A tariff is a tax on imported
goods. When a ship arrives in port a customs officer inspects the contents and
charges a tax according to the tariff formula. Since the goods cannot be landed
until the tax is paid it is the easiest tax to collect, and the cost of
collection is small. Smugglers of course seek to evade the tariff.
An ad valorem tax is a percentage of the value of the item, say 10 cents on
the dollar, while a specific tariff is so-much per weight, say $5 per ton.
"revenue tariff" is a set of rates designed primarily to raise money for the
government. A tariff on coffee imports, for example (by a country that does not
grow coffee) raises a steady flow of revenue.
A "protective tariff" is
intended to artificially inflate prices of imports and "protect" domestic
industries from foreign competition. For example, a 50% tax on a machine that
importers formerly sold for $100 and now sell for $150. Without a tariff the
local manufacturers could only charge $100 for the same machine; now they can
charge $149 and make the sale.
A prohibitive tariff is one so high that no
one imports any of that item.
The distinction between
protective and revenue tariffs is subtle: protective tariffs in addition to
protecting local producers also raise revenue; revenue tariffs produce revenue
but they also offer some protection to local producers. (A pure revenue tariff
is a tax on goods not produced in the country, like coffee perhaps.)
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 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. Protective
tariffs have been used as a measure against this possibility. However,
protective tariffs have disadvantages as well. The most notable is that they
increase the price of the good subject to the tariff, 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 disadvantaging both sides.
There are two main ways of implementing a tariff:
An ad valorem tariff is a fixed 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 higher. They also face the problem of 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 may be harder to decide the amount at which to set them,
and they may need to be updated due to changes in the market or
Adherents of supply-side economics sometimes refer to domestic
taxes, such as income taxes, as being a "tariff" affecting inter-household
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