Tariff

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Taxation
An aspect of fiscal policy

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A tariff is a tax levied on imports or exports.

Contents
 [hide]

1 History

2 Types

3 Economic
analysis

4 Political

analysis

o 4.1 Un

ited States

5 See also

6 References

7 Further

reading

8 External links

[edit]History

Tariffs are usually associated with protectionism, the economic policy of restraining trade between nations. For
political reasons, tariffs are usually imposed on imported goods, although they may also be imposed on
exported goods.

In the past, tariffs formed a much larger part of government revenue than they do today.

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. Since the goods cannot continue on their way until the duty is paid, it is the
easiest duty to collect, and the cost of collection is small. Traders seeking to evade tariffs are known
as smugglers.

[edit]Types

There are various types of tariffs:

 An ad valorem tariffs is a set percentage of the value of the good that is being imported. Sometimes
these are problematic, as when the international price of a good falls, so does the tariff, and domestic
industries become more vulnerable to competition. Conversely, when the price of a good rises on the
international market so does the tariff, but a country is often less interested in protection when the price is
high.

They also face the problem of inappropriate transfer pricing where a company declares a value for goods being
traded which differs from the market price, aimed at reducing overall taxes due.

 A SPECIFIC tariff, is a tariff of a specific amount of money that does not vary with the price of the
good. These tariffs are vulnerable to changes in the market or inflation unless updated periodically.
 A REVENUE tariff is a set of rates designed primarily to raise money for the government. A tariff on
coffee imports imposed by countries where coffee cannot be grown, for example, raises a steady flow of
revenue.

 A PROHIBITIVE tariff is one so high that nearly no one imports any of that item.

 A PROTECTIVE tariff is intended to artificially inflate prices of imports and protect domestic industries
from foreign competition (see also effective rate of protection,) especially from competitors whose host
nations allow them to operate under conditions that are illegal in the protected nation, or who subsidize
their exports.

 An environmental tariff, similar to a 'protective' tariff, is also known as a 'green' tariff or 'eco-tariff', and

 A RETALIATORY tariff is one placed against a country who already charges tariffs against the country
charging the retaliatory tariff (e.g. If the United States were to charge tariffs on Chinese goods, China
would probably charge a tariff on American goods, also). These are usually used in an attempt to get other
tariffs rescinded.

Currently tariffs are set by a Tariff Commission based on information obtained from the government or local
authority and suo motu studies of industry structure.

Tax, tariff and trade rules in modern times are usually set together because of their common impact
on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries
agreeing to minimize or eliminate tariffs and other barriers against trade with each other, and possibly to
impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and,
according to an agreed formula, the participating countries share the revenues from tariffs on goods entering
the customs union.

If a country's major industries lose to foreign competition, the loss of jobs and tax revenue can severely impair
parts of that country's economy and increase poverty. If a nation's standard of living or industrial regulations are
too great, it is impossible for domestic industries to survive unprotected trade with inferior nations without
compromising them; this compromise consists of a global race to the bottom. Protective tariffs have historically
been used as a measure against this possibility. However, protective tariffs have disadvantages as well. The
most notable is that they prevent the price of the good subject to the tariff from undercutting local competition,
disadvantaging consumers of that good or manufacturers who use that good to produce something else: for
example a tariff on food can increase poverty, while a tariff on steel can make automobile manufacture less
competitive. They can also backfire if countries whose trade is disadvantaged by the tariff impose tariffs of their
own, resulting in a trade war and, according to free trade theorists, disadvantaging both sides.(Murad)

[edit]Economic analysis
Neoclassical economic theories hold that tariffs are a harmful interference with the individual freedom and the
laws of the free market. They believe that it is unfair toward consumers and generally disadvantageous for a
country to artificially maintain an industry made inefficient by local demands, and that it is better to allow a
collapse to take place. Opposition to all tariffs is part of the free tradeprinciple; the World Trade
Organization aims to reduce tariffs and to avoid countries discriminating between differing countries when
applying tariffs.

In the following graph we see the effect that an import tariff has on the domestic economy. In a closed economy
without trade we would see equilibrium at the intersection of the demand and supply curves (point B), yielding
prices of $70 and an output of Y*. In this case theconsumer surplus would be equal to the area inside points A,
B and K, while producer surplus is given as the area A, B and L. When incorporating free international trade
into the model we introduce a new supply curve denoted as SW. 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. In this case the international
price of the good is $50 ($20 less than the domestic equilibrium price).

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. The small FGL triangle will be matched by an
equally small mirror image triangle of consumers still able to buy. With tariffs, a larger CDL triangle and its
mirror will survive.

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 slows down this process, allowing more time for new forms of production to be developed,
but also buttresses industries which may never regain competitive prices.

[edit]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.[1]

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, [2] but the move was criticised by the Cato Institute.[3]

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.[4] 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". [5]