The Function of Tarrifs in International Trade

The word “tariff” comes from the Arabic word “ta’rif,” which makes reference to a list of fees that must be paid. A tariff includes the list of prices or fees required to pay when a service is used or when someone wants to access a product. For instance: a hotel’s tariffs or those that telecommunications companies always apply.

A tariff is a price or fee a consumer or user must pay in order to use a service, whether it is public or private, or if they want to acquire a determinate product. There isn’t a single type of tariff; there can be present variations.

Throughout history, tariffs have been used by governments as tools to generate revenue. However, the production and domestic industry take advantage of them in order to protect their finances. For instance, if imported goods’ prices rise, consumers of a determinate country will prefer to purchase national goods instead.

Due to the mentioned theory, tariffs often produce some side effects. For example, they may generate higher prices, so it is still debated whether tariffs are a useful economic tool.

Throughout this article, we’ll explore the crucial information related to tariffs, including how they work and how they affect us in our daily lives.

What is a tariff?

To summarize, a tariff can be defined as a tax the government imposes on a country on all the imported goods and services that come from a foreign country.

Although the word “fee” is often used as a synonym for “tariff,” both concepts are different. This way, we can say that:

A tariff is the price or list of prices a consumer must pay to have access to a service, or to acquire a product, regardless of whether it is public or private.

On the other hand, a fee is a tribute a consumer must pay in order to make private use of a good or service of the public domain.

Both concepts are similar, but they are used in distinct situations.

With that being said, the tax applied is a percentage of the product’s total cost. For instance, in the USA, tariffs are set by Congress.

How do tariffs work?

Import prices are affected directly by tariffs, as they increase them. Since imported goods have higher prices, the domestic industry takes advantage of it. That is why tariffs are known as a method of “protecting” a country’s production.

Although the previous fact is something positive, tariffs often cause barriers and affect the business world and international trade. Due to this, countries usually retaliate and have different tariffs applied.

For instance, in 2018, the USA tariffs were less than 2%. It’s also worth noting that the rates can be different depending on the industry the country is trying to protect. Different charges may be applied, for example, local taxes or sales taxes.

In some cases, a country can have free trade agreements with another country, which causes tariffs to disappear. For instance, there are over twenty countries that have trade agreements with the USA.

In some cases, a country can have free trade agreements with another country, which causes tariffs to disappear. For instance, there are over twenty countries that have trade agreements with the USA.

Different types of Tariffs

Tariffs are the taxes or duties the government imposes in a country when a commodity enters the national territory. There are multiple types of tariffs, and they are applied in different situations.

Some countries avoid using export tariffs in order to maximize their exports, for example. In these cases, they are similar or equal to the import tariffs.

The different types of tariffs can be organized into five groups, as you can read below:

1.      Basis of the criterion for Imposition

Specific Tariff

A specific tariff is determined by the weight or measurement, depending on the good. This can be, for example, sugar or clothing. They can be applied to imported and exported commodities.

Ad Valorem Tariff

“Ad Valorem” is a Latin term that makes reference to the phrase “on the value.” So, the ad valorem tariff is applied when the duty is calculated using a specific percentage of the good or service’s value.

Compound Tariff

This type combines the ad valorem and specific tariff types. Therefore, both principles are applied, so the total tariff is equal to the sum of specific duties (that depend on the unit) and a determinate percentage of the good or service’s value.

Sliding Scale Tariff

This tariff is applied to import duties that often tend to fluctuate the prices of goods and services. The previous principles may be applied, but it’s usual for sliding scale tariffs to include specific duties.

2.      Basis of Purpose

Revenue Tariff

Revenue tariffs are applied to generate revenue that benefits the government directly. These tariffs are applied in less developed countries, and it is one of their primary sources of revenue.

Protective tariff

The government imposes protective tariffs in order to protect a specific area of the domestic industry. Higher tariffs result in more significant effects, and in some scenarios, abroad importations can be prohibited as a result of them. This is called “perfect protective” and as of now, it’s just a theory.

3.      Basis of Discrimination

Non-Discriminatory

A tariff is non-discriminatory when the current rate can be applied to all the goods and services, regardless of the country they come from. As mentioned above, countries with trade agreements can have lower tariffs for some commodities. The same low rate is still applied to all the countries the home country has a trade agreement with.

Sometimes, non-discriminatory tariffs are referred to as “single column tariffs” because they’re easy to manage.

Discriminatory

A tariff is discriminatory when it is applied to different goods and services. These tariffs are sometimes referred to as “double column tariffs” because there are two distinct duty rates for certain commodities, and sometimes, it is applied to all of them. The government establishes the rates from the beginning.

4.      Basis of Products

Import Tariffs

The home country applies an import tariff once a foreign good enters its territory.

Export Tariffs

Export tariffs are applied when the products can be subject to tax when they leave their home country and enter a different country’s market.

5.      Basis of Retaliation

Retaliatory Tariff

A retaliatory tariff is the result of the home country’s tariffs when the foreign country applies tariffs to the former’s exported goods.

Countervailing Tariff

Countervailing tariffs happen when a foreign country exports massive quantities of goods to the home country. The latter “neutralizes” this great advantage by imposing tariffs once the products enter its territory.

What is the current US tariff rate?

Since 2018, the average tariff applied in the USA was not higher than 2% on industrial goods. As mentioned above, all countries fix distinct tariff rates, depending on what industry they intend to protect.

In some cases, a country may have free trade agreements with multiple countries. Over twenty countries have free trade agreements with the United States.  This is beneficial for both parties. Businesses from the home country won’t have to deal with tariffs that may threaten their profit, while foreign countries enjoy cheaper goods thanks to the tariff-free exports.

Conclusion

Throughout history, tariffs have been one of the most potent economic elements. They have been used by different states in multiple eras to protect their domestic industries.

Until some years ago, it was believed that tariffs were near extinction. However, economic problems, such as the commercial war between the USA and China, nationalist movements, and even the COVID-19 pandemic, have made them highlight again.

In theory, a tariff is a fee that is applied to imported commodities of a particular country. There are exportation tariffs as well, but they’re less common.

Unlike other tributes, the objective of tariffs is not about revenue; most of the time, they can also be dissuasive. A tariff applied to a particular good increase in its price, which results in less consumption, and imports are reduced simultaneously, which is beneficial for national production.

Although tariffs can be seen as an excellent protective idea so the national industry can be impulsed, if tariffs are applied to all imported products with no discrimination, problems can be generated. For example, if the previous situation happens, it is very likely for the foreign country to apply similar rates, resulting in fewer exports.

Evidently, tariffs have a direct effect on the national industry. It is often referred to as a protection mechanism for a country’s businesses because it reduces the competition. All of this is because the prices of imported goods are increased and often cost more than national goods.

However, this can be prejudicial for the national industry because it may erase multiple incentives that can help them improve their productivity. Also, as it was mentioned above, tariffs can turn commercial wars worse.

There are ups and downs, and we have yet to see in the following years how tariffs keep affecting our economy or if they finally disappear, which is very unlikely due to the existence of conflicts between countries.

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