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For other uses of this word, see tariff (disambiguation). A tariff is a tax on foreign goods. When a ship arrives in port a customs officer inspects the contents and charges a tax according to the tariff formula. Since the goods cannot be landed until the tax is paid it is the easiest tax to collect, and the cost of collection is small. Smugglers of course seek to evade the tariff. Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and, according to an agreed formula, the participating countries share the revenues from tariffs on goods entering the customs union. If a country's major industries lose to foreign competition, the loss of jobs and tax revenue can severely impair parts of that country's economy. Protective tariffs have been used as a measure against this possibility. However, protective tariffs have disadvantages as well. The most notable is that they increase the price of the good subject to the tariff, disadvantaging consumers of that good or manufacturers who use that good to produce something else: for example a tariff on food can increase poverty, while a tariff on steel can make automobile manufacture less competitive. They can also backfire if countries whose trade is disadvantaged by the tariff impose tariffs of their own, resulting in a trade war and disadvantaging both sides. There are two main ways of implementing a tariff: Adherents of supply-side economics sometimes refer to domestic taxes, such as income taxes, as being a "tariff" affecting inter-household trade.
Economic analysis Some economic theories hold that tariffs are a harmful interference with the individual freedom and the laws of the free market. They believe that it is unfair toward consumers and generally disadvantageous for a country to artificially maintain an inefficient industry, and that it is better to allow it to collapse and to allow a new one to develop in its place. The 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 other countries when applying tariffs. In the following graph we see the effect that an import tariff has on the domestic economy. In a closed economy without trade we would see equilibrium at the intersection of the demand and supply curves (point B), yielding prices of $70 and an output of Y As a result of this price differential we see that domestic consumers will import these cheaper international alternatives, while decreasing consumption of domestic made produce. This reduction in domestic production is equal to Y Let’s say we now introduce a tariff of $10/unit on imports. This has the effect of shifting the world supply curve vertically by $10 to SW + Tariff. Again, this will create a redistribution of surplus within the model. We see that consumer surplus will decrease to the area C, E and K, which is a net loss of the area C, E, F and J. This now makes consumers unambiguously worse off than under a free trade regime, but still better off than under a system without trade. Producer surplus has increased, as they are now receiving an extra $10 per sale, to the area C, D and L. This is a net gain of the area C, D, F and G. With this increase in price the level of domestic production has increased from Y1 to Y3, while the level of imports has reduced to Y4 minus Y3. The government also receives an increase in revenues as a result of the tariff equal to the area D, E, H and I. In dollar terms this figure is essentially $10 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. The small FGL triangle will be matched by an equally small mirror image triangle of consumers still able to buy. With tariffs, a larger CDL triangle and its mirror will survive. 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. 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. Moderate tariffs would slow down this process, allowing more time for new forms of production to be developed. Infant industry argument Some proponents of protectionism claim that imposing tariffs that help protect newly founded infant industries allows those domestic industries to grow and become self sufficient within the international economy once they reach a reasonable size. Revenue argument Critics of free trade have argued that tariffs are especially important to developing countries as a source of revenue. Developing nations do not have the institutional capacity to effectively levy income and sales taxes. In comparison with other forms of taxation, tariffs are relatively easy to collect. The trend of lifting tariffs and promoting free trade has been argued to have had disproportionately negative effects on the governments of developing nations who have greater difficulty than developed nations in replacing tariffs as a revenue source.* United States See also | ||||||||
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