Tariff << TAR ihf >> is a tax placed on goods that one nation imports from another. Many nations use tariffs to protect their industries from foreign competition. Tariffs provide protection by acting to raise the price of imported goods. Thus, tariffs encourage domestic firms to increase their production, and consumers are forced to pay higher prices for the protected goods. Tariffs on exports from the United States are prohibited by the U.S. Constitution. But such tariffs are sometimes used in other countries to raise revenue. A nation may also use tariffs to influence, or protest against, political or economic policies of other countries.
Nations set their tariff rates in various ways. They may have commercial treaties that include a most-favored-nation (MFN) clause, sometimes called a normal trading relations clause. Under an MFN clause, each nation’s lowest regular tariff rates apply to all countries that sign the treaty. Preferential tariffs, which are lower than MFN tariffs, may be applied to favor imports from less developed countries. Nations that form a customs union eliminate tariffs on trade among themselves. These nations also have a common set of tariffs that cover their trade with nonmember countries. A common market has the same tariff policies as a customs union but provides for greater economic cooperation among its members. Nations that form a free trade area have no tariffs among themselves, but each member may set its own tariffs on goods produced by nonmembers.
Main kinds of tariffs
Tariffs may be classified according to their purpose. Tariffs levied to restrict imports are called protective tariffs. Those levied to increase government revenue are known as revenue tariffs. Many governments used revenue tariffs in the past. But today, income taxes and sales taxes are the main sources of government revenue, and revenue tariffs are seldom used. Protective tariffs are used more often. However, protective tariffs have also been reduced substantially in the United States and many other major countries since World War II ended in 1945.
Tariffs may also be classified according to the way in which they are levied. Specific tariffs are levied as a certain sum of money per unit of the product imported. For example, a government may levy a specific tariff on a product at a rate of 10 cents per pound or 25 cents per liter. Many specific tariffs are levied against such raw materials as iron ore and rubber and such food products as sugar, wheat, and wine. Ad valorem tariffs are levied as a percentage of the value of a product. For example, a rate of 5 per cent may apply to imports of such manufactured products as automobiles.
Why tariffs are levied
Tariffs are often levied (1) to protect domestic jobs, (2) to protect new industries, (3) to offset unfair trade practices of other countries, or (4) to prevent dependence on foreign products.
Protecting domestic jobs.
Firms and workers sometimes have difficulty competing with imports when foreign firms and workers are more efficient. The affected groups may promote tariffs to increase or maintain company profits and keep wages high.
Protecting new industries.
In some instances, a new industry cannot compete successfully with established industries in other countries. A protective tariff may shield the new industry from foreign competition until its workers and firms become more productive.
Offsetting unfair trade practices.
Some governments use tariffs to protect their industries from the effects of export subsidies and dumping. Export subsidies are support payments paid by a government to its export industries. Such payments are designed to allow the industries to sell their goods for less overseas. Dumping involves pricing items below their production cost to drive competitors out of an import market. For example, radio manufacturers in one country may sell their products so cheaply in another country that radio firms in the importing nation cannot compete successfully. As a result, those firms may go out of business. The importing nation would then have to depend on foreign manufacturers for radios. The foreign firms could then raise prices far above their original levels.
In some cases, export subsidies or dumping may not harm an importing country’s industries. In such cases, if no tariff is imposed, consumers may benefit from the lower prices that result from these practices.
Preventing dependence on foreign products.
Many nations do not want to depend on other countries for such essential products as petroleum, steel, or food. Supplies of these products from foreign sources may be cut off or disrupted in time of war or international tension. Thus, some nations use tariffs to protect industries that produce these goods.
Arguments against tariffs
Arguments against tariffs include the belief that they result in (1) higher prices, (2) industrial inefficiency, and (3) unfair support for some industries. Tariffs may reduce trade, and so many economists believe they lower the standard of living in trading nations.
Higher prices.
Many people believe tariffs waste a nation’s supply of labor and natural resources and thus raise prices. A country wastes money if it tries to produce everything it needs. Therefore, it should produce chiefly what it makes best and most economically. If a country has excellent factories but poor farmland, for example, it should export manufactured products and import most of its food. If such a nation tries to expand its farming by placing a tariff on imported food, its people will have to pay higher prices for food. In addition, many people who believe that certain industries must be protected think that it is better to support them with direct subsidies than with tariffs. Unlike tariffs, subsidies do not raise consumer prices.
Industrial inefficiency.
