Tariffs: Tariff and Tax in International Trade
Published on: Jan, 15, 2011
A tariff or customs duty is a tax levied upon goods as they cross national boundaries, usually by the government of the importing country. The words tariff, duty, and customs are generally used interchangeably.
Tariffs may be levied either to raise revenue or to protect domestic industries, but a tariff designed primarily to raise revenue may exercise a strong protective influence and a tariff levied primarily for protection may yield revenue. Gottfried Haberler in his Theory of International Trade suggested that the best objective distinction between revenue duties and protective duties (disregarding the motives of the legislators) is to be found in their discriminatory effects as between domestic and foreign producers.
If domestically produced goods bear the same taxation as similar imported goods, or if the goods subject to duty are not produced at home, even after the duty has been levied, and if there can be no home-produced substitutes toward which demand is diverted because of the tariff, the duty is not protective. A purely protective duty tends to shift production away from the export industries into the protected domestic industries and those industries producing substitutes for which demand is increased. On the other hand, a purely revenue duty will not cause resources to be invested in industries producing the taxed goods or close substitutes for such goods, but it will divert resources from the production of export goods to the production of those goods and services upon which the additional government receipts are spent.
From the purely revenue standpoint, a country can levy an equivalent tax on domestic production, to avoid protecting it, or select a relatively small number of imported articles of general consumption and subject them to low duties so that there will be no tendency to shift resources into industries producing such taxed goods (or substitutes for them). During the period when it was on a free-trade basis, Great Britain followed the latter practice, levying low duties on a few commodities of general consumption such as tea, sugar, tobacco, and coffee. Unintentional protection was not a major issue, because Britain could not have produced these goods domestically. If, on the other hand, a country wishes to protect its home industries its list of protected commodities will be long and the tariff rates high.
Tariffs may be further classified into three groups—transit duties, export duties, and import duties.
This type of duty is levied on commodities that originate in one country, cross another, and are consigned to a third. As the name implies, transit duties are levied by the country through which the goods pass. Such duties are no longer important instruments of commercial policy, but, during the mercantilist period (17th and 18th centuries) and even up to the middle of the 19th century in some countries, they played a role in directing trade and controlling certain of its routes. The development of the German Zollverein (customs union) in the first half of the 19th century was partly the result of Prussia’s exercise of its power to levy transit duties. The most direct and immediate effect of transit duties is to reduce the amount of commodities traded internationally and raise their cost to the importing country. In 1921 the Barcelona Statute on Freedom of Transit abolished all transit duties.
Export duties are no longer used to a great extent, except to tax certain mineral and agricultural products. Several resource-rich countries depend upon export duties for much of their revenue. Export duties were common in the past, however, and were significant elements of mercantilist trade policies. Their main function was to safeguard domestic supplies rather than to raise revenue. Export duties were first introduced in England by a statute of 1275 that imposed them on hides and wool. By the middle of the 17th century the list of commodities subject to export duties had increased to include more than 200 articles. With the growth of free trade in the 19th century, export duties became less appealing; they were abolished in England in 1842, in France in 1857, and in Prussia in 1865. At the beginning of the 20th century only a few countries levied export duties: for example, Spain still levied them on coke and textile waste; Bolivia and Malaya on tin; Italy on objects of art; and Romania on hides and forest products. The neo-mercantilist revival in the 1920s and 1930s brought about a limited reappearance of export duties. In the United States, export duties were prohibited by the Constitution, mainly because of pressure from the South, which wanted no restriction on its freedom to export agricultural products.
Export duties are now generally levied by raw-material-producing countries rather than by advanced industrial countries. Differential exchange rates are sometimes used to extract revenues from export sectors. Commonly taxed exports include coffee, rubber, palm oil, and various mineral products. The state-controlled pricing policies of international cartels such as the Organization of Petroleum Exporting Countries have some of the characteristics of export duties.
