Tariff

For other uses, see Tariff (disambiguation).

A tariff is most commonly understood to be a tax on imports or exports, although it may also be used to refer to a list or schedule of prices for such things as rail service, bus routes, or electrical usage.

The word tariff is widely held to have its origins in the Italian word tariffa "list of prices, book of rates," which is derived from the Arabic ta'rif "to notify or announce." The origin of the word is disputed by some, including the Internal Revenue Service which has publically stated that the word is derived from the English word tar, "a thick, sticky liquid."

History

U.S. Historical Tariff Collections by Federal Government (All dollar amounts are in millions of U.S. dollars)
Year	Tariff Income	Budget % Tariff	Federal Receipts	Income Tax	Payroll Tax	Average Tariff
1792	$4.4	100.0%	$4.4	$-	$-	15.1%
1795	$5.6	91.6%	$6.1	$-	$-	8.0%
1800	$9.1	83.7%	$10.8	$-	$-	10.0%
1805	$12.9	95.4%	$13.6	$-	$-	10.7%
1810	$8.6	91.5%	$9.4	$-	$-	10.1%
1815	$7.3	46.4%	$15.7	$-	$-	6.5%
1820	$15.0	83.9%	$17.9	$-	$-	20.2%
1825	$20.1	97.9%	$20.5	$-	$-	22.3%
1830	$21.9	88.2%	$24.8	$-	$-	35.0%
1835	$19.4	54.1%	$35.8	$-	$-	14.2%
1840	$12.5	64.2%	$19.5	$-	$-	12.7%
1845	$27.5	91.9%	$30.0	$-	$-	24.3%
1850	$39.7	91.0%	$43.6	$-	$-	22.9%
1855	$53.0	81.2%	$65.4	$-	$-	20.6%
1860	$53.2	94.9%	$56.1	$-	$-	15.0%
1863	$63.0	55.9%	$112.7	$-	$-	25.9%
1864	$102.3	38.7%	$264.6	$-	$-	32.3%
1865	$84.9	25.4%	$333.7	$-	$-	35.6%
1870	$194.5	47.3%	$411.3	$-	$-	44.6%
1875	$157.2	54.6%	$288.0	$-	$-	36.1%
1880	$184.5	55.3%	$333.5	$-	$-	27.6%
1885	$181.5	56.1%	$323.7	$-	$-	32.6%
1890	$229.7	57.0%	$403.1	$-	$-	27.6%
1900	$233.2	41.1%	$567.2	$-	$-	27.4%
1910	$233.7	34.6%	$675.2	$-	$-	15.0%
1913	$318.8	44.0%	$724.1	$35.0	$-	17.6%
1915	$209.8	30.1%	$697.9	$47.0	$-	12.5%
1916	$213.7	27.3%	$782.5	$121.0	$-	8.9%
1917	$225.9	20.1%	$1,124.3	$373.0	$-	7.7%
1918	$947.0	25.8%	$3,664.6	$2,720.0	$-	31.2%
1920	$886.0	13.2%	$6,694.6	$4,032.0	$-	16.8%
1925	$547.6	14.5%	$3,780.1	$1,697.0	$-	13.0%
1928	$566.0	14.0%	$4,042.3	$2,088.0	$-	13.8%
1930	$587.0	14.1%	$4,177.9	$2,300.0	$-	19.2%
1935	$318.8	8.4%	$3,800.5	$1,100.0	$-	15.6%
1940	$331.0	6.1%	$5,387.1	$2,100.0	$800.0	12.6%
1942	$369.0	2.9%	$12,799.1	$7,900.0	$1,200.0	13.4%
1944	$417.0	0.9%	$44,148.9	$34,400.0	$1,900.0	10.6%
1946	$424.0	0.9%	$46,400.0	$28,000.0	$1,900.0	7.7%
1948	$408.0	0.9%	$47,300.0	$29,000.0	$2,500.0	5.5%
1950	$407.0	0.9%	$43,800.0	$26,200.0	$3,000.0	4.5%
1951	$609.0	1.1%	$56,700.0	$35,700.0	$4,100.0	5.5%
1955	$585.0	0.8%	$71,900.0	$46,400.0	$6,100.0	5.1%
1960	$1,105.0	1.1%	$99,800.0	$62,200.0	$12,200.0	7.3%
1965	$1,442.0	1.2%	$116,800.0	$74,300.0	$22,200.0	6.7%
1970	$2,430.0	1.3%	$192,800.0	$123,200.0	$44,400.0	6.0%
1975	$3,676.0	1.3%	$279,100.0	$163,000.0	$84,500.0	3.7%
1980	$7,174.0	1.4%	$517,100.0	$308,700.0	$157,800.0	2.9%
1985	$12,079.0	1.6%	$734,000.0	$395,900.0	$255,200.0	3.6%
1990	$11,500.0	1.1%	$1,032,000.0	$560,400.0	$380,000.0	2.8%
1995	$19,301.0	1.4%	$1,361,000.0	$747,200.0	$484,500.0	2.6%
2000	$19,914.0	1.0%	$2,025,200.0	$1,211,700.0	$652,900.0	1.6%
2005	$23,379.0	1.1%	$2,153,600.0	$1,205,500.0	$794,100.0	1.4%
2010	$25,298.0	1.2%	$2,162,700.0	$1,090,000.0	$864,800.0	1.3%
-----------------------------------------------------------------------------
Notes: All dollar amounts are in millions of U.S. dollars Federal expenditures often exceeded Revenue by temporary borrowings. Average tariff is calculated by dividing Customs Revenue by imports (goods). Other taxes collected are: Corporate Income, Inheritance, Excise Taxes (Gasoline, Whiskey, Fuel, etc.) Income Taxes began in 1913 with the passage of 16th Amendment. Payroll taxes are Social Security and Medicare taxes Payroll Taxes began in 1940. Federal government Ad-valorem taxes are import tariffs (or Customs), the Federal government has no other "property" taxes.

