.
18. ^ Watts, Denise K. (1990-06-28). "Martin County News". Gathering Information on High Technology.