A tariff is a tax or duty imposed by one nation on the imported goods or services of another nation. Tariffs are a political tool that have been used throughout history to control the amount of imports that flow into a country and to determine which nations will be granted the most favorable trading conditions. High tariffs create protectionism, shielding a domestic industry's products against foreign competition. High tariffs usually reduce the importation of a given product because the high tariff leads to a high price for the customers of that product.
There are two basic types of tariffs imposed by governments on imported goods. First is the ad valorem tax which is a percentage of the value of the item. The second is a specific tariff which is a tax levied based on a set fee per number of items or by weight.
Tariffs are generally imposed for one of four reasons:
- To protect newly established domestic industries from foreign competition.
- To protect aging and inefficient domestic industries from foreign competition.
- To protect domestic producers from "dumping" by foreign companies or governments. Dumping occurs when a foreign company charges a price in the domestic market which is below its own cost or under the cost for which it sells the item in its own domestic market.
- To raise revenue. Many developing nations use tariffs as a way of raising revenue. For example, a tariff on oil imposed by the government of a company that has no domestic oil reserves may be a way to raise a steady flow of revenue.
Since the early 1990s, the trend has been decreased tariffs on a global scale, as evidenced by the passage of well-known treaties such as the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA), as well as the lowering of trade barriers in the European Economic Community, reducing or even abolishing tariffs. These changes reflect the conviction among some politicians and economists that lower tariffs spur growth and reduce prices generally.
Opponents of tariffs argue that tariffs hurt both (or all) countries involved, those that impose the tariff and those whose products are the target of the tariffs. For the country whose products are the target of tariffs, costs of production and sale prices rise and for most this leads to fewer exports and fewer sales. A decline in business leads to fewer jobs and spreads the slowdown in economic activity.
The argument that tariffs actually harm the country that imposes them is somewhat more complex. Although tariffs may initially be a boon to domestic producers who are faced with reduced competition as a result of the tariffs, the reduced competition then allows prices to rise. The sales of domestic producers should rise, all else being equal. The increased production and higher price lead to domestic increases in employment and consumer spending. The tariffs also increase government revenues that can be used to the benefit of the economy. All of this sounds positive. However, tariff opponents argue that the costs of tariffs can not be ignored. These costs come when the price of the goods on which the tariffs were imposed has increased, the consumer is forced to either buy less of these goods or less/fewer of some other goods. The price increase can be thought of as a reduction in consumer income. Since consumers are purchasing less, domestic producers in other industries are selling less, causing a decline in the economy.
Despite these arguments that tariffs are eventually harmful to all parties in a trade relationship, they have been used by all nations from time to time. Most developing countries use tariffs to try and protect their fledgling industries or industries they feel the nation needs domestically in order to remain independent. The United States used tariffs extensively throughout its early years as a nation, and continues to do so today when the political will exists. Even proponent of free trade sometimes determine that tariffs may serve a useful purpose. In 2002, for example, President George W. Bush announced the imposition of steel tariffs for a three year period on imports from the European Union, Japan, China, South Korea and Taiwan. The reaction to these tariffs was swift and threatening. The U.S. ended up withdrawing the tariff in December of 2003 in order to avert the trade war that was brewing in reaction to the steel tariff.
How companies are impacted by tariffs differs from company to company based on a number of factors—proximity of industry sector to the tariff imposed, how directly the company's inputs and outputs are touched by the tariff, whether or not the company is involved in exporting or importing, etc. Businesses that do most of their business within a domestic market may benefit from the imposition of tariffs on competitive products. If, however, the material inputs to the products of a business are the targets of tariffs, then the business may well be harmed by rising prices on its material inputs. In another possible scenario, a business that is involved with exporting may be harmed if it sees the imposition of a tariff on products similar to those it exports, and retaliatory tariffs are imposed by other nations on the products it exports. As these examples show, the impact of tariffs on one business may be very different than those experienced by another business and the impacts differ based on characteristic other than the size of the businesses.
Exporters are usually well aware of the potential harm that may befall them if tariffs are unexpectedly imposed on their products and for that reason they usual include a disclaimer of responsibility for such tariffs that are imposed after a purchase agreement is signed. Such clauses to a purchase agreement usually state something like: "Prices quoted do not include (and Customer agrees to pay) taxes, tariffs, duties, or fees of any kind which may be levied or imposed on either party by federal, state, municipal, or other governmental authorities in connection with the sale or delivery of the product." The key is to protect the business from liability for potential unpredictable and potentially arbitrary government actions.
Worth noting is the fact that non-tariff barriers are also used quite frequently by nations of all sizes in their attempt to bolster their own economies and protect domestic interests. The Small Business Administration defines non-tariff barriers as "laws or regulations that a country enacts to protect domestic industries against foreign competition. Such non-tariff barriers may include subsidies for domestic goods, import quotas or regulations on import quality."
Allen, Mike. "President To Drop Tariffs On Steel. Bush Seeks to Avoid a Trade War and Its Political Fallout." Washington Post. 1 December 2003.
Ethier, Wilfred J. "The Theory of Trade Policy and Trade Agreements: A Critique." University of Pennsylvania. Department of Economics. Second Edition. 23 March 2005.
Rushford, Greg. "Quit Hiding Behind Tariffs and Embrace Globalization." Seafood Business. August 2005.
Tirschwell, Peter. "An Emerging Trade Barrier." The Journal of Commerce. 15 December 2003.
U.S. Small Business Administration. "Breaking Into the Trade Game: A Small Business Guide." Available from http://www.sba.gov/oit/txt/info/Guide-To-Exporting/trad7.html. Retrieved on 20 May 2006.