Tariff
Encyclopedia
A tariff may be either tax on imports or exports (trade tariff), or a list or schedule of prices for such things as rail
service, bus routes, and electrical usage (electrical tariff, etc.).
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."
Tariffs have played different roles in trade policy and the nation's economic history
. Tariffs (often called customs
) were by far the largest source of federal revenue from the 1790s to the eve of World War I
, until they were surpassed by income taxes. Tariffs are import tax rates and the collected income is called customs
or custom duties or Ad valorem taxes. Responding to an urgent need for revenue following the American Revolutionary War
, after passage of the U.S. Constitution the First United States Congress passed, and President George Washington
, signed the Hamilton tariff
act of July 4, 1789, which authorized the collection of duties on imported goods. Customs
duties as set by tariff rates up to 1860 were usually about 80-95% of all federal revenue. Having just fought a war over taxation (among other things) the U.S. Congress wanted a reliable source of income that was relatively unobtrusive and easy to collect. Tariffs and excise taxes were authorized by the United States Constitution and recommended by the first United States Secretary of the Treasury
, Alexander Hamilton
in 1789 to tax foreign imports and set up low excise taxes on whiskey and a few other products to provide the Federal Government with enough money to pay its operating expenses and to redeem at full value U.S. Federal debts and the debts the states had accumulated during the Revolutionary War. Hamilton thought it was important to start the U.S. Federal government out on a sound financial basis with good credit. The first Federal budget was about $4.6 million dollars and the population in the 1790 U.S. Census was about four million. Hence the average federal tax was about $1/person per year. Then tradesmen earned about $0.25 a day for a 10-12 hour day so federal taxes could be paid with about four days work. Paying even this was usually optional as taxed imports listed on the tariff lists could usually be avoided if desired.
The Congress set low excise taxes on only a few goods, such as, whiskey, rum
, tobacco
, snuff
and refined sugar
. Tariff rates from 1792 to 1860 were usually about 80-95% of all federal revenue. The excise tax on whiskey
was so despised it led to the Whiskey Rebellion
which had to be quelled by Washington calling up the militia
and repressing the rebellious farmers—all were later pardoned. The whiskey excise tax collected so little and was so despised it was abolished by President Thomas Jefferson
in 1802.
All tariffs were on a long list of goods (dutiable goods) with different customs rates and some goods like books, newspapers, models of inventions, etc. on a "free" list. Congress spent enormous amounts of time figuring out these tariff import tax schedules.
Tariffs for many years were primarily to collect Federal revenue and only secondarily to protect start-up industries. Since the government largely restricted its activities to maintaining order and protecting property via the army, navy and courts tariffs raised enough revenues to finance the government. The U.S. Mail was largely self supporting. During wars or to meet other needs additional income was secured by raising the tariff and excise tax rates. Short term and unanticipated capital needs (budget deficits) were usually covered by borrowing. The first unexpected cost was the Northwest Indian War
s in the Northwest Territory
in the 1790s which required rebuilding the U.S. Army
(the poorly trained militia were initially slaughtered) which had largely been disbanded after the Revolutionary War. Tariffs were adjusted up to cover these costs even as increased imports reduced the average tariff rates.
A protective Tariff is often used by governments to attempt to control trade between nations to protect and encourage their noncompetitive or undeveloped local industries, businesses, unions etc. giving them time to become competitive. In addition it was thought under the theory of mercantilism
generally believed by many countries in this era that exclusive trade with the colonies should be nearly all on ships of the parent country and all advanced industries etc. should be restricted to the mother country. Raw materials should be exported to the parent country and finished goods exported to the colonies. The United States starting out as a colony had these and other handicaps. The advantages they had were a free, independent, innovative and lightly taxed populace with close ties to the British
Industrial Revolution
.
The reasons for an industry or business being noncompetitive are basically four:
In the U.S. all these conditions applied except for the lack of raw materials. The new textile producing machines (the start of the Industrial Revolution
) developed by Britain were prohibited to be imported to what would become the United States (and elsewhere), skilled mechanics and engineers knowledgeable about these machines were prohibited from emigration and the U.S. had significantly higher wages due to the lack of people—one of the main reasons people immigrated to the U.S.. A protective tariff was proposed by Secretary of Treasury Alexander Hamilton to help overcome these handicaps while knowledge and organization skills were accumulated to build competitive industries and to allow higher wages to be paid in these industries. These protectionist ideas were essentially ignored for many years as Federal tariff revenue was the main goal of tariffs. More imported goods could easily be paid for by exporting more raw products.
Major problems occurred in this state of affairs starting in the Napoleonic Wars
when both France
and Britain
tried to interfere with each other's trade by blockading U.S. (and other) shipping. In 1807 imports dropped by more than half and some products became much more expensive or unobtainable. Congress passed the Embargo Act of 1807
and the Non-Intercourse Act (1809) to punish British and French governments for their actions; unfortunately their main effect was to reduce imports even more. The War of 1812
brought a similar set of problems as U.S. trade was again restricted by British naval blockades and Congress needed additional funds to expand the U.S. Army
and rebuild the U.S. Navy
which had largely been disbanded after the Revolutionary War. Tariffs were adjusted and the excise tax on whiskey reinstated to cover most of these costs.
The lack of imported goods relatively quickly gave very strong incentives to start building several U.S. industries. Slowly but surely many of the initial handicaps were overcome as knowledge about the machinery and/or the organization of industries were released by Britain or "emigrated from" the British isles, the Netherlands
or wherever they were more developed. Many new industries were set up and run profitably during the wars and about half of them failed after hostilities ceased and normal imports resumed. Industry in the U.S. was advancing up the skill set, innovation knowledge and organization curve.
