A tariff is a tax on imports or exports, or a list of prices for such things as rail service,
bus routes, and electrical usage. The meaning in is now the more common meaning. The meaning
in is historically earlier. The meaning in developed from a tabular list of tax rates
for different import goods.
Etymology The word comes from the Italian word tarifa
translated as "list of prices, book of rates," which is derived from the Arabic ta'rif meaning
"making known." Customs duty
A customs duty or due is the indirect tax levied on the import or export of goods in
international trade. In economic sense, a duty is also a kind of consumption tax. A
duty levied on goods being imported is referred to as an import duty. Similarly, a duty levied
on exports is called an export duty. A tariff, which is actually a list of commodities along
with the leviable rate of customs duty, is popularly referred to as a customs duty.
In the Kingdom of England, customs duties were typically part of the customary revenue
of the king, and therefore did not need parliamentary consent to be levied, unlike excise duty,
land tax, or other forms of taxes. This is no longer the case.
Calculation of customs duty Customs duty is calculated on the determination
of the assessable value in case of items for which the duty is levied ad valorem. This
is often the transaction value unless a customs officers determines assessable value in accordance
with the Harmonized System. However, for certain items like petroleum
and alcohol, customs duty is realized at a specific rate applied to the volume of the
import or export consignments. Harmonized System Code
For the purpose of assessment of customs duty, products are given an identification code
that has come to be known as the Harmonized System code. This code was developed by the
World Customs Organization based in Brussels. A Harmonized System code may be from four
to ten digits. For example 17.03 is the HS code for molasses from the extraction or refining
of sugar. However, within 17.03, the number 17.03.90 stands for "Molasses".
Introduction of Harmonized System code in 1990s has largely replaced the Standard International
Trade Classification, though SITC remains in use for statistical purposes. In drawing
up the national tariff, the revenue departments often specifies the rate of customs duty with
reference to the HS code of the product. In some countries and customs unions, 6-digit
HS codes are locally extended to 8 digits or 10 digits for further tariff discrimination:
for example the European Union uses its 8-digit CN and 10-digit TARIC codes.
Customs authority A Customs authority in each country is responsible
for collecting taxes on the import into or export of goods out of the country. Normally
the Customs authority, operating under national law, is authorized to examine cargo in order
to ascertain actual description, specification volume or quantity, so that the assessable
value and the rate of duty may be correctly determined and applied.
Evasion of customs duty
Evasion of customs duties takes place mainly in two ways. In one, the trader under-declares
the value so that the assessable value is lower than actual. In a similar vein, a trader
can evade customs duty by understatement of quantity or volume of the product of trade.
Evasion of customs duty may take place with or without the collaboration of customs officials.
Evasion of customs duty does not necessarily constitute smuggling.
Duty-free goods Many countries allow a traveller to bring
goods into the country duty-free. These goods may be bought at ports and airports or sometimes
within one country without attracting the usual government taxes and then brought into
another country duty-free. Some countries impose allowances which limit the number or
value of duty-free items that one person can bring into the country. These restrictions
often apply to tobacco, wine, spirits, cosmetics, gifts and souvenirs. Often foreign diplomats
and UN officials are entitled to duty-free goods. Duty-free goods are imported and stocked
in what is called a bonded warehouse. Duty calculation for companies in real life
With many methods and regulations, businesses at times struggle to manage the duties. In
addition to difficulties in calculations, there are challenges in analyzing duties;
and to opt for duty free options like using a bonded warehouse.
Companies use ERP software to calculate duties automatically to, on one hand, avoid error-prone
manual work on duty regulations and formulas and on the other hand, manage and analyze
the historically paid duties. Moreover, ERP software offers an option for customs warehouse,
introduced to save duty and VAT payments. In addition, the duty deferment and suspension
is also taken into consideration. Economic analysis
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 judgements 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
tariff Organization aims to reduce tariffs and to avoid countries discriminating between
differing countries when applying tariffs. The diagrams to the right show 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 or . 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 of the
good. Before the tariff, there is a demand of Qc1 or D. The difference in demand was
filled by importing from abroad. This is shown on diagram 1 as Quantity of Imports. After
the imposition of a tariff, domestic price rises, but foreign export prices fall due
to the difference in tax incidence on the consumers and producers.
The new price level at Home is Ptariff or Pt, which is higher than the world price.
More of the good is now produced at Home – it now makes Qs2 or S' of the good. Due to the
higher price, only Qc2 or D* of the good is demanded by Home. The difference between the
supply and demand is still filled by importing from abroad. However, the imposition of the
tariff reduces the quantity of imports from SD to S*D*. This is also shown on Diagram
1 as Quantity of Imports. 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. This includes the gained producer surplus, the
deadweight loss, and the tax revenue. The government gains from the taxes. 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. However, there is a Deadweight loss of the triangles B and D,
or in Diagram 1, the triangles labeled Societal Loss. Deadweight loss is also called efficiency
loss. This cost is incurred because tariffs reduce the incentives for the society to consume
and produce. 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,
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:
That is, tariffs are beneficial to the society if the area given by the rectangle E is greater
than the deadweight loss. Rectangle E is called the terms of trade gain.
The model above is completely accurate only in the extreme case where no consumer belongs
to the producers group and the cost of the product is a fraction of their wages. If the
opposite extreme is taken, assuming that all consumers come from the producers' group,
consumers' only purchasing power comes from the wages earned in production, and the product
costs their whole wage, 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. 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.
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, but
the move was criticised by the Cato Institute. 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. 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".
Unpopular tariffs are known to have ignited social unrest. Example of this are the 1905
Meat riots in Chile that evolved from protests against tariffs applied to the cattle imports
from Argentina. Tariffs within technology strategies
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 outmaneuver 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. This is related to the Infant industry argument.
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 amounted to technology
strategies to transform the country into a superpower.
See also Types of tariff:
Ad valorem tax Bound tariff rate
Environmental tariff Excise duty
Import quota List of tariffs
Tariff-rate quota Telecommunications tariff
Trade dynamics: Deadweight loss
Effective rate of protection Tariffication
Trade liberalisation: General Agreement on Tariffs and Trade
International free trade agreement Swiss Formula
United States International Trade Commission General:
Trade barrier Protectionism
Embargo References
Further reading Salvatore, Dominick, Introduction to International
Economics, Hoboken, NJ: Wiley, ISBN 0-471-20226-6 . Taussig, F. W., "Tariff", Encyclopædia Britannica
26, pp. 422–427 . External links
Types of Tariffs Effectively applied tariff by Country 2008
to 2012 MFN Trade Weighted Average Tariff by country
2008 - 2012 World Bank's site for Trade and Tariff
Market Access Map, an online database of customs tariffs and market requirements
WTO Tariff Analysis Online - Detailed information on tariff and trade data