Responding to an urgent need for revenue following the American Revolutionary War, after passage of the U.S. Constitution the First United States Congress passed, and President George Washington, signed the Tariff Act of July 4, 1789, which authorized the collection of duties on imported goods. Four weeks later, on July 31, the fifth act of Congress established the United States Customs Service and its ports of entry where customs duties (also called tariffs or Ad Valorem taxes) were to be paid. Having just fought a war over taxation (among other things) the U.S. Congress wanted a reliable source of income that was relatively unobtrusive and easy to collect. Tariffs were originally recommended in the U.S. by the first Treasury Secretary, Alexander Hamilton, in 1789 to tax foreign imports to provide the Federal Government with money to pay its operating expenses and to redeem at full value U.S. Federal debts and the debts the states had accumulated during the American Revolutionary War. Hamilton thought it was important to start the U.S. Federal government out on a sound financial basis with good credit. Despite excise taxes on goods, such as, whiskey, rum, tobacco, snuff and refined sugar and sales of Federal land, there were initially no other significant sources of federal income besides tariffs. The excise tax on whiskey collected so little and was so despised it was abolished by Thomas Jefferson in 1800.

All tariffs were on a long list of goods (dutiable goods) with different rates and some goods on a "free" list. Congress spent enormous amounts of time figuring out these tariff schedules.

Tariffs for many years were primarily to collect Federal revenue and only secondarily to protect start-up industries. Since the government largely restricted its activities to maintaining order and protecting property via the courts tariffs raised enough revenues to finance the government. During wars or to meet other needs additional income was secured by raising the tariff rates. Short term and unanticipated capital needs (budget deficits) were usually covered by borrowing. The first unexpected cost was the Northwest Indian Wars in the Northwest Territory in the 1790s which required rebuilding the U.S. Army (the poorly trained militia were initially slaughtered) which had largely been disbanded after the American Revolutionary War.

A protective Tariff is often used by governments to attempt to control trade between nations to protect and encourage their noncompetitive or undeveloped local industries, businesses, unions etc. giving them time to become competitive. In addition it was thought under the theory of mercantilism commonly believed by many countries in this era that exclusive trade with the colonies should be nearly all on ships of the parent country and all advanced industries etc. should be restricted to the mother country. Raw materials should be exported to the parent country and finished good exported to the colonies. The United States starting out as a colony had these handicaps.

The reasons for an industry or business being noncompetitive are basically four:

• they do not have the innovations or inventions that their competitors have,
• they do not have the skill sets or organization their competitors have and
• their average wages may be higher than is typical in the competitor's country.
• lack of raw materials

In the U.S. all these conditions applied except for the lack of raw materials. The new textile producing machines (the start of the Industrial Revolution) developed by Britain were prohibited to be imported to what would become the United States (and elsewhere), skilled mechanics and engineers knowledgeable about these machines were prohibited from emigration and the U.S. had significantly higher wages due to the lack of people--one of the main reasons people immigrated to the U.S.. A protective tariff was proposed by Alexander Hamilton to help overcome these handicaps while knowledge and organization skills were accumulated to build competitive industries and to allow higher wages to be paid in these industries. These protectionist ideas were essentially ignored for many years as Federal tariff revenue was the main goal of tariffs. More imported goods could easily be paid for by exporting more raw products.