Tariffs soon became a major political issue as the Whigs
and later the Republicans
wanted to protect their mostly northern industries and constituents by voting for higher tariffs and the Democratic Party (United States)
, dominated by Southern Democrats, which had very little industry but imported many goods voted for lower tariffs. Each party as it came into power voted to raise or lower tariffs under the constraints that the Federal Government always needed a certain level of revenues. The United States public debt
was paid off in 1834 and President Andrew Jackson
, a strong Southern Democrat, oversaw the cutting of the tariff rates roughly in half and eliminating nearly all federal excise taxes in about 1835.
The American Civil War
(1860–65) with its tremendous costs built up an even stronger case for higher tariffs and the opposing Southern Democrats had nearly all left office so tariffs zoomed. The Morrill Tariff
significantly raising tariff rates was signed by Democratic President James Buchanan
in early March 1861 shortly before President Abraham Lincoln
took office. The Civil War began in April 1861. To help pay for the war, tariff rates were increased, excise taxes on a wide range of products were reintroduced and the income tax
(a new revenue "invention" later declared unconstitutional) was introduced.
By about 1900 it had become clear that the U.S. industries were competitive (or more) in nearly all areas and as the need for protection tariffs to pay for the Civil War receded, tariffs were gradually reduced. The next peak in tariffs was in about 1918 when World War I
expenditures had to be paid for. The next peak in tariffs was due to the Smoot–Hawley Tariff Act of 1930 at the start of the Great Depression. It is generally believed this act with its high tariff rates prolonged the Great Depression
under President Franklin D. Roosevelt
of 1929-1939.
Tariff rates are set up many times to "punish" trade tariffs, etc., on U.S. goods passed by other countries who are trying to protect their uncompetitive industries and/or businesses. It is unclear whether this policy works very well because the lack of competition often encourages companies (and governments) to keep inefficient and out dated equipment or business practices. These protected industries are often uncompetitive on the non-domestic market. Without the tariffs the customers can buy imported products cheaper and force the local companies to become more competitive. Tariffs are nearly always imposed on imported foreign goods and very seldom on exported goods and nearly always cost the consumer extra money. Historically U.S. tariffs on imported goods and products till 1913 ranged from 8% to 45% (averaging about 22%) and the collected tariff income supported nearly all the Federal Governments expenses until the Sixteenth Amendment to the United States Constitution
allowing Federal Income Taxes was passed in 1913.
In the 18th and 19th centuries, many countries primary source of income was import tariffs. Tariffs tended to be lowered as other sources of tax income like income taxes, payroll tax
es, value-added taxes (VAT), property tax
es, sales tax
, etc. have been enacted. In the United States property taxes and sales tax have nearly always been reserved for state and local government income sources. Various Income Tax rates and schedules are also common in many states but tariffs are not. Tariffs in the U.S. can only be imposed only by the Federal government at a uniform rate and not by state or local governments.
Tariffs up to the Smoot–Hawley Tariff Act of 1930, were set by Congress with many hours of bickering and testimony. In 1934, the U.S. Congress, in a rare delegation of authority, passed the Reciprocal Tariff Act
of 1934 which authorized the executive branch to negotiate bilateral tariff reduction agreements with other countries. The prevailing view then was that trade liberalization may help stimulate economic growth—much depressed by the Great Depression
. However, no one country was willing to liberalize its tariff rates unilaterally. Between 1934 and 1945, the executive branch negotiated over 32 bilateral trade liberalization (reciprocal tariff reductions) agreements with other countries. The belief that low tariffs lead to a more prosperous country are now the predominant belief with some exceptions. Multilateralism is embodied in the seven tariff reduction rounds which occurred between 1948 and 1994. In each of these "rounds", all General Agreement on Tariffs and Trade
(GATT) members came together to negotiate mutually agreeable trade liberalization packages and reciprocal tariff rates. In the Uruguay round in 1994, the World Trade Organization
(WTO) was established to help establish uniform tariff rates.
Presently only about 30% of all import goods are subject to tariffs in the United States, the rest are on the free list. The "average" tariffs now charged by the United States are at a historic low. The list of negotiated tariffs are listed on the Harmonized Tariff Schedule as put out by the United States International Trade Commission
.
Historically, high tariffs have led to high rates of smuggling. The United States Revenue Cutter Service
, the oldest naval unit in the United States, was established by Secretary of the Treasury Alexander Hamilton
in 1790 as an armed maritime law and customs
enforcement service. In 1915 the Service merged with the United States Life-Saving Service
to form the United States Coast Guard
. In 1939 the U.S. Coast Guard merged with the United States Lighthouse Service
to form what is today the primary maritime law enforcement force in the United States. In addition, the Coast Guard has roles in maritime homeland security
, maritime law enforcement
(MLE), search and rescue
(SAR), marine environmental protection (MEP), and the maintenance of river, intracoastal
and offshore aids to navigation (ATON).
The U.S. Customs and Border Protection
(CBP) is a federal law enforcement agency of the United States Department of Homeland Security charged with regulating and facilitating international trade, collecting customs (import duties or tariffs approved by the U.S. Congress), and enforcing U.S. regulations, including trade, customs and immigration. They man most border crossing stations and ports. When shipments of goods arrive at a border crossing or port, customs officers inspect the contents and charge a tax according to the tariff formula for that product. Usually the goods cannot continue on their way until the custom duty is paid. Custom duties are one the easiest taxes to collect, and the cost of collection is small. Traders seeking to evade tariffs are known as smugglers and can be fined or sent to prison if caught.
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 judgments 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 tariffs is part of the free trade
principle; the World Trade Organization
aims to reduce tariffs and to avoid countries discriminating between differing countries when applying tariffs.
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 quantity at the given price. Obviously, in real world conditions this is somewhat unrealistic, but making such assumptions is unlikely to have a material impact on the outcome of the model.
At world equilibrium, Pw, Home produced only 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*, S*D* 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 tariffs. 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.
Interestingly, the triangles B and D are lost by the consumers without any gain by any other party within the society. Therefore, areas B and D represent the dead weight lost to the society.
