Tariffs and Import Duties Economic Research

Executive summary.

 A tariff is the tax that is imposed by a country on goods and services imported from another country while an Import duty is a form of tax collected by customs authorities on imports coming into a country. While both terminologies may appear to bear similar meanings, tariffs are usually specific to a particular list of commodities that leviable at a rate set by the government while import duty is a general levy on all goods coming into a country and its rate is usually constant for all goods and services. While both a tariff and Import duty are types of taxes, the underlying government’s objective of imposing each of them is what differentiates them.

An import duty is a basic tax imposed by a government for the purposes of obtaining revenue from all imports of goods coming into the country. It is basically a revenue collection stream set to obtain money needed to run government operations which is why most import duties are set as a constant percentage on all types of imports. Tariffs on the other hand are more complex in nature and are set by governments as a strategic maneuver to either protect a specific local industry against cheaper similar products from outside, keep away sub-standard or unhealthy goods or as retaliation on a country for violating trade agreements or for undertaking unfair trade practices. 

Tariffs are usually imposed on top of the import duty payable for the same product/service. They are meant to punish to the company importing that type of goods/services and to benefit similar locally produced goods and/or the government. In reality, once a government imposes a tariff, the importer will either reduce (or stop) the number of imports or increase the price of the product. It is therefore the final consumer who bears the brunt of an increase in tariffs because they will miss out on their favorite product or they will be forced to pay more for it. This report will seek to explain the different types of tariffs, their purposes and the impact they have on local industries, multinationals, the country’s economy and the people at large. It will also seek to explore alternatives that can be considered to replace tariffs.

Introduction.

As stated above, there are various types of import duty and tariffs imposed on goods/services been imported into a country. Import duty are generally taxed as Goods and services tax which is usually calculated at 10% of the export price of the product and a customs duty of 5% of the product at export point. Tariffs on the other hand are imposed based on the type of goods been imported and the country of origin. The percentage rate of tariffs ranges from one product to another and is set by the government based on the end result anticipated by the country on the tariff’s imposition. While import duty is primarily a revenue collection venture for a government, there are varying reasons for imposing tariffs. All of the reasons are aimed at one factor, to protect the host country’s various economic interests.

The topics covered here will dwell on the various kinds of duties and tariffs, factors that contribute to imposing of tariffs and the purpose they are intended to serve. Lastly. we will explore their costs and benefits to a country’s economy, its people, businesses and industries.

The various classifications of tariffs.

One way of classifying tariffs is by the method in which duty on the imports is calculated. In this regard, we can classify tariffs as specific, ad-valorem, compound or sliding scale tariffs: –

1. Specific tariffs are imposed on one unit of the imported product that is targeted i.e. 1,000 dollars for every unit of motor vehicle imported from such a country or region. They are easy to administer since they don’t need evaluation of the products been taxed. Most governments prefer specific tariffs because it is kept out of the complexities of prices which may vary.
2. Ad Valorem tariffs are imposed as a percentage of the value of a certain product imported from the targeted place of origin i.e. 10% of the value of a vehicle imported from such a country. It is usually imposed on products whose value is disproportionately higher as compared to their physical characteristics.
3. Compound tariffs are calculated as a combination of specific and ad valorem tariffs. The government may decide to impose a tariff on the basis of a specific duty on each unit of the product and then add a percentage of ad valorem duty. They are usually applied when the aim is to protect the local industries.
4. Sliding scale tariff – These are similar to specific tariffs but the percentage of the duty applied may reduce with an increase in volume of the product imported. This is done to encourage importation of large volume of a particular product.

Another method of classifying tariffs is on the basis of the purpose for which the tariff is imposed. In this regard, they can be classified into two segments; Revenue and Protective tariffs: –

1. Revenue tariffs are imposed for the primary aim of generating more revenue for the government. They are mostly applied by less developed countries which have not diversified their direct tax avenues and therefore need to collect revenue from goods being imported.
2. Protective tariffs are usually imposed by governments primarily to protect home based industries from competition brought by goods produced outside the country or from unfair trade practices by the countries where the targeted products originate from.