Export duties may act as a form of protection to domestic industries. As examples, Norwegian and Swedish duties on exports of forest products were levied chiefly to encourage milling, woodworking, and paper manufacturing at home. Similarly, duties on the export from India of untanned hides after World War I were levied to stimulate the Indian tanning industry. In a number of cases, however, duties levied on exports from colonies were designed to protect the industries of the mother country and not those of the colony.
If the country imposing the export duty supplies only a small share of the world’s exports and if competitive conditions prevail, the burden of an export duty will likely be borne by the domestic producer, who will receive the world price minus the duty and other charges. But if the country produces a significant fraction of the world output and if domestic supply is sensitive to lower net prices, then output will fall and world prices may rise and as a consequence not only domestic producers but also foreign consumers will bear the export tax. How far a country can employ export duties to exploit its monopoly position in supplying certain raw materials depends upon the success other countries have in discovering substitutes or new sources of supply.
Import duties are the most important and most common types of custom duties. As noted above, they may be levied either for revenue or protection or both, but tariffs are not a satisfactory means of raising revenue, because they encourage uneconomic domestic production of the dutied item. Even if imports constitute the bulk of the available revenue base, it is better to tax all consumption, rather than only consumption of imports, in order to avoid uneconomical protection.
Import duties are no longer an important source of revenues in developed countries. In the United States, for example, revenues from import duties in 1808 amounted to twice the total of government expenditures, while in 1837 they were less than one-third of such expenditures. Until near the end of the 19th century the customs receipts of the U.S. government made up about half of all its receipts. This share had fallen to about 6 percent of all receipts before the outbreak of World War II and it has since further decreased.
A tariff may be either specific, ad valorem, or compound (i.e., a combination of both). A specific duty is a levy of a given amount of money per unit of the import, such as $1.00 per yard or per pound. An ad valorem duty, on the other hand, is calculated as a percentage of the value of the import. Ad valorem rates furnish a constant degree of protection at all levels of price (if prices change at the same rate at home and abroad), while the real burden of specific rates varies inversely with changes in the prices of the imports. A specific duty, however, penalizes more severely the lower grades of an imported commodity. This difficulty can be partly avoided by an elaborate and detailed classification of imports on the basis of the stage of finishing, but such a procedure makes for extremely long and complicated tariff schedules. Specific duties are easier to administer than ad valorem rates, for the latter often raise difficult administrative issues with respect to the valuation of imported articles.
A list of all import duties is usually known as a tariff schedule. A single tariff schedule, such as that of the United States, applies to all imports regardless of the country of origin. This is to say that a single duty is listed in the column opposite the enumerated commodities. A double-columned or multi-columned tariff schedule provides for different rates according to the country of origin, lower rates being granted to commodities coming from countries with which tariff agreements have been negotiated. Most trade agreements are based on the most-favored-nation clause (MFN), which extends to all nations’ party to the agreement whatever concessions are granted to the MFN.
Every country has a free list that includes articles admitted without duty. By looking at the free list and the value of the goods imported into the United States under it one might be led to conclude that tariff protection is very limited, for more than half of all imports are exempt from duties. Such a conclusion, however, is not correct, for it ignores the fact that the higher the tariff, the less will be the quantity of dutiable imports. Attempts to measure the height of a tariff wall and make international comparisons of the degree of protection, based upon the ratio of tariff receipts to the total value of imports, are beset by difficulties and have little meaning.
A better method of measuring the height of a tariff wall is to convert all duties into ad valorem figures and then estimate the weighted-average rate. The weight should reflect the relative importance of the different imports; a tariff on foodstuffs, for example, may be far more important than a tariff on luxuries consumed by a small group of people.
A more appropriate measure of protection is that of effective protection. It recognizes that the protection afforded a particular domestic industry depends on the treatment of its productive inputs, as well as its outputs. Suppose, for example, that half of the inputs to an industry are imported and subject to a duty of 100 percent. If the imports with which the industry competes are subject to a duty of less than 50 percent there is no effective protection.
(1) “international trade.” Encyclopædia Britannica from Encyclopædia Britannica Premium Service.
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