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, we can conclude that the net welfare loss due to the tariff is equal to:
or graphically, this gain is given by the areas shown by:
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 only completely accurate in the extreme case where none of the consumers belong to the producers group and the cost of the product is a fraction of their wages. If instead, we take the opposite extreme, and assume all consumers come from the producers' group, and also assume their only purchasing power
comes from the wages earned in production and the product costs their whole wage, then 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.
Note also, that with or without tariffs, there is no incentive to buy the imported goods over the domestic, as the price of each is the same. Only by altering available purchasing power through debt, selling off assets, or new wages from new forms of domestic production, will the imported goods be purchased. Or, of course, if its price were only a fraction of wages.
In the real world, as more imports replace domestic goods, they consume a larger fraction of available domestic wages, moving the graph towards this view of the model. If new forms of production are not found in time, the nation will go bankrupt, and internal political pressures will lead to debt default, extreme tariffs, or worse.
Establishing tariffs inefficiently slows down this process at the expense of the consumer's real wages, allowing more time for new forms of production to be developed, but also buttresses industries which may never regain competitive prices.
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, but the move was criticised by the Cato Institute
.
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. 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".
, 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 out maneuver 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.
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 what amounted to technology strategies to transform the country into a superpower.
Rail
Rail or rails may refer to:Railway transportation* A generic term for railroads, railways, rail transport, and related matters* Rail tracks, or railway lines, the running surface of a railway...
service, bus routes, and electrical usage (electrical tariff, etc.).
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."
Trade tariffs in the United States
| U.S. Historical Tariffs (Customs Customs Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country... ) Collections by Federal Government (All dollar amounts are in millions of U.S. dollars) |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year | Tariff Income |
Budget % Tariff |
Federal Receipts |
Income Tax |
Payroll Tax |
Average Tariff |
||||||
| 1792 | $4.4 | 95.0% | $4.6 | $- | $- | 15.1% | ||||||
| 1795 | $5.6 | 91.6% | $6.1 | $- | $- | 8.0% | ||||||
| 1800 | $9.1 | 83.7% | $10.8 | $- | $- | 10.0% | ||||||
| 1805 | $12.9 | 95.4% | $13.6 | $- | $- | 10.7% | ||||||
| 1810 | $8.6 | 91.5% | $9.4 | $- | $- | 10.1% | ||||||
| 1815 | $7.3 | 46.4% | $15.7 | $- | $- | 6.5% | ||||||
| 1820 | $15.0 | 83.9% | $17.9 | $- | $- | 20.2% | ||||||
| 1825 | $20.1 | 97.9% | $20.5 | $- | $- | 22.3% | ||||||
| 1830 | $21.9 | 88.2% | $24.8 | $- | $- | 35.0% | ||||||
| 1835 | $19.4 | 54.1% | $35.8 | $- | $- | 14.2% | ||||||
| 1840 | $12.5 | 64.2% | $19.5 | $- | $- | 12.7% | ||||||
| 1845 | $27.5 | 91.9% | $30.0 | $- | $- | 24.3% | ||||||
| 1850 | $39.7 | 91.0% | $43.6 | $- | $- | 22.9% | ||||||
| 1855 | $53.0 | 81.2% | $65.4 | $- | $- | 20.6% | ||||||
| 1860 | $53.2 | 94.9% | $56.1 | $- | $- | 15.0% | ||||||
| 1863 | $63.0 | 55.9% | $112.7 | $- | $- | 25.9% | ||||||
| 1864 | $102.3 | 38.7% | $264.6 | $- | $- | 32.3% | ||||||
| 1865 | $84.9 | 25.4% | $333.7 | $61.0 | $- | 35.6% | ||||||
| 1870 | $194.5 | 47.3% | $411.3 | $37.8 | $- | 44.6% | ||||||
| 1875 | $157.2 | 54.6% | $288.0 | $- | $- | 36.1% | ||||||
| 1880 | $184.5 | 55.3% | $333.5 | $- | $- | 27.6% | ||||||
| 1885 | $181.5 | 56.1% | $323.7 | $- | $- | 32.6% | ||||||
| 1890 | $229.7 | 57.0% | $403.1 | $- | $- | 27.6% | ||||||
| 1900 | $233.2 | 41.1% | $567.2 | $- | $- | 27.4% | ||||||
| 1910 | $233.7 | 34.6% | $675.2 | $- | $- | 15.0% | ||||||
| 1913 | $318.8 | 44.0% | $724.1 | $35.0 | $- | 17.6% | ||||||
| 1915 | $209.8 | 30.1% | $697.9 | $47.0 | $- | 12.5% | ||||||
| 1916 | $213.7 | 27.3% | $782.5 | $121.0 | $- | 8.9% | ||||||
| 1917 | $225.9 | 20.1% | $1,124.3 | $373.0 | $- | 7.7% | ||||||
| 1918 | $947.0 | 25.8% | $3,664.6 | $2,720.0 | $- | 31.2% | ||||||
| 1920 | $886.0 | 13.2% | $6,694.6 | $4,032.0 | $- | 16.8% | ||||||
| 1925 | $547.6 | 14.5% | $3,780.1 | $1,697.0 | $- | 13.0% | ||||||
| 1928 | $566.0 | 14.0% | $4,042.3 | $2,088.0 | $- | 13.8% | ||||||
| 1930 | $587.0 | 14.1% | $4,177.9 | $2,300.0 | $- | 19.2% | ||||||
| 1935 | $318.8 | 8.4% | $3,800.5 | $1,100.0 | $- | 15.6% | ||||||
| 1940 | $331.0 | 6.1% | $5,387.1 | $2,100.0 | $800.0 | 12.6% | ||||||
| 1942 | $369.0 | 2.9% | $12,799.1 | $7,900.0 | $1,200.0 | 13.4% | ||||||
| 1944 | $417.0 | 0.9% | $44,148.9 | $34,400.0 | $1,900.0 | 10.6% | ||||||
| 1946 | $424.0 | 0.9% | $46,400.0 | $28,000.0 | $1,900.0 | 7.7% | ||||||
| 1948 | $408.0 | 0.9% | $47,300.0 | $29,000.0 | $2,500.0 | 5.5% | ||||||
| 1950 | $407.0 | 0.9% | $43,800.0 | $26,200.0 | $3,000.0 | 4.5% | ||||||
| 1951 | $609.0 | 1.1% | $56,700.0 | $35,700.0 | $4,100.0 | 5.5% | ||||||
| 1955 | $585.0 | 0.8% | $71,900.0 | $46,400.0 | $6,100.0 | 5.1% | ||||||
| 1960 | $1,105.0 | 1.1% | $99,800.0 | $62,200.0 | $12,200.0 | 7.3% | ||||||