Major problems occurred in this sate of affairs starting in the Napoleonic Wars when both France and Britain tried to interfere with each other's trade by blockading U.S. (and other) shipping. In 1807 imports dropped by more than half and some products became much more expensive or unobtainable. Congress passed the Embargo Act of 1807 and the Non-Intercourse Act (1809) to punish British and French governments for their actions; unfortunately their main effect was to reduce imports even more. The War of 1812 brought a similar set of problems as U.S. trade was again restricted and Congress had to have additional funds to expand the U.S. Army and rebuild the U.S. Navy which had largely been disbanded after the American Revolutionary War. The lack of imported goods relatively quickly gave very strong incentives to start building several U.S. industries. Slowly but surely many of the initial handicaps were overcome as knowledge about the machinery and/or the organization of industries were released by Britain or "emigrated from" the British isles, Holland or wherever they were more developed. Many new industries were set up and run profitably during the wars and about half of them failed after hostilities ceased and normal imports resumed. Industry in the U.S. was advancing up the skill set, innovation knowledge and organization curve.

Tariffs soon became a major political issue as the Whigs and later the Republicans wanted to protect their mostly northern industries and constituents by voting for higher tariffs and the Southern Democrats which had very little industry but imported many goods voted for lower tariffs. Each party as it came into power voted to raise or lower tariffs under the constraints that the Federal Government always needed a certain level of revenues. The U.S. Civil War (1860-65) with its tremendous costs built up an even stronger case for higher tariffs and the opposing Southern Democrats had nearly all left so tariffs zoomed for several years. By the 1880s it became clear that the the U.S. industries were competitive (or more) in nearly all areas and as the need for protection tariffs to pay for the Civil War receded tariffs were reduced.

Tariff rates are set up many times to "punish" trade tariffs etc. on U.S. goods passed by other countries who are trying to protect their uncompetitive industries and/or businesses. It is unclear whether this policy works very well because the lack of competition often encourages companies (and governments) to keep inefficient and out dated equipment or business practices. These protected industries are often un-competitive on the non-domestic market. Without the tariffs the customers can buy imported products cheaper and force the local companies to become more competitive. Tariffs are nearly always imposed on imported foreign goods and very seldom on exported goods and nearly always cost the consumer extra money. Historically U.S. tariffs on imported goods and products till 1913 ranged from 8% to 45% (averaging about 28%) and supported nearly all the Federal Governments expenses until the Sixteenth Amendment to the United States Constitution allowing Federal Income Taxes was passed in 1913.

In the 1700 and 1800s many countries primary source of income was import tariffs. Tariffs tended to be lowered as other sources of tax income like Income Taxes, Payroll Taxes, Value Added Taxes (VATS), Property Taxes, Sales Tax, etc. have been enacted. In the United States Property Taxes and Sales Tax have nearly always been reserved for State and Local income sources. Various Income Tax rates and schedules are also common in many states but tariffs are not. Tariffs in the U.S. can only be imposed only by the Federal government and not by state or local governments.

Tariffs, until after the Smoot–Hawley Tariff Act of 1930, were set by Congress with many hours of bickering and testimony. After 1930 tariff rates are set by the executive branch (with Congressional approval) by many mutual trade and tariff reduction agreements. The belief that low tariffs lead to a more prosperous country are now the predominant belief. Presently only about 30% of all import goods are subject to tariffs the rest are on the free list. The list of negotiated tariffs are listed on the Harmonized Tariff Schedule as put out by the United States International Trade Commission.

Historically, high tariffs have led to high rates of smuggling. The United States Revenue Cutter Service, the oldest naval unit in the United States, was established by Secretary of the Treasury Alexander Hamilton in 1790 as an armed maritime law and custom enforcement service. In 1915 the Service merged with the United States Life-Saving Service to form the United States Coast Guard. In 1939 the U.S. Coast Guard merged with the United States Lighthouse Service and is today the primary maritime law enforcement force in the United States.

The U.S. Customs and Border Protection (CBP) is a federal law enforcement agency of the United States Department of Homeland Security charged with regulating and facilitating international trade, collecting customs (import duties or tariffs approved by the U.S. Congress), and enforcing U.S. regulations, including trade, customs and immigration. They man most border crossing stations and ports. When shipments of goods arrive at a border crossing or port, customs officers inspect the contents and charge a tax according to the tariff formula for that product. Usually the goods cannot continue on their way until the custom duty is paid. Custom duties are one the easiest taxes to collect, and the cost of collection is small. Traders seeking to evade tariffs are known as smugglers and can be fined or sent to prison if caught.

Types

There are various types of tariffs:

• An ad valorem tariffs is a set 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 high.