Tariffs may encourage inefficiency by protecting industries from competition. Without competition, an industry has little need to become more efficient. If a nation’s tariff policy encourages inefficiency, its industries will lose business to those of more efficient countries. Many economists claim that tariffs themselves cannot make—or keep—a nation prosperous by protecting inefficient industries.
Unfair support for some industries.
Tariffs may help some industries—but only at the expense of others. If a high tariff protects a nation’s aluminum industry, for example, aluminum might cost more in that country than it would without a tariff. All domestic industries that use aluminum would save money if they could buy the imported product at a lower price.
History
Tariff policies reflect the economic and political conditions within various countries. Throughout history, nations have changed their tariff policies to keep in step with their economic and political goals.
The first tariffs.
In early times, nations did not have formal tariffs—but they did collect such taxes. Most tariff collectors simply charged merchants the highest duties they thought they could get.
From about 1100 to 1300, the Christian military campaigns called the Crusades brought increased trade between Europe and the Middle East. The rise in trade led to formal tariffs during this period. The first tariff agreements were made by Italian trading cities, such as Genoa and Venice, with various commercial partners in Africa and Asia. England levied a revenue tariff in 1303 that included an ad valorem duty on imported and exported goods. Collectors based this duty, called poundage, on the value in pounds of the goods.
Beginning in the 1490’s, the explorations of Christopher Columbus, Vasco da Gama, and other Europeans resulted in a great increase in foreign trade. European trading nations began to follow an economic policy called mercantilism. This policy involved the use of high tariffs to limit imports, so that exports would exceed imports. An excess of exports over imports produced a favorable balance of trade—and boosted the size of a nation’s treasury. Mercantilism flourished until the 1700’s.
The changing role of tariffs.
During the late 1700’s, the beginning of industrialization in Europe led to a major change in the role of tariffs. The production of goods increased in the industrial nations, such as Belgium and the United Kingdom. As a result, these nations wanted to sell more products to other countries. To increase trade, many industrial nations sought lower tariffs with their trade partners. But nations that were just beginning to industrialize kept tariffs high to protect their new industries. Efforts to reduce tariffs increased as industrialization progressed during the 1800’s and 1900’s.
Modern tariff policies.
By the 1950’s, three major trading groups had developed. These groups were (1) the chief Western industrialized countries, (2) the less developed countries, and (3) the Communist nations. The major Western industrialized countries began negotiations to increase their trade by reducing tariffs on manufactured and agricultural goods. These negotiations took place under a treaty called the General Agreement on Tariffs and Trade (GATT). In 1995, the countries that had formed the GATT helped create the World Trade Organization. This organization administers the GATT and works to reduce barriers to trade in services and in other areas not covered by the GATT. Since the late 1950’s, Western European countries have eliminated almost all tariffs on one another’s goods. They have done so as members of the European Free Trade Association and the European Economic Community, which was incorporated into the European Union in 1993. Many developing countries in Africa, Asia, and Latin America continue to use high tariffs to protect their industries.
Traditionally, imports and exports of Communist nations were controlled by centralized economic planning, and tariffs did not play an important role. But after 1980, some Communist governments relaxed strict control of their economies. They expanded their countries’ international trading and became concerned with winning favorable tariff treatment from Western industrialized nations. In the late 1980’s and early 1990’s, the Communist trading group largely disintegrated after Communists lost control of the governments of many Eastern European countries and the Soviet Union. In 1991, most of the Soviet republics declared their independence, and the Soviet Union was dissolved. The new Eastern European governments and the former Soviet republics continued to seek favorable tariff treatment.
United States tariffs
have played a major role in the nation’s history. The U.S. government has changed its tariff policies many times through the years.
The revolutionary period.
Many people in the American Colonies resented the tariffs that the United Kingdom put on goods that they imported. They sought independence partly to free themselves from British tariffs.
Soon after the Revolutionary War ended in 1783, many Americans demanded that the government establish a tariff. They argued that a tariff would (1) protect the nation’s industries, (2) raise government revenue, and (3) encourage other nations to grant fair tariffs to the United States. The first Congress passed the Tariff Act of 1789, which set up U.S. tariffs.
The 1800’s.
The nation’s first tariffs were low, but most of them rose during the early 1800’s. People in various parts of the country called for different tariff policies. For example, people in the New England and Middle Atlantic states sought high tariffs to protect their manufacturing industries. But Southerners, whose income came chiefly from agriculture, demanded low tariffs. They wished to buy European products, which were better and cheaper than those made in the United States. Westerners, whose income also came mostly from agriculture, at first opposed high tariffs. But they came to accept a plan called the “American System” proposed by Representative Henry Clay of Kentucky. This plan included a protective tariff. In 1824, Congress boosted most tariffs as a result of Clay’s proposals.