| 1965 | $1,442.0 | 1.2% | $116,800.0 | $74,300.0 | $22,200.0 | 6.7% | ||||||
| 1970 | $2,430.0 | 1.3% | $192,800.0 | $123,200.0 | $44,400.0 | 6.0% | ||||||
| 1975 | $3,676.0 | 1.3% | $279,100.0 | $163,000.0 | $84,500.0 | 3.7% | ||||||
| 1980 | $7,174.0 | 1.4% | $517,100.0 | $308,700.0 | $157,800.0 | 2.9% | ||||||
| 1985 | $12,079.0 | 1.6% | $734,000.0 | $395,900.0 | $255,200.0 | 3.6% | ||||||
| 1990 | $11,500.0 | 1.1% | $1,032,000.0 | $560,400.0 | $380,000.0 | 2.8% | ||||||
| 1995 | $19,301.0 | 1.4% | $1,361,000.0 | $747,200.0 | $484,500.0 | 2.6% | ||||||
| 2000 | $19,914.0 | 1.0% | $2,025,200.0 | $1,211,700.0 | $652,900.0 | 1.6% | ||||||
| 2005 | $23,379.0 | 1.1% | $2,153,600.0 | $1,205,500.0 | $794,100.0 | 1.4% | ||||||
| 2010 | $25,298.0 | 1.2% | $2,162,700.0 | $1,090,000.0 | $864,800.0 | 1.3% | ||||||
| -------------------------------------------------------------------------------------------- | ||||||||||||
| Notes: All dollar amounts are in millions of U.S. dollars Income taxes include Individual and Corporate taxes Federal expenditures often exceed Revenue by temporary borrowings. Initially the U.S. Federal Government was financed mainly by customs Customs Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country... (tariffs Average Tariff Rate % = Customs Revenue/ cost of Imports (goods) Tariffs are often called Customs Customs Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country... or duties on imports, etc. Income Taxes began in 1913 with the passage of 16th Amendment. Payroll taxes are Social Security and Medicare taxes Payroll Taxes began in 1940. Many Federal government Excise Excise Excise tax in the United States is a indirect tax on listed items. Excise taxes can be and are made by federal, state and local governments and are far from uniform throughout the United States... taxes are assigned to Trust Funds and are collected for and “dedicated” to a particular Trust. Sources:
|
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Tariffs have played different roles in trade policy and the nation's economic history
Economic history of the United States
The economic history of the United States has its roots in European colonization in the 16th, 17th, and 18th centuries. Marginal colonial economies grew into 13 small, independent farming economies, which joined together in 1776 to form the United States of America...
. Tariffs (often called customs
Customs
Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country...
) were by far the largest source of federal revenue from the 1790s to the eve of World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
, until they were surpassed by income taxes. Tariffs are import tax rates and the collected income is called customs
Customs
Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country...
or custom duties or Ad valorem taxes. Responding to an urgent need for revenue following the American Revolutionary War
American Revolutionary War
The American Revolutionary War , the American War of Independence, or simply the Revolutionary War, began as a war between the Kingdom of Great Britain and thirteen British colonies in North America, and ended in a global war between several European great powers.The war was the result of the...
, after passage of the U.S. Constitution the First United States Congress passed, and President George Washington
George Washington
George Washington was the dominant military and political leader of the new United States of America from 1775 to 1799. He led the American victory over Great Britain in the American Revolutionary War as commander-in-chief of the Continental Army from 1775 to 1783, and presided over the writing of...
, signed the Hamilton tariff
Hamilton tariff
The Hamilton Tariff was the second statute ever enacted by the new federal government of the United States by a vote of the first U.S. Congress. Most of the rates of the revenue tariff were between 5 and 10 percent, depending on the value of the item...
act of July 4, 1789, which authorized the collection of duties on imported goods. Customs
Customs
Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country...
duties as set by tariff rates up to 1860 were usually about 80-95% of all federal revenue. Having just fought a war over taxation (among other things) the U.S. Congress wanted a reliable source of income that was relatively unobtrusive and easy to collect. Tariffs and excise taxes were authorized by the United States Constitution and recommended by the first United States Secretary of the Treasury
United States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
, Alexander Hamilton
Alexander Hamilton
Alexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America's first constitutional lawyers and the first United States Secretary of the Treasury...
in 1789 to tax foreign imports and set up low excise taxes on whiskey and a few other products to provide the Federal Government with enough money to pay its operating expenses and to redeem at full value U.S. Federal debts and the debts the states had accumulated during the Revolutionary War. Hamilton thought it was important to start the U.S. Federal government out on a sound financial basis with good credit. The first Federal budget was about $4.6 million dollars and the population in the 1790 U.S. Census was about four million. Hence the average federal tax was about $1/person per year. Then tradesmen earned about $0.25 a day for a 10-12 hour day so federal taxes could be paid with about four days work. Paying even this was usually optional as taxed imports listed on the tariff lists could usually be avoided if desired.
