A tariff is a tax or duty imposed by the government of a country on goods, commodities or services imported
into a country. A tariff could be applied to all imports, but this is a rarely employed action. Generally they are targeted on specific imports.
Tariffs can take two main forms:-
- A lump sum tax - based on a specific amount per unit measurement (e.g. volume, weight)
- An ad Valorem tax - based on a percentage of the value of imports
Objectives of tariffs
- protecting a domestic industry
- controlling the level of consumption of a good (e.g. alcohol)
- generate revenue for the government - tariffs have the political adavantage that they target foreign suppliers
- to protect employment levels within the country (by trying to mitigate the distributional effects of global trade)
- to improve the terms of trade (getting export prices to increase relative to import prices, or alternatively import prices to fall relative to export prices that will favour the exporting country)
Effect of tarrifs
The initial effects of a tarrif will be the higher price paid by the consumer for the protected good or service, and the corresponding reduction in consumption of the effected products. Longer term effects include less drive to run an efficent low cost industry when competitors have been reduced or excluded by the use of tarrifs. This would also make price collusion
easier. Introducing a tariff for one particular industry will also place the government in a difficult position if other domestic industries seek forms of protection. Ultimately long term protectionism against market forces will result in domestic consumers paying higher prices than those in the rest of the world. This in turn can lead to a circle as the costs of production increase domestically, leading to clamours for even higher tariffs. However this is an extreme example, sensible introduction of tariffs (usually with a pre-defined life span) can help increase competition in some industries allowing them to be able to compete with low cost competition from abroad.
Over the last two or three decades there has been a great reduction in the use of tariffs. This was due to the apparent success of economies which where open to international trade. This process was controlled by the GATT which was later to become the World Trade Organisation. These negotiations resulted in countries reducing some of the most obvious barriers to trade, including tarrifs. However these have been replaced by a host of more subtle pratices, such as worsening customs administation, and the tightening of various health, safety, packaging and labelling requirements. These new tactics have been referred to as new protectionism. It seems that such devices were too complex for the current US administation to fathom, and that good old-fashioned tariffs may be making a comeback. On March 4, 2002, President George W Bush announced the imposition of tariffs of up to 30% on steel imports to the USA.