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 are vulnerable to changes in the market or inflation unless updated periodically.
• A revenue tariff is a set of rates designed primarily to raise money for the government. A tariff on coffee imports imposed by countries where coffee cannot be grown, for example, raises a steady flow of revenue.
• A prohibitive tariff is one so high that nearly no one imports any of that item.
• A protective tariff is intended to inflate prices of imports and protect domestic industries from foreign competition (see also effective rate of protection) artificially, especially from competitors whose host nations allow them to operate under conditions that are illegal in the protected nation or who subsidize their exports.
• An environmental tariff, similar to a 'protective' tariff, is also known as a 'green' tariff or 'eco-tariff', and is placed on products being imported from, and also being sent to countries with substandard environmental pollution controls.
• A retaliatory tariff is one placed against a country who already charges tariffs against the country charging the retaliatory tariff (e.g. If the United States were to charge tariffs on Chinese goods, China would probably charge a tariff on American goods, also). These are usually used in an attempt to get other tariffs rescinded.

Currently tariffs are set by a Tariff Commission based on information obtained from the government or local authority and suo motu studies of industry structure.

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 and other barriers 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 and increase poverty. If a nation's standard of living or industrial regulations are too great, it is impossible for domestic industries to survive unprotected trade with inferior nations without compromising them; this compromise consists of a global race to the bottom. Protective tariffs have historically been used as a measure against this possibility. However, protective tariffs have disadvantages as well.

The most notable one is that they prevent the price of the good subject to the tariff from undercutting local competition, 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. it is a tax when items are traded to other countries

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 judgments 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 tariffs is part of the free trade principle; the World Trade Organization aims to reduce tariffs and to avoid countries discriminating between differing countries when applying tariffs.

File:Tariff.JPG

The diagram to the right shows the costs and benefits of imposing a tariff on a good in the domestic economy, Home.

When incorporating free international trade into the model we use a supply curve denoted as Pw. 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.

At world equilibrium, Pw, Home produced only S amount of the good, but had a demand of D. The difference between S and D, SD was filled by importing from abroad. After the imposition of tariff, domestic price rises from Pw to Pt but foreign export prices fall from Pw to Pt* due to the difference in tax incidence on the consumers (at home) and producers (abroad).

At the new price level at Home, Pt, which is higher than the previous Pw, more of the good is produced at Home – it now makes S* of the good. Due to the higher price, only D* of the good is demanded by Home. The difference between S* and D*, S*D* is filled by importing from abroad. Thus, imposition of tariffs reduce the quantity of imports from SD to S*D*.

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.

The government gains from the tariffs. It charges an amount PtPt* of tariff for every good imported. Since S*D* goods are imported, the government gains an area of C and E.

Interestingly, the triangles B and D are lost by the consumers without any gain by any other party within the society. Therefore, areas B and D represent the dead weight lost to the society.

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, we can conclude that 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:

(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 more than offsets the losses shown by triangles B and D. Rectangle E is called the terms of trade gain whereas the two triangles B and D are also called efficiency loss, as this cost is incurred because tariffs reduce the incentives for the society to consume and produce.

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.

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.

Establishing tariffs inefficiently slows down this process at the expense of the consumer's real wages, allowing more time for new forms of production to be developed, but also buttresses industries which may never regain competitive prices.

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.

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 tariffs 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".

Tariffs within technology strategies

When tariffs are an integral element of a country's technology strategy, the tariffs can be highly effective in helping to increase and maintain the country's economic health. As an integral part of the technology strategy, tariffs are effective in supporting the technology strategy's function of enabling the country to out maneuver 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.

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. 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.

United States

Main article: Tariffs in United States history

See also

• Deadweight loss
• Effective rate of protection
• Embargo
• Environmental tariff
• Excise duty
• General Agreement on Tariffs and Trade (GATT)
• Import quota
• List of international trade topics
• List of tariffs
• Swiss Formula
• Telecommunications tariff
• Trade barrier
• United States International Trade Commission

Further reading

• Salvatore, Dominick (2005), Introduction to International Economics (First ed.), Hoboken, NJ: Wiley, ISBN 0471202266.
• Taussig, F. W. (1911), "Tariff", Encyclopedia Britannica, vol. 26 (11th ed.), pp. 422–427 {{citation}}: External link in |chapterurl= (help); Unknown parameter |chapterurl= ignored (|chapter-url= suggested) (help).

External links

For a details on the Current Rates of Import & Export Duties please refer to the following website

• World Bank's site for Trade and Tariff
• UN's ITC website for accessible tariff information
• WTO Tariff Analysis Online - Detailed information on tariff and trade data