The Congress set low excise taxes on only a few goods, such as, whiskey, rum
Rum
Rum is a distilled alcoholic beverage made from sugarcane by-products such as molasses, or directly from sugarcane juice, by a process of fermentation and distillation. The distillate, a clear liquid, is then usually aged in oak barrels...
, tobacco
Tobacco
Tobacco is an agricultural product processed from the leaves of plants in the genus Nicotiana. It can be consumed, used as a pesticide and, in the form of nicotine tartrate, used in some medicines...
, snuff
Snuff
Snuff is a product made from ground or pulverised tobacco leaves. It is an example of smokeless tobacco. It originated in the Americas and was in common use in Europe by the 17th century...
and refined sugar
Sugar
Sugar is a class of edible crystalline carbohydrates, mainly sucrose, lactose, and fructose, characterized by a sweet flavor.Sucrose in its refined form primarily comes from sugar cane and sugar beet...
. Tariff rates from 1792 to 1860 were usually about 80-95% of all federal revenue. The excise tax on whiskey
Whiskey Rebellion
The Whiskey Rebellion, or Whiskey Insurrection, was a tax protest in the United States in the 1790s, during the presidency of George Washington. Farmers who sold their corn in the form of whiskey had to pay a new tax which they strongly resented...
was so despised it led to the Whiskey Rebellion
Whiskey Rebellion
The Whiskey Rebellion, or Whiskey Insurrection, was a tax protest in the United States in the 1790s, during the presidency of George Washington. Farmers who sold their corn in the form of whiskey had to pay a new tax which they strongly resented...
which had to be quelled by Washington calling up the militia
Militia
The term militia is commonly used today to refer to a military force composed of ordinary citizens to provide defense, emergency law enforcement, or paramilitary service, in times of emergency without being paid a regular salary or committed to a fixed term of service. It is a polyseme with...
and repressing the rebellious farmers—all were later pardoned. The whiskey excise tax collected so little and was so despised it was abolished by President Thomas Jefferson
Thomas Jefferson
Thomas Jefferson was the principal author of the United States Declaration of Independence and the Statute of Virginia for Religious Freedom , the third President of the United States and founder of the University of Virginia...
in 1802.
All tariffs were on a long list of goods (dutiable goods) with different customs rates and some goods like books, newspapers, models of inventions, etc. on a "free" list. Congress spent enormous amounts of time figuring out these tariff import tax schedules.
Tariffs for many years were primarily to collect Federal revenue and only secondarily to protect start-up industries. Since the government largely restricted its activities to maintaining order and protecting property via the army, navy and courts tariffs raised enough revenues to finance the government. The U.S. Mail was largely self supporting. During wars or to meet other needs additional income was secured by raising the tariff and excise tax rates. Short term and unanticipated capital needs (budget deficits) were usually covered by borrowing. The first unexpected cost was the Northwest Indian War
Northwest Indian War
The Northwest Indian War , also known as Little Turtle's War and by various other names, was a war fought between the United States and a confederation of numerous American Indian tribes for control of the Northwest Territory...
s in the Northwest Territory
Northwest Territory
The Territory Northwest of the River Ohio, more commonly known as the Northwest Territory, was an organized incorporated territory of the United States that existed from July 13, 1787, until March 1, 1803, when the southeastern portion of the territory was admitted to the Union as the state of Ohio...
in the 1790s which required rebuilding the U.S. Army
History of the United States Army
From its formation in 1775, the United States Army has been the primary land based portion of the United States military. Though not solely used as a military force, sometimes helping in domestic violence and disaster situations, the Army's primary responsibility has been the fighting of land...
(the poorly trained militia were initially slaughtered) which had largely been disbanded after the Revolutionary War. Tariffs were adjusted up to cover these costs even as increased imports reduced the average tariff rates.
A protective Tariff is often used by governments to attempt to control trade between nations to protect and encourage their noncompetitive or undeveloped local industries, businesses, unions etc. giving them time to become competitive. In addition it was thought under the theory of mercantilism
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
generally believed by many countries in this era that exclusive trade with the colonies should be nearly all on ships of the parent country and all advanced industries etc. should be restricted to the mother country. Raw materials should be exported to the parent country and finished goods exported to the colonies. The United States starting out as a colony had these and other handicaps. The advantages they had were a free, independent, innovative and lightly taxed populace with close ties to the British
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
Industrial Revolution
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
.
The reasons for an industry or business being noncompetitive are basically four:
- Their average wages may be higher than is typical in the competitor's country.
- They do not have the innovations or inventions that their competitors have.
- They do not have the skill sets or organization their competitors have.
- They lack raw materials needed to make some product.
In the U.S. all these conditions applied except for the lack of raw materials. The new textile producing machines (the start of the Industrial Revolution
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
) developed by Britain were prohibited to be imported to what would become the United States (and elsewhere), skilled mechanics and engineers knowledgeable about these machines were prohibited from emigration and the U.S. had significantly higher wages due to the lack of people—one of the main reasons people immigrated to the U.S.. A protective tariff was proposed by Secretary of Treasury Alexander Hamilton to help overcome these handicaps while knowledge and organization skills were accumulated to build competitive industries and to allow higher wages to be paid in these industries. These protectionist ideas were essentially ignored for many years as Federal tariff revenue was the main goal of tariffs. More imported goods could easily be paid for by exporting more raw products.
