Tariff

What Are Tariffs and Why Do Governments Impose Them?

Tariffs are a tax imposed by governments on imported or exported goods, aiming to protect local industries and raise revenue. But do tariffs really achieve their intended goals? Or do they end up hurting the very economies they aim to support?

Origins of Tariffs

The term ‘tariff’ comes from the French ‘tarif,’ which traces its roots back through Italian and Ottoman Turkish. The concept dates as far back as ancient Greece, where Athens enforced levies on imported goods at its port of Piraeus. Over centuries, tariffs have been used by various nations to promote local industries and protect against foreign competition.

Historical Context

In the 14th century, Edward III of England took steps to develop local manufacturing through export duties on raw wool. The Tudor monarchs furthered this protectionism by using tariffs to promote the wool industry, making England a dominant player in global trade. By the mid-19th century, Britain had high tariff rates and restrictions on strategic goods, leading to technological advancements but also limiting free trade.

Protectionist Policies

The repeal of the Corn Laws in 1846 marked a shift towards free trade in Britain. However, other countries like the USA and Germany continued with protectionist policies. The US had one of the highest average tariff rates on manufactured imports from 1816 until World War II, driven by the belief that tariffs were necessary for industrial independence.

Modern Debates

Economists like Douglas Irwin and Ha-Joon Chang debate whether protectionism contributed to America’s industrial growth. While some argue that high tariffs drove American innovation, others point out that abundant resources and openness played a larger role in economic development.

Arguments Against Tariffs

Tariffs distort the free market by increasing prices for both foreign and domestic products. They reduce consumer surplus while increasing producer surplus and government revenue. However, overall welfare is reduced as losses to consumers outweigh gains to producers and governments.

Economic Effects of Tariffs

Imposing an import tariff has several effects: it raises the price from world price Pw to a higher tariff price Pt; reduces quantity demanded from C1 to C2 due to higher prices; domestic suppliers increase supply from Q1 to Q2 at a higher price. Consumer surplus shrinks by areas A+B+C+D, while producer surplus increases by area A. Government tax revenue is the import quantity (C2 − Q2) times the tariff price (Pw − Pt).

Consequences of Tariffs

Tariffs can lead to persistent declines in domestic output and productivity, higher unemployment and inequality, real exchange rate appreciation, and significant declines in trade balances. They are generally more inefficient than consumption taxes and can result in a lose-lose situation with increased worldwide inflation.

Examples of Tariff Policies

The Russian Federation is the world leader in protectionism, introducing 20% of global protectionist measures and one-third of G20 measures in 2013. India has introduced tariffs on electronic products as part of its ‘Make in India’ program to stimulate domestic manufacturing. Armenia established its customs service in 1992 and joined the Eurasian Customs Union in 2015, applying tariffs on imports at a rate of 0–10%.

Global Trade Dynamics

The tariff has been used as a political tool to establish an independent nation, with examples including the US Tariff Act of 1789 and the Nullification Crisis of 1832. Customs duty is calculated based on the assessable value of items, and products are given identification codes known as Harmonized System codes for assessment purposes.

Conclusion

Tariffs may seem like a straightforward way to protect local industries, but their complex effects often lead to unintended consequences. While they can provide temporary relief, the long-term benefits of free trade and open markets are undeniable. As we navigate the global economy, it’s crucial to weigh these factors carefully.