Tariff — is a tax imposed on foreign goods. A certain sum is added to the final cost of the imported goods, and the importer should pay it. This sum is defined according to the special schedule. The money received from the tariffs goes to the government. It will be directed to the development of the domestic economy.
Classification of Tariffs
Tariffs are imposed depending on the current economic situation and the sector that should be protected. In most countries the tariffs are implemented by the ministry of trade.
Basic types of tariffs:
Ad valorem tariff. This term is derived from the Latin definition “ad valorem” which means “according to value”. This tariff is defined according to the cost of goods and charged as a percentage of goods’ price. Ad valorem tariffs are calculated by multiplying the customs value of the cargo by the current rate. To calculate them, the customs specialist applies the rates that exist at the time of acceptance of the customs declaration.
Specific tariff. This tariff doesn’t depend on the product’s value. It is defined by the number of units coming in. For example, a country could levy a $20 tariff on each imported motherboard, but levy a $200 on each foreign notebook.
Compound tariff. This tariff combines the traits of the specific and ad valorem tariff. It includes a percentage of the value of the good and the cost per unit.
Tariff-rate quota (TRQ). This is a combination of tariff and quota. The tariff-rate quota usually concerns a specific group of goods or a certain amount of them. The government establishes a quota for the import of a certain product. If the value or quantity of the imported goods meets the quota, then such goods are subject to customs duties at the usual rate. If the tariff quota is exceeded, the goods are taxed at a higher tariff rate.
Retaliatory tariff. This is a restriction on the import of a specific group of goods. A retaliatory tariff is imposed if it is proven that a certain country breaks the rules of the trading agreement. This tariff is applied as a way to confront unacceptable trade practices.
Why Tariffs Are Implemented
There are several reasons why the government imposes tariffs. Mostly, they are related to the protection of the national economy.
Protection of national employment. Sometimes, the foreign goods are cheaper than the local ones, because the cost of labor is also quite cheap. This cheapness provokes the production transfer and reduction of demand for the local goods. As a result, the local manufacturers produce fewer goods and stop staff recruitment. But this tariff increases the prices of foreign goods. As a result, the demand for the local goods and employment level is preserved.
Protection of the emerging industries. When a certain industry just starts to develop, it needs time to fully integrate into the economy. In such a situation the local manufacturers can’t compete with the foreign ones, and free trade will kill the emerging industry. So, the government implements the tariffs to protect the local industry and give it time to develop.
National security. Some industries are connected with the defense industry (steel, aerospace technology). In this case, some information may be crucial for national security. So the government should protect the local companies that work for the military enterprises.
Influence of Tariffs
The influence of the tariffs on the national economy is still a controversial issue. The opinion on this question depends on the economist’s point of view. The adepts of free trade believe in the comparative advantage and speak out against any trade regulations. On the other hand, the adepts of restricted trade believe in a zero-sum game and support some restrictions.
Many economists indicate that the competent use of tariffs helps to protect the national manufacturers and goods. But other ones indicate the numerous side effects that negatively influence the national economy.
First, the lack of concurrency makes the local manufacturer less innovative and reduces the quality of their services. They have no motivation to develop the production because the consumers will buy their goods in any case. The concurrence is a required measure to make the manufacturers monitor the quality of the production to save the consumers.
Also, the absence of concurrence may lead to the rising cost of local goods. When the local manufacturer sees that they are the monopolists, they don’t need to follow the price policy and fight for the money of consumers. On the contrary, they try to take as much money as they can from the clients.
And finally, the unnecessary regulations may lead to the deterioration of the relationship between countries and even to trade wars. Trade war damages the economy and slows GDP. The unnecessary tariffs increase the cost of export and hinder foreign and local businesses. It breaks the supply chains and worsens the investment climate.
Therefore, we see that the tariffs should be implemented carefully and thoughtfully. The government should understand the needs of citizens and businesses and regulate the market when it is necessary and in the right way.