Major problems occurred in this state of affairs starting in the Napoleonic Wars
Napoleonic Wars
The Napoleonic Wars were a series of wars declared against Napoleon's French Empire by opposing coalitions that ran from 1803 to 1815. As a continuation of the wars sparked by the French Revolution of 1789, they revolutionised European armies and played out on an unprecedented scale, mainly due to...
when both France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
and Britain
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
tried to interfere with each other's trade by blockading U.S. (and other) shipping. In 1807 imports dropped by more than half and some products became much more expensive or unobtainable. Congress passed the Embargo Act of 1807
Embargo Act of 1807
The Embargo Act of 1807 and the subsequent Nonintercourse Acts were American laws restricting American ships from engaging in foreign trade between the years of 1807 and 1812. The Acts were diplomatic responses by presidents Thomas Jefferson and James Madison designed to protect American interests...
and the Non-Intercourse Act (1809) to punish British and French governments for their actions; unfortunately their main effect was to reduce imports even more. The War of 1812
War of 1812
The War of 1812 was a military conflict fought between the forces of the United States of America and those of the British Empire. The Americans declared war in 1812 for several reasons, including trade restrictions because of Britain's ongoing war with France, impressment of American merchant...
brought a similar set of problems as U.S. trade was again restricted by British naval blockades and Congress needed additional funds to expand the U.S. Army
History of the United States Army
From its formation in 1775, the United States Army has been the primary land based portion of the United States military. Though not solely used as a military force, sometimes helping in domestic violence and disaster situations, the Army's primary responsibility has been the fighting of land...
and rebuild the U.S. Navy
History of the United States Navy
The history of the United States Navy divides into two major periods: the "Old Navy", a small but respected force of sailing ships that was also notable for innovation in the use of ironclads during the American Civil War, and the "New Navy", the result of a modernization effort that began in the...
which had largely been disbanded after the Revolutionary War. Tariffs were adjusted and the excise tax on whiskey reinstated to cover most of these costs.
The lack of imported goods relatively quickly gave very strong incentives to start building several U.S. industries. Slowly but surely many of the initial handicaps were overcome as knowledge about the machinery and/or the organization of industries were released by Britain or "emigrated from" the British isles, the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
or wherever they were more developed. Many new industries were set up and run profitably during the wars and about half of them failed after hostilities ceased and normal imports resumed. Industry in the U.S. was advancing up the skill set, innovation knowledge and organization curve.
Tariffs soon became a major political issue as the Whigs
Whig Party (United States)
The Whig Party was a political party of the United States during the era of Jacksonian democracy. Considered integral to the Second Party System and operating from the early 1830s to the mid-1850s, the party was formed in opposition to the policies of President Andrew Jackson and his Democratic...
and later the Republicans
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
wanted to protect their mostly northern industries and constituents by voting for higher tariffs and the Democratic Party (United States)
Democratic Party (United States)
The Democratic Party is one of two major contemporary political parties in the United States, along with the Republican Party. The party's socially liberal and progressive platform is largely considered center-left in the U.S. political spectrum. The party has the lengthiest record of continuous...
, dominated by Southern Democrats, which had very little industry but imported many goods voted for lower tariffs. Each party as it came into power voted to raise or lower tariffs under the constraints that the Federal Government always needed a certain level of revenues. The United States public debt
United States public debt
The United States public debt is the money borrowed by the federal government of the United States at any one time through the issue of securities by the Treasury and other federal government agencies...
was paid off in 1834 and President Andrew Jackson
Andrew Jackson
Andrew Jackson was the seventh President of the United States . Based in frontier Tennessee, Jackson was a politician and army general who defeated the Creek Indians at the Battle of Horseshoe Bend , and the British at the Battle of New Orleans...
, a strong Southern Democrat, oversaw the cutting of the tariff rates roughly in half and eliminating nearly all federal excise taxes in about 1835.
The American Civil War
American Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
(1860–65) with its tremendous costs built up an even stronger case for higher tariffs and the opposing Southern Democrats had nearly all left office so tariffs zoomed. The Morrill Tariff
Morrill Tariff
The Morrill Tariff of 1861 was a protective tariff in the United States, adopted on March 2, 1861 during the administration of President James Buchanan....
significantly raising tariff rates was signed by Democratic President James Buchanan
James Buchanan
James Buchanan, Jr. was the 15th President of the United States . He is the only president from Pennsylvania, the only president who remained a lifelong bachelor and the last to be born in the 18th century....
in early March 1861 shortly before President Abraham Lincoln
Abraham Lincoln
Abraham Lincoln was the 16th President of the United States, serving from March 1861 until his assassination in April 1865. He successfully led his country through a great constitutional, military and moral crisis – the American Civil War – preserving the Union, while ending slavery, and...
took office. The Civil War began in April 1861. To help pay for the war, tariff rates were increased, excise taxes on a wide range of products were reintroduced and the income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
(a new revenue "invention" later declared unconstitutional) was introduced.
By about 1900 it had become clear that the U.S. industries were competitive (or more) in nearly all areas and as the need for protection tariffs to pay for the Civil War receded, tariffs were gradually reduced. The next peak in tariffs was in about 1918 when World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
expenditures had to be paid for. The next peak in tariffs was due to the Smoot–Hawley Tariff Act of 1930 at the start of the Great Depression. It is generally believed this act with its high tariff rates prolonged the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
under President Franklin D. Roosevelt
Franklin D. Roosevelt
Franklin Delano Roosevelt , also known by his initials, FDR, was the 32nd President of the United States and a central figure in world events during the mid-20th century, leading the United States during a time of worldwide economic crisis and world war...
of 1929-1939.
Tariff rates are set up many times to "punish" trade tariffs, etc., on U.S. goods passed by other countries who are trying to protect their uncompetitive industries and/or businesses. It is unclear whether this policy works very well because the lack of competition often encourages companies (and governments) to keep inefficient and out dated equipment or business practices. These protected industries are often uncompetitive on the non-domestic market. Without the tariffs the customers can buy imported products cheaper and force the local companies to become more competitive. Tariffs are nearly always imposed on imported foreign goods and very seldom on exported goods and nearly always cost the consumer extra money. Historically U.S. tariffs on imported goods and products till 1913 ranged from 8% to 45% (averaging about 22%) and the collected tariff income supported nearly all the Federal Governments expenses until the Sixteenth Amendment to the United States Constitution
Sixteenth Amendment to the United States Constitution
The Sixteenth Amendment to the United States Constitution allows the Congress to levy an income tax without apportioning it among the states or basing it on Census results...
allowing Federal Income Taxes was passed in 1913.
