A tariff is either (1) a tax on imports or exports (trade tariff) in and out of a country, or (2) a list or schedule of prices for such things as rail service, bus routes, and electrical usage (electrical tariff, etc.).^[1]

Etymology[link]

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."^[2]

Trade tariffs in the United States[link]

Tariffs, often called customs, were by far the largest source of United States federal revenue from the 1790s to the eve of World War I, until they were surpassed by income taxes.

Economic analysis[link]

Neoclassical economic 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:

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 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.^{[citation needed]}

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.^{[citation needed]}

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.^{[citation needed]}

Political analysis[link]

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.^[3]

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,^[4] but the move was criticised by the Cato Institute.^[5]

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.^[6] 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".^[7]

Tariffs within technology strategies[link]

When tariffs are an integral element of a country's technology strategy, 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.^[8]

See also[link]

Types of tariff:

• Environmental tariff
• Excise duty
• Import quota
• List of tariffs
• Telecommunications tariff

Trade dynamics:

• Deadweight loss
• Effective rate of protection

Trade liberalisation:

• General Agreement on Tariffs and Trade (GATT)
• Swiss Formula
• United States International Trade Commission

General:

• Trade barrier
• Protectionism
• Embargo

References[link]

Further reading[link]

• Salvatore, Dominick (2005), Introduction to International Economics (First ed.), Hoboken, NJ: Wiley, ISBN 0-471-20226-6 .
• Taussig, F. W. (1911), "Tariff", Encyclopædia Britannica, 26 (11th ed.), pp. 422–427, http://www.econlib.org/library/Taussig/tsgEnc1.html .

External links[link]

• World Bank's site for Trade and Tariff
• UN's ITC website for accessible tariff information
• WTO Tariff Analysis Online - Detailed information on tariff and trade data