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Tariffs

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Tariffs

For other uses, see Tariff (disambiguation).

A tariff is either (1) a tax on imports or exports (an international trade tariff), or (2) a list of prices for such things as rail service, bus routes, and electrical usage (electrical tariff, etc.).[1] The meaning in (1) is now the more common meaning. The meaning in (2) is historically earlier. The meaning in (1) developed from a tabular list of tax rates for different import goods.

Etymology

The word comes from the Italian word tariffa "list of prices, book of rates," which is derived from the Arabic ta'rif "to notify or announce."[2]

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 Organization aims to reduce tariffs and to avoid countries discriminating between differing countries when applying tariffs.

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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 q 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*, StD* 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 taxes. 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.

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:

(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 completely accurate only in the extreme case where no consumer belongs to the producers group and the cost of the product is a fraction of their wages. If instead, the opposite extreme is taken by assuming that all consumers come from the producers' group and that their only purchasing power comes from the wages earned in production and the product costs their whole wage, 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.

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.[3]

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,[4] but the move was criticised by the Cato Institute.[5]

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.[6] 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".[7]

Unpopular tariffs are known to have ignited social unrest. Example of this are the 1905 Meat riots in Chile that evolved from protests against tariffs applied to the cattle imports from Argentina.[8][9]

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 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.

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. It was also determined that the US, in its early years, had also used tariffs as an integral part of amounted to technology strategies to transform the country into a superpower.[10]

See also

Types of tariff:

Trade dynamics:

Trade liberalisation:

General:

References

Further reading

  • .
  • .

External links

Template:NIE Poster

  • 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

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