A further classification of tariffs is on the basis of discrimination nature of the duty imposed. In this regard, the tariffs can either be discriminatory or non-discriminatory in nature. Non-discriminatory duty is applicable to all products irrespective of their place of origin. Here, a country decides to apply uniform duty, known as single column tariff, to products from all countries (despite possible existence of trade agreements with some countries for lower tariffs). Discriminatory tariffs are imposed on varying rates of the same commodities depending on the place of origin. Products from favored countries, which have existing trade agreement with the host country, are taken through a lower tariff those from other countries. The discrimination nature can be applied in double (one column for some countries and another one for a certain country or trading bloc) or multiple column tariffs (a general rate, an international rate and a preferential rate agreed between the host country and other countries)

A further classification of tariffs is on the basis of retaliation. Here, a country imposes tariffs on products from a particular country as retaliation for that country imposing tariffs of their own on the host count. There are two types of retaliatory tariffs namely, retaliatory and countervailing tariffs: –

1. Retaliatory tariffs are imposed as retaliation to a foreign country which has imposed tariffs on products from the home country. They are applied by the host country to serve as an equilibrium and get to the same trading level with the foreign country. A good example is the current tariffs being imposed by both China and USA in an effort by each country to get the other to trade by fair terms.
2. Countervailing tariffs are imposed by the host country to a foreign country that has been taking advantage of export subsidies to export large quantities of its products to the host country. They are aimed at neutralizing the unfair advantage enjoyed by the foreign products and set them on equal competing terms with locally produced goods.

Effects of tariffs and duty on industries.

There are two main objectives for imposing tariffs; for the host government to raise revenue on imported goods or to protect local industries from competition and unfair trade practices by foreign based companies making similar products. In the second instance, tariffs such as retaliatory, countervailing, discriminatory, protective and other such duty are imposed with the sole aim of ensuring that the host country’s local industry and markets are protected by the influx of goods/raw materials from outside countries.

• Tariffs help to level the competing field.

Higher tariffs act as a discouragement to importers of the taxed goods due to the increase in prices. This in turn gives room to local producers of similar goods to access the market that was been enjoyed by the foreign companies. Increase in tariffs also leads to increase in prices of the targeted foreign products which gives local industries a level competing field since they can now match the prices given by foreign companies for similar products.

A consequence to a level competing field is that it can also lead to increased costs of acquiring raw materials for local industries. For instance, the US imposed tariffs on imported Chinese steel which in turn helped to lift the fortunes of locally based US steel companies, creating hundreds of thousands of jobs in the process. However, it also meant that US industries who rely on imported steel as a raw material such as the vehicle manufacturers have to pay a higher price for the steel which primarily from china, which is a principal source of steel. The price increase has thus threatened the automotive industry and millions of jobs with it. Therefore, in this instance the negative impacts of the tariffs on industry and employment are more than the positive ones.

• Increased industrial production.

Protective tariffs lead to resurgence of local industries since they have a bigger access to the local market. This leads to increase in production of locally produced products. Increased production means more employment opportunities for local population. It also means that the industries will be paying more domestic duties to the government thereby creating a revenue for the country.

However, some tariffs if not applied well will lead to increased prices of necessary raw materials needed to run essential industries. An increase in prices will lead to reduced production increase in cost of production which will in turn trickle down to higher prices of goods. This in effect leads to les spending by the consumers. 

• Increased local manpower capacity.

An increase in the number and production capacity of local industries means they will need more manpower to manage and operate the factories that are producing products. This means the country’s local manpower will train and acquire skills and capacity needed to run the increased number of industries. A ripple effect of the need for more local manpower is creation of training centers for the skills needed and an increase in employment opportunities.

Economic Costs and benefits of tariffs.

