Tariffs

The first documented example of a tariff was found in the Syrian oasis city of Palmyra in A.D. I37 and formed part of a new tax system introduced by the Roman Emperor Hadrian. The Palmyran tariff was imposed on goods flowing into and out of Palmyra. Like most early tariffs, its purpose was to raise revenue, but over-time tariffs began to be used as a means of controlling trade and protecting domestic producers.

From the middle of the 19th Century European states and the USA began to formulate comprehensive trade policies.

Average tariffs 1875-1914

USA 25%

Canada 15%

Denmark 12%

Sweden 10%

Italy 8%

France 8%

Germany 7%

UK 5%

Source: The Economic Journal, 110, p456-483, Blackwell, 2000.

Over time tariffs became an important source of revenue and a key part of trade policy. By 2019, US tariff revenue reached around $75bn, some 5% of all revenue. However, tariffs are a form of protectionism and while they raise revenue and protect domestic industries, the 'net' effect is generally agreed to be negative.

Video on tariffs

A tariff is, therefore, a tax on imports which is used to raise revenue or to protect domestic industries from overseas competition. In this respect, tariffs are a form of protectionism, along with quotas and other non-tariff barriers. Economic theory suggests that tariffs are likely to result in a net welfare loss to society.

The tariff diagram

Assuming no trade between a country and the rest of the world, economic welfare is area 'k a P', consumer surplus, plus 'P a 0', producer surplus.

Opening up to free trade increases consumer surplus to 'k e P1', but reduces producer surplus to 'P1 f 0'.

When the tariff is added to imports consumer surplus falls to 'k c P3', but producer surplus rises to 'P3 g 0'. The welfare loss is 'g c e f'. However, when tariff revenue of g c m u' is added, the net welfare loss is 'g u f' + 'c e m'.

Given this, trade organisations such as the World Trade Organisation (WTO) have actively promoted trade without barriers.

However, while the WTO has sought to reduce trade barriers, countries have typically sought protection from free trade either by erecting their own barriers, or by joining trading blocs which bring down barriers between members, but still retain barriers to non-members.

Non-tariff barriers

Non-tariff barriers include:

  1. Quotas - physical limits on imports
  2. Favouring domestic firms over international ones - especially when involving 'public procurement' and contract allocation
  3. State aid to industries or sectors which are susceptible to cheap overseas imports
  4. Preventing imports using various spurious health and safety arguments - such a quarantine and border controls
  5. Sanctions against another country
  6. Currency controls - which make it harder to import from global markets
  7. Export subsidies - which may enable cheap products to be 'dumped' at below cost on other countries

Motives for protection (summary)

  1. To raise revenue
  2. To protect industries or sectors including ‘infant industries’ and ‘declining industries
  3. To save foreign currency or keep a currency from depreciating
  4. For health or environmental reasons
  5. To help improve food security
  6. In retaliation for barriers to trade imposed by other countries
  7. To prevent ‘dumping’ of cheap goods from abroad

Read more - The World Trade Organisation

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