In the 18th and 19th centuries, many countries primary source of income was import tariffs. Tariffs tended to be lowered as other sources of tax income like income taxes, payroll tax
Payroll tax
Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...
es, value-added taxes (VAT), property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
es, sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
, etc. have been enacted. In the United States property taxes and sales tax have nearly always been reserved for state and local government income sources. Various Income Tax rates and schedules are also common in many states but tariffs are not. Tariffs in the U.S. can only be imposed only by the Federal government at a uniform rate and not by state or local governments.
Tariffs up to the Smoot–Hawley Tariff Act of 1930, were set by Congress with many hours of bickering and testimony. In 1934, the U.S. Congress, in a rare delegation of authority, passed the Reciprocal Tariff Act
Reciprocal Tariff Act
- Reciprocal Trade Agreements Act of 1934 :President Franklin Delano Roosevelt signed the Reciprocal Trade Agreements Act into law in 1934. RTAA gave the president power to negotiate bilateral, reciprocal trade agreements with other countries. This law enabled Roosevelt to liberalize American...
of 1934 which authorized the executive branch to negotiate bilateral tariff reduction agreements with other countries. The prevailing view then was that trade liberalization may help stimulate economic growth—much depressed by the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. However, no one country was willing to liberalize its tariff rates unilaterally. Between 1934 and 1945, the executive branch negotiated over 32 bilateral trade liberalization (reciprocal tariff reductions) agreements with other countries. The belief that low tariffs lead to a more prosperous country are now the predominant belief with some exceptions. Multilateralism is embodied in the seven tariff reduction rounds which occurred between 1948 and 1994. In each of these "rounds", all General Agreement on Tariffs and Trade
General Agreement on Tariffs and Trade
The General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...
(GATT) members came together to negotiate mutually agreeable trade liberalization packages and reciprocal tariff rates. In the Uruguay round in 1994, the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
(WTO) was established to help establish uniform tariff rates.
Presently only about 30% of all import goods are subject to tariffs in the United States, the rest are on the free list. The "average" tariffs now charged by the United States are at a historic low. The list of negotiated tariffs are listed on the Harmonized Tariff Schedule as put out by the United States International Trade Commission
United States International Trade Commission
The United States International Trade Commission is an independent, bi-partisan, quasi-judicial, federal agency of the United States that provides trade expertise to both the legislative and executive branches. Further, the agency determines the impact of imports on U.S...
.
Historically, high tariffs have led to high rates of smuggling. The United States Revenue Cutter Service
United States Revenue Cutter Service
The United States Revenue Cutter Service was established by Secretary of the Treasury Alexander Hamilton in 1790 as an armed maritime law enforcement service. Throughout its entire existence the Revenue Cutter Service operated under the authority of the United States Department of the Treasury...
, the oldest naval unit in the United States, was established by Secretary of the Treasury Alexander Hamilton
Alexander Hamilton
Alexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America's first constitutional lawyers and the first United States Secretary of the Treasury...
in 1790 as an armed maritime law and customs
Customs
Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country...
enforcement service. In 1915 the Service merged with the United States Life-Saving Service
United States Life-Saving Service
The United States Life-Saving Service was a United States government agency that grew out of private and local humanitarian efforts to save the lives of shipwrecked mariners and passengers...
to form the United States Coast Guard
United States Coast Guard
The United States Coast Guard is a branch of the United States Armed Forces and one of the seven U.S. uniformed services. The Coast Guard is a maritime, military, multi-mission service unique among the military branches for having a maritime law enforcement mission and a federal regulatory agency...
. In 1939 the U.S. Coast Guard merged with the United States Lighthouse Service
United States Lighthouse Service
The United States Lighthouse Service, also known as the Bureau of Lighthouses, was the agency of the US Federal Government that was responsible for the upkeep and maintenance of all lighthouses in the United States from the time of its creation in 1910 until 1939...
to form what is today the primary maritime law enforcement force in the United States. In addition, the Coast Guard has roles in maritime homeland security
Homeland security
Homeland security is an umbrella term for security efforts to protect states against terrorist activity. Specifically, is a concerted national effort to prevent terrorist attacks within the U.S., reduce America’s vulnerability to terrorism, and minimize the damage and recover from attacks that do...
, maritime law enforcement
Police
The police is a personification of the state designated to put in practice the enforced law, protect property and reduce civil disorder in civilian matters. Their powers include the legitimized use of force...
(MLE), search and rescue
Search and rescue
Search and rescue is the search for and provision of aid to people who are in distress or imminent danger.The general field of search and rescue includes many specialty sub-fields, mostly based upon terrain considerations...
(SAR), marine environmental protection (MEP), and the maintenance of river, intracoastal
Intracoastal Waterway
The Intracoastal Waterway is a 3,000-mile waterway along the Atlantic and Gulf coasts of the United States. Some lengths consist of natural inlets, salt-water rivers, bays, and sounds; others are artificial canals...
and offshore aids to navigation (ATON).
The U.S. Customs and Border Protection
U.S. Customs and Border Protection
U.S. Customs and Border Protection is a federal law enforcement agency of the United States Department of Homeland Security charged with regulating and facilitating international trade, collecting import duties, and enforcing U.S. regulations, including trade, customs and immigration. CBP is the...
(CBP) is a federal law enforcement agency of the United States Department of Homeland Security charged with regulating and facilitating international trade, collecting customs (import duties or tariffs approved by the U.S. Congress), and enforcing U.S. regulations, including trade, customs and immigration. They man most border crossing stations and ports. When shipments of goods arrive at a border crossing or port, customs officers inspect the contents and charge a tax according to the tariff formula for that product. Usually the goods cannot continue on their way until the custom duty is paid. Custom duties are one the easiest taxes to collect, and the cost of collection is small. Traders seeking to evade tariffs are known as smugglers and can be fined or sent to prison if caught.