There are many costs and benefits of economic nature accrued by government when it decides to impose tariffs. In order for a government to enjoy the full benefits of tariffs of the tariffs that it imposes, it has to choose the duty that will not yield more costs then benefits to the country, its local industries and the population.

Economic Benefits of tariffs.

1. Increased Revenues – Increased tariffs serve to increase the revenue options of a country especially developed countries whose domestic tax collection capacity is limited. Such governments must however raise the tariff to a rate that will not result in importers bringing in less products which will be detrimental to the country’s revenue collection efforts.
2. Increased employment – Protectionist tariffs serve to increase the production capacity of local industries which helps to create more employment opportunities for the local populations. In retrospect, the quality of manpower for the increased industries may be low especially in developing countries which may not yet possess the qualified personnel to run sophisticated industries which will force them to hire foreign expatriates to run the industries.
3. Reliable supply and security of essential products and services – protectionist tariffs are often imposed so as to protect the local product of essential goods and services of national interest such as defense goods and services, medical products etc. when a country becomes self-sufficient in its essential goods production, it removes the reliance of other countries on such products which may be needed in urgent situations and emergency cases. Thus, the availability of such products is guaranteed of reliability and security.
4. Increase in related industries and services – When protectionist tariffs result in an increase in the production levels of some industries, it also means all other industries that are directly or indirectly associated with that industries will be set to also thrive. For instance, an increase in the number of steel-producing mills means industries that produce steel products like automotive plants and factories dealing in steel-based products will also increase. The number of vehicle assembly plants will also increase as well as car sales show rooms.
5. Increase n infrastructural capacity for industries – An increase in the number and capacity of industries will lead to the necessary infrastructure to be upgraded to enable it handle the increased industries. This means there will be better roads, railways, electricity, communication tools etc. for the host county.         

Economic cost of tariffs.

1. Low quality goods produced by protected industries – A side effect of protecting local industries from outside competition through tariffs is that they may not have the industrial know-how to produce high quality goods like their foreign counterparts. The lack of worthy competitors can also lead the local industries lack the competitive motivation to produce high quality goods. This leads to consumers getting stuck with goods that are according to international standards. A retro-effect of this is that some importers may try to smuggle in foreign based alternatives if the demand from local population is high which leads to the government losing duty.
2. Low revenue collection of import duty – If the tariffs are set at very high rates, the importers will significantly reduce the volume of products they import into the host country. Decreased imports means less amount of import duty collected which leads to less revenue for the host country.
3. Raised prices lead to slow economic growth – USA’s imposition of tariffs on Chinese products did not stop the imports. It instead led to increase in prices of raw materials and products which in turn led to slowing down of production in some industries like automotive industries. The end result has been a slowing down of the country’s economic growth. This in turn affects the income levels of citizens, reduces employment figures, reduces spending power of the population and slows down the economic.
4. Tariffs can also lead to the local production shifting to smaller production units which have fewer economies of scale hence higher cost of production. This leads to higher price for goods and services which means less spending on such goods.
5. Retaliatory tariffs by the targeted country on the host country (as is happening between the US and China) leads to a decline in export numbers of the host country thereby affecting the economy negatively.

Conclusion.

Tariffs and import duties are imposed by countries for various reasons which include revenue collection, honoring trade agreements, levelling the trading field for local companies and retaliating against foreign countries for imposing unfair tariffs on the host countries. For a tariff to be effective, the host country has to weigh the benefits of the tariff to be imposed against the cost it will have on the economic prospects of the country and its citizens. Some tariffs may end up been more costly than beneficial to the economy of the host country.

While tariffs and import duty can help spur growth of local industry through elimination of competition and equalization of prices and increase the infrastructural capacity of a country, they may also lead to low quality goods produced, reduced competitive edge of a country and retaliatory tariffs which may lead to lower export numbers for the host country.

All in all, for a country to benefit from tariffs, it has to impose them in such a manner that does not result in negative and economically hurting ripple effects. All the costs and benefits that can accrue due to that tariff been imposed have to be interrogated exhaustively before a tariff measure is undertaken.