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The Top 10 Things You Need to Know About Tariffs: An Analysis of The Power of Governments to Impose Duties on Imports

This briefing on Tariffs was prepared by Chris Saucedo while a Business Administration major in the College of Business at Southeastern Louisiana University.

Introduction

Tariffs are a tax levied by a government on imported goods. A tariff is also sometimes called a customs duty or an impost. There are several variations of tariffs as well as several reasons for a government to utilize them. In the following presentation we will discuss tariffs beginnings and growth over time and see whether our global economy has been affected by it. Also presented will be the different types of tariffs.

The Idea in a Nutshell

The Tariff Act of 1789 was the first tariff levied on the new born United States of America. This tariff was the beginning of the first real source of revenue for the weak legged States. With the ratification of the new Constitution it granted the power to the federal government to levy tariffs,  and only the federal government. This did away with the outdated system of state tax rates The new law taxed all imports at rates from 5 to 15 percent.  They did this so that it could compete in the new world economy that was booming between European nations and also Asian and African trade routes. They also have a purpose in promoting the purchase of goods from ones home country, facilitating growth and prosperity. This type of tariff is known as a protective tariff, which is in turn the opposite of free trade. These higher prices allow some developing nations that are imposing the tariffs to compete with more settle countries like the United States. Some see this as the only way to survive in the global economy.

The Top 10 Things You Need to Know About Tariffs

  1. The World Trade Organization was created to promote free trade in the world. Even with the direction of the World Trade Organization, governments have a stark contrasting opinion on levying tariffs on imported goods. The WTO feels that imposing these taxes hinder free trade and have subsequently made it more difficult for foreign nations to put them on imported goods.
  2. Governments do see increased revenue from imposing tariffs on imported goods. The benefits can be from just having the increased assets for infrastructure, as well as home grown industries seeing their competition dwindle. Yet, the consumer is the one that sees no benefit for tariffs on imported goods. In some cases, the domestic product may corner the market and not produce a product conducive to what the consumer wants. They can then raise the price however they see fit, and raise tariffs even higher on foreign goods.
  3. Developing countries are usually guilty of the highest trade restrictions. These countries explain that with the influx of goods from foreign entities, created quicker and cheaper than their domestic product that their home grown industries will never be able to thrive and grow. Therefore higher tariffs are seen in these countries to facilitate domestic economic growth.
  4. There are certain tariffs like the environmental tariff. These are charged to productions that are imported from countries with low standards or laws on pollution and environments policies.   This certain tariff has been the source of some debate since this is not sanctioned by the WTO. Without the permission of the World Trade Organization it can cause issues with the importer and exporter of goods.
  5. The most heated exchange of tariff placements have been between the United States and China recently. The United States has put tariffs on the Chinese importation of steel pipes and tires within the past 3 years. China has put a tariff on the importation of American poultry as well as “an anti-dumping and anti-subsidies investigation would be launched on U.S. auto parts” says the LA Times.
  6. There is also a specific tariff which Investopedia calls, ”A fixed fee levied on one unit of an imported good.”. This means that there is no set percent levying. Instead they could charge a $10 dollar tax on t-shirts and a $2000 tax on vehicles. This has can also lead to countries putting retaliatory tariffs on the specific tariff imposer because they feel that the country is not doing the right thing. Rifts between countries normally lead to more tariffs.
  7. Prohibitive tariffs are set at such a high level that the country importing the good has no real chance of selling it. This is not a generally accepted practice as it goes against the WTO’s free trade agreement. These tariffs can of course hurt not only the importing nation but the nation imposing the tariff. Sometimes a product is made better in a foreign state, and by taxing it so high that there is no chance for the consumer to obtain it, it therefore is a problem.
  8. Import duties are important as they form a structure of what each country will tariff what country. In doing so, they avoid confusion on which nations to tax higher or tax lower. Most countries create a tariff schedule which is all the duties aligned and sometimes does favor different nations all the while maintaining an inflow of revenue for the country.
  9. Following specific taxes, some countries impose retaliatory tariffs to combat another countries tariff. They do this in hopes of rescinding the counter nations tariffs by imposing on one their products. One good example is how America imposed a 35% tariff on Chinese tires. With this the Chinese imposed a tariff on American poultry. These tariffs hurt the consumer and cause rifts between trading nations.
  10. Ad valorem tariffs are tariffs imposed by taxing them by the percentage of the value of the products as a whole. This is a more accepted way of imposing taxes as it makes it fair for the importer to make better strides to sell their product while the domestic product can compete fairly.

The Video Lounge

 

I remember when this was being discussed and its interesting to see each side of the coin. One side will tell you its great because it helps out American jobs by giving them a better change to compete with China or any low cost producing country. But the downfall is causing a rift between the two countries, as well as hurting the consumers. In December of 2010 the WTO upheld the sanctions by the United States for the 3 year levy on Chinese tire imports. This video is a good example of how differently people perceive tariffs. It discusses the imposed tariff on tires from China that the United States set. As you can tell the difference of opinion is not in short supply and truth be told it affects each and every person. The consumer and domestic workers are two important parts to the puzzle and the government feels that what they are doing in turn will benefit both at the same time. What do you think?

My Take

Tariffs are still important today because with or without them, they shape the way our race, the human race, grows. There are varying views on tariffs, some positive such as from third world countries imposing tariffs to compete and grow their struggling and sometimes young nation. Yet, negatives flow like with the consumers of taxed products that may wound their wallet due to the sometimes high tariffs. Without tariffs, countries we have today may not have been here, and some may still have existed. So the jury is out on whether what they have accomplished is good or bad but one thing is for certain, as Benjamin Franklin once said “The only things certain in life are death and taxes.”

References

History, US. (2009, March 10). Tariff. Retrieved from http://www.u-s-history.com/pages/h394.html

McClure, C, Pava, M, Pepelasis, A, & Smith, G. (2008). Tariff. Encyclopedia Britannica. Retrieved February 22, 2011, from http://www.Britannica.com/EBchecked/topic/583535/tariff#

Moffatt, M. (2009, June). The Economic Effect f Tariffs: If Tariffs Are Bad For The Economy, Why Do We Have Them?. Retrieved from http://economics.about.com/cs/taxpolicy/a/tariffs_3.htm

Pierson, D. (2009, September 14). In Latest Export Salvo, China Takes Aim At U.S. Auto Parts and Chicken Products. The LA Times, pp. A2-A3.

Radcliffe, B. (2009). The Basics Of Tariffs And Trade Barriers . Investopedia. Retrieved February 22, 2011, from http://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp

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Contact Information

To contact the author of “The Top 10 Things You Need to Know About Tariffs,” please email Chris Saucedo at W0308369@selu.edu or chrissaintsedo@gmail.com.

Biography

David C. Wyld (dwyld.kwu@gmail.com) is the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, and executive educator. His blog, Wyld About Business, can be viewed at http://wyld-business.blogspot.com/. He also serves as the Director of the Reverse Auction Research Center (http://reverseauctionresearch.com/), a hub of research and news in the expanding world of competitive bidding. Dr. Wyld also maintains compilations of works he has helped his students to turn into editorially-reviewed publications at the following sites:

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