Economic analysis
Neoclassical economicNeoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
theorists tend to view tariffs as distortions to the free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
. 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 judgments 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 tariffs is part of the free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
principle; the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
aims to reduce tariffs and to avoid countries discriminating between differing countries when applying tariffs.
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
Elasticity (economics)
In economics, elasticity is the measurement of how changing one economic variable affects others. For example:* "If I lower the price of my product, how much more will I sell?"* "If I raise the price, how much less will I sell?"...
and that the world can produce at a near infinite quantity at the given price. Obviously, in real world conditions this is somewhat unrealistic, but making such assumptions is unlikely to have a material impact on the outcome of the model.
At world equilibrium, Pw, Home produced only 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
Tax incidence
In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax...
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*, S*D* 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 tariffs. 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.
Interestingly, the triangles B and D are lost by the consumers without any gain by any other party within the society. Therefore, areas B and D represent the dead weight lost to the society.
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, we can conclude that 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 only completely accurate in the extreme case where none of the consumers belong to the producers group and the cost of the product is a fraction of their wages. If instead, we take the opposite extreme, and assume all consumers come from the producers' group, and also assume their only purchasing power
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...
comes from the wages earned in production and the product costs their whole wage, then 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.
Note also, that with or without tariffs, there is no incentive to buy the imported goods over the domestic, as the price of each is the same. Only by altering available purchasing power through debt, selling off assets, or new wages from new forms of domestic production, will the imported goods be purchased. Or, of course, if its price were only a fraction of wages.
In the real world, as more imports replace domestic goods, they consume a larger fraction of available domestic wages, moving the graph towards this view of the model. If new forms of production are not found in time, the nation will go bankrupt, and internal political pressures will lead to debt default, extreme tariffs, or worse.
Establishing tariffs inefficiently slows down this process at the expense of the consumer's real wages, allowing more time for new forms of production to be developed, but also buttresses industries which may never regain competitive prices.
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.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, but the move was criticised by the Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
.
Tariffs can occasionally emerge as a political issue prior to an election
Election
An election is a formal decision-making process by which a population chooses an individual to hold public office. Elections have been the usual mechanism by which modern representative democracy operates since the 17th century. Elections may fill offices in the legislature, sometimes in the...
. In the leadup to the 2007 Australian Federal election, the Australian Labor Party
Australian Labor Party
The Australian Labor Party is an Australian political party. It has been the governing party of the Commonwealth of Australia since the 2007 federal election. Julia Gillard is the party's federal parliamentary leader and Prime Minister of Australia...
announced it would undertake a review of Australian car tariffs if elected. The Liberal Party
Liberal Party of Australia
The Liberal Party of Australia is an Australian political party.Founded a year after the 1943 federal election to replace the United Australia Party, the centre-right Liberal Party typically competes with the centre-left Australian Labor Party for political office...
made a similar commitment, while independent candidate Nick Xenophon
Nick Xenophon
Nicholas "Nick" Xenophon is a South Australian barrister, anti-gambling campaigner and politician. He attended Prince Alfred College, and studied law at the University of Adelaide, attaining his Bachelor of Laws in 1981. Xenophon established and became principal of his own law firm, Xenophon & Co....
announced his intention to introduce tariff-based legislation as "a matter of urgency".
Tariffs within technology strategies
When tariffs are an integral element of a country's technology strategyTechnology strategy
A Technology strategy is a particular generation of an organization's overall objective, principles and tactics relating to the technologies that the organization uses. Such strategies primarily focus on the technologies themselves and in some cases the people who directly manage those technologies...
, 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 out maneuver 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.
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
Project Socrates
Project Socrates was a US Defense Intelligence Agency program established in 1983 within the Reagan administration. This classified program, founded and directed by physicist Michael Sekora, was designed for the purpose of identifying the root cause of the United States' declining ability to...
, 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 what amounted to technology strategies to transform the country into a superpower.
See also
- Deadweight lossDeadweight lossIn economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...
- Effective rate of protectionEffective rate of protectionIn economics, the effective rate of protection is a measure of the total effect of the entire tariff structure on the value added per unit of output in each industry, when both intermediate and final goods are imported...
- EmbargoEmbargoAn embargo is the partial or complete prohibition of commerce and trade with a particular country, in order to isolate it. Embargoes are considered strong diplomatic measures imposed in an effort, by the imposing country, to elicit a given national-interest result from the country on which it is...
- Environmental tariffEnvironmental tariffAn Environmental tariff, also known as a green tariff or eco-tariff, is an import or export tax placed on products being imported from, or also being sent to countries with substandard environmental pollution controls...
- Excise duty
- General Agreement on Tariffs and TradeGeneral Agreement on Tariffs and TradeThe General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...
(GATT) - Import quotaImport quotaAn import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time....
- List of international trade topics
- List of tariffs
- ProtectionismProtectionismProtectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...
- Swiss FormulaSwiss FormulaThe Swiss Formula is a mathematical formula designed to cut and harmonize tariff rates in international trade. Several countries are pushing for its use in World Trade Organization trade negotiations. It was first introduced by the Swiss Delegation to the WTO during the current round of trade...
- Telecommunications tariff
- Trade barrierTrade barrierTrade barriers are government-induced restrictions on international trade. The barriers can take many forms, including the following:* Tariffs* Non-tariff barriers to trade** Import licenses** Export licenses** Import quotas** Subsidies...
- United States International Trade CommissionUnited States International Trade CommissionThe United States International Trade Commission is an independent, bi-partisan, quasi-judicial, federal agency of the United States that provides trade expertise to both the legislative and executive branches. Further, the agency determines the impact of imports on U.S...