tariff is also known as Customs Dutythe tax charged on goods when they cross national borders, generally through the governments of the importer country. The terms customs duty, taxduty, and customs are often utilized interchangeably.

Understanding the Tariff

Tariffs can be used to regulate imports. Essentially, they increase the cost of goods and services bought from another country, making them less appealing to domestic customers.

One of the most important things to consider is that the tax is imposed directly on the exporting country since the consumer in the home country could be hesitant to purchase their products due to the rise in cost. If the consumer in the home prefers to buy imported goods, the tariff has in essence, increased costs for the consumer in the home.

The purpose of tariffs

Tariffs are imposed in order to generate revenue or to protect domestic industries. However, a tariff’s purpose of generating revenue may also have a significant impact on protection in the same way that a tariff imposed solely for protection could result in revenues. Gottfried of Haberler’s book The Theory of International Trade (1937) advised that the most effective method to distinguish between revenue duty and protection duties (disregarding motivations behind legislatures) is to examine their impact on domestic and foreign producers. (See protectionism.)

Domestically produced goods are subject to the same taxation as products imported, or the imported goods that are subject to duty aren’t manufactured domestically, and there aren’t any domestically manufactured alternatives to the demand that is diverted as a result due to the duty; it isn’t considered to be protective. A solely protective duty is likely to shift production from the export industry and towards the protected domestic industry or other industries that create substitutes, for which demand is increasing. However, the revenue duty does not require resources to be put into factories that manufacture tax-exempt products or substitutes for these items but will redirect resources to the production of the goods and services on which extra government revenues are used.

Why do tariffs have to be imposed?

There are various reasons governments have to impose tariffs on import products. The most frequent reasons are:

#1 To ensure the safety of producers in the U.S.

Sometimes, governments seek to shield local industries and producers that cheap imported products could impact. Additionally, helping the domestic industry can prevent a possible rise in unemployment.

#2 To safeguard domestic consumers

A few cheap imports could pose a risk for consumers. For instance, the products could contain components that can cause harm to consumers. In addition, by making the products more expensive, the government can discourage these products’ consumption.

#3 To safeguard national security

The government could be looking to safeguard industries that have an important strategic importance to national security from dependence on imports.

#4 To guard the industry’s infants

Tariffs could safeguard emerging and growing industries. They could draw more customers to products made in the country and will encourage the growth of companies operating in emerging industries will be boosted.

From the perspective of revenue only, a country could apply a tax equivalent to domestic production (to keep it from being protected) or pick a limited number of imported goods that are of general use and subject them to lower taxes so that there would be no incentive to transfer resources into the production of tax-exempted products (or alternatives to the taxed goods). Look at it from a different angle. If an individual country seeks to safeguard its industries, the list of protected commodities will be lengthy, and tariffs will be very high. Politics often drive the enactment or removal of tariffs. Tariffs are further classified into three categories: transit duties, export duties, and import duties.

Transit duties

This duty is imposed on goods that originate in one country, pass through another, and are then transferred to the third. Like the name suggests, transit taxes are imposed from the nation through which merchandise travel. These duties have become powerful instruments of trade policy. Still, in the mercantilist time (16th-18th period) and up to the mid-19th century in some nations, they played a part in directing trade and controlling certain routes. The growth of Germany’s Zollverein (a trade union) in the early part of the late 19th century was a result partly of the exercise by Prussia of its right to impose transit duty. The most immediate and immediate consequence of these duties is a decrease in the number of commodities that are traded internationally as well as an increased price of these products for the importer country.

Export duties

Export duties are not utilized to the fullest extent, besides taxing certain petroleum, mineral and agricultural products. Many countries that have abundant resources rely on export duties to generate a large portion of their revenues. Export duties were commonplace in the past they were a major element of mercantilist trading policies. They’re primarily designed to protect domestic resources rather than to generate revenues. The first time export duties came into force was in England through a law in 1275, which placed them on hides as well as wool. At the beginning of the seventeenth century, the list of items subject to export duties was now more than 200 products. As the development of free trade during the late 19th century duties on exports decreased in appeal and were eliminated during the 1842-year period, in England (1842) as well as to France (1857) as well as the case of Prussia (1865). In the early 20th century, just a handful of countries had imposed export duties. For instance, Spain still levied them on coke, Bolivia, and Malaysia on Tin, Italy on objects of art and Romania on products from the forest. The rise of the neo-mercantilist movement in the 1920s and 1930s resulted in a sporadic reappearance of export duties. It was during the United States export duties were prohibited under the Constitution in part due to tensions from the South. They were in favor of having no restrictions on its right to export agricultural goods.

Import duties

Import duties are among the most significant and common kinds of customs duties. As mentioned above, they can be imposed for revenue or for, protection or both. However, tariffs are not the most effective method of generating revenue since they increase the product’s cost of production. Although imports make up the majority of the revenue source, it’s preferential to tax all consumption instead of just the imports’ consumption to prevent uneconomical protection.

Import duties have not been important sources of revenue in the developed world. The United States, for example, the revenue from import duty in 1808 was nearly two times the total government expenditures, but in 1837, it made up less than one-third of the expenses. Up until the close of the 19th century the customs revenue that were a part of the U.S. government made up approximately half of its revenue. The share of customs receipts had dropped to around 6 percent of the total amount before the start of World War II, and it has since decreased further.

The reduction in tariffs and the expansion of international trade

For both goods and services, International trade increased dramatically during the second half of this century. In 2000, the total global commerce was nearly 22x higher than what it was in 1950.

The increase in multilateral international trade happened the as barriers to trade, including tariffs, were lowered or, in certain cases, eliminated around the world. One of the main factors that influenced the growth of trade globally is that of the General Agreement on Tariffs and Trade (GATT), a set of trade agreements signed in 1948. The GATT system was created in 1948. GATT promoted a variety of trade talks focused on reducing tariffs. The first trade agreements were mostly geared toward tangible goods , such as agricultural products, processed food items, steel, automobiles, and other products. A series of talks called the Uruguay Round (1986-94) finally resulted in the establishment of the World Trade Organization (WTO) in 1995.