TARIFF

also called customs duty tax levied upon goods as they cross national boundaries, usually by the government of the importing country. The words tariff, duty, and customs are generally used interchangeably. Tariffs may be levied either to raise revenue or to protect domestic industries, but a tariff designed primarily to raise revenue may exercise a strong protective influence and a tariff levied primarily for protection may yield revenue. Gottfried Haberler in his Theory of International Trade suggested that the best objective distinction between revenue duties and protective duties (disregarding the motives of the legislators) is to be found in their discriminatory effects as between domestic and foreign producers. If domestically produced goods bear the same taxation as similar imported goods, or if the goods subject to duty are not produced at home, even after the duty has been levied, and if there can be no home-produced substitutes toward which demand is diverted because of the tariff, then the duty is not protective. A purely protective duty tends to shift production away from the export industries into the protected domestic industries and those industries producing substitutes for which demand is increased. On the other hand, a purely revenue duty will not cause resources to be invested in industries producing the taxed goods or close substitutes for such goods, but it will divert resources from the production of export goods to the production of those goods and services upon which the additional government receipts are spent. From the purely revenue standpoint, a country can levy an equivalent tax on domestic production, to avoid protecting it, or select a relatively small number of imported articles of general consumption and subject them to low duties so that there will be no tendency to shift resources into industries producing such taxed goods (or substitutes for them). During the period when it was on a free-trade basis, Great Britain followed the latter practice, levying low duties on a few commodities of general consumption such as tea, sugar, tobacco, and coffee. Unintentional protection was not a major issue, because Britain could not have produced these goods domestically. If, on the other hand, a country wishes to protect its home industries its list of protected commodities will be long and the tariff rates high. Tariffs may be further classified into three groupstransit duties, export duties, and import duties. also called customs duty a tax levied on a commodity traded across the border of a country or that of a group of countries that have formed a customs union. A tariff may be assessed in a number of ways, including directly, at the border, or indirectly, by requiring the prior purchase of a license or permit to import given quantities of the good. The taxed good can be anything, but for practical purposes tariffs usually apply to items that are easily detected, classified, and measured or valued. Thus, many types of services and, of course, successfully smuggled goods tend not to be subject to such taxes. Generally, tariffs are assessed on goods imported or brought into a country across a border. Taxes on goods exported also exist but are less common. Transit duties or taxes may be assessed on goods passing through a customs area en route to another destination. There are three basic methods of evaluating goods for the levy of a tariff. The cheapest is the free on board (FOB) or free alongside ship (FAS) price, which represents the cost of the goods up to the point of loading them on the vehicle that will take them to the importing country. The cost, insurance, and freight (CIF) price represents the value of the goods and all costs of shipping. The most expensive evaluation is the wholesale price of the item in the importing country. Most countries use the basic CIF method, but some, particularly the United States, Canada, and many South American countries, use the FOB or FAS. All nations established since 1932 use the CIF price, which, since it rises proportionately to the length of the voyage, tends to discourage imports from distant countries and encourage local trade. The purpose of imposing a tariff is generally revenue collection, the protection of local industry, or both. For revenue purposes tariffs have three principal advantages. Under certain conditions they generate revenue from foreigners not otherwise taxable; even in cases when taxing foreigners is not feasible, the appearance of taxing foreigners, or their goods, often makes the tax more politically acceptable than a direct tax on domestic consumption; and in many cases, especially in underdeveloped countries, it is easier to keep track of border crossings than of domestic economic or taxable activity. The second motive for tariffs is protection of domestic industry. By driving up the price of the imported item, tariffs allow domestic competitors to charge a higher price for their goods and increase their revenues. If such domestic competitors can be expected to expand their output and become more efficient, the tariff may be defended as favouring infant industries. A related argument holds that the protection of domestic industries promotes employment. Often, however, tariffs are also proposed to protect older, established industries that for various reasons are unable to function profitably at the prices that would prevail in the absence of the tariff. Each argument for tariffs has a counterargument. Thus, while raising revenues, tariffs also reduce the aggregate amount of the taxed economic activity. Although appearing to tax foreigners or foreign goods, they are in fact indirect and sometimes hidden taxes on domestic consumers and do nothing, as open and direct taxes might, to encourage efficiency in domestic manufacturing. If the objective is to favour selected domestic industries, there are frequently more direct and efficient ways to do so, such as by subsidy. Tariffs are subject to negotiation and treaty among nations (see trade agreement). Additional reading Trade taxes are studied in Joseph F. Kenkel, Progressives and Protection: The Search for a Tariff Policy, 18661936 (1983), a historical survey; Edmond McGovern, International Trade Regulation: GATT, the United States, and the European Community, 2nd ed. (1986); Harvey M. Applebaum and Gilbert B. Kaplan (eds.), U.S. Trade Law and Policy (1987); Eugene T. Rossides, U.S. Import Trade Regulation (1986); and Michael Davenport, Trade Policy, Protectionism, and the Third World (1986). Charles E. McLure, Jr.