Many people, especially Southerners, protested the rising tariffs, particularly what they called the “Tariff of Abominations” of 1828. This tariff again increased the cost of foreign products needed by farmers. To satisfy those who wanted to eliminate all tariffs, Clay helped work out the Compromise Tariff of 1833. This law maintained some high duties but included a plan to reduce tariffs gradually until 1842. However, poor economic conditions resulted in a new and higher tariff in 1842. In 1846, after the economy had improved, Congress lowered tariffs with the Walker Tariff Act. Further reductions were made in 1857, but the Morrill Tariff Act of 1861 once again raised tariffs.
The tariff disagreement between the North and South helped cause the Civil War, which began in 1861. Southerners felt betrayed when the Westerners and Northerners joined in support of high tariffs.
During the Civil War, the government raised tariffs to new highs. Most tariffs remained high throughout the 1800’s. Several attempts to lower them failed. For example, the Mills bill of 1888 included President Grover Cleveland’s proposal to lower tariffs. The House of Representatives passed the bill, but the Senate never voted on it. The McKinley Tariff Act of 1890 raised the average level of tariffs to a new high.
The 1900’s.
During the early 1900’s, many people in the United States wanted to increase the nation’s trade by lowering tariffs. The Payne-Aldrich Tariff of 1909 changed many tariff rates, but it failed to lower the average level of tariffs. In 1913, the Underwood Tariff Act generally reduced tariffs. However, a decline in shipping during World War I (1914-1918) cut trade and limited the effects of the lower tariffs. In 1922, the Fordney-McCumber Tariff Act raised tariff rates sharply. United States tariffs reached an all-time high under the Smoot-Hawley Tariff Act of 1930.
In 1934, during the Great Depression, Congress passed the Reciprocal Trade Agreements Act to increase trade. This law authorized the President to cut tariffs for certain nations by as much as half. It also enabled him to make agreements setting the tariff rate for each product. Formerly, Congress had set the rates.
In 1947, the United States and 22 other nations signed the General Agreement on Tariffs and Trade. This treaty reduced tariffs and provided for the settlement of trade disputes. It also sought to limit the situations in which its signers restricted imports from one another.
Beginning in the 1950’s, Congress passed a series of laws that enabled the United States to participate in negotiations under the GATT. The negotiations were designed to further reduce tariffs and other trade barriers. Since then, several major rounds of GATT negotiations have taken place. As a result of these talks, the tariff rates of the United States and other major industrialized countries have been reduced substantially. By the mid-1990’s, about 120 nations had signed the GATT.
Many industrialized countries, including the United States, have had difficulty adjusting to competition from imports. This difficulty has resulted in an increase in attempts to protect domestic industries by means of nontariff measures that are not clearly illegal under the GATT. These measures include special import quotas and voluntary export restraints. Such measures have been used to restrict the importation of automobiles, raw materials, textiles and clothing, footwear, steel products, electronic goods, and some food products. For many products, nontariff restrictions have become more important than tariffs in the United States and other major industrialized countries.
In GATT negotiations, efforts have been made to design acceptable rules governing conditions for the use of nontariff trade barriers. But it has proven difficult to define the circumstances in which protection should be used. In 1995, the United States became a founding member of the World Trade Organization. The organization was designed, in part, to deal more effectively with nontariff trade barriers.
The 2000’s.
During the 2000’s, the United States occasionally imposed tariffs on goods in attempts to combat unfair trade practices. In 2009, President Barack Obama imposed a tariff on automobile tires imported from China. Obama argued that China was flooding the market with tires at artificially low prices, making it difficult for U.S. companies to compete. However, as imports from China fell, imports of inexpensive tires from other countries rose dramatically. The tariffs on China eventually expired.
In 2018, President Donald Trump announced new tariffs on aluminum and steel imported from several countries. The tariffs were imposed under a provision of the U.S. Trade Expansion Act of 1962 that allows the president to place import restrictions or tariffs for national security reasons. Trump argued that unfair competition and low prices on imports damaged the domestic aluminum and steel industries to a point that national security could be compromised. The Trump administration also imposed tariffs on many products imported from China, claiming unfair trade practices by the Chinese. China retaliated by imposing tariffs on American imports. Despite periodic negotiations between the two countries, the dispute, often called a trade war, continued under President Joe Biden.
