A duty is a tax imposed by a government on imported or exported goods. The terms "duty" and "tariff are often used synonymously, but a duty is the actual tax imposed on goods while a tariff is the schedule of duties. Duties are imposed on imports for a variety of reasons, but they can also be imposed on exports although this is much less common. The U.S. Constitution (art. I, sec. 9, par. 5) prohibits the government from levying export duties, while prohibiting the various states "without the consent of the Congress" from levying import or export duties (art. I, sec. 10, par. 2). As less common usage, the term "tariff also refers to a posting of railroad rates for carrying passengers or freight, or a schedule of fees for goods or services rendered.
Tariffs existed in ancient Greece and Rome and were prevalent throughout medieval Europe. They were levied mostly to raise revenue but later were used in an attempt to keep scarce commodities available for the home market. Through much of the 16th, 17th, and 18th centuries, however, import tariffs were seen primarily as a way to guarantee the accumulation of gold and silver in government coffers. During the 1700s, in an effort to increase exports, many countries sought trade agreements that would bilaterally lower tariffs. Many of these countries were caught in a typical tariff double trap, however, by seeking protection of their own burgeoning industries by imposing import duties on other countries.
Duty rates or tariffs are always controversial and are imposed for a variety of reasons. There are two general types of import tariffs, the revenue tariff and the protective tariff. The purpose of the former is to raise government revenues. In the United States, for instance, about half of the government's operating revenue up to the early 1900s came from import duties. A protective tariff, on the other hand, is imposed to protect something—be it an industry or a political concept. One common type of protective tariff is the "infant-industry" tariff. This usually begins as a temporary tariff and is meant to protect a new industry until it reaches maturity. A new industry typically needs time to develop a pool of skilled labor, set up production, acquire new markets, and explore new technologies. As such the infant industry is at a disadvantage in the marketplace vis-à-vis established foreign competitors. A tax on foreign imports and the subsequent rise in prices or lowering of profit margins will reduce the competitiveness of foreign manufacturers, allowing the home industry time to develop and mature.
A tariff may also be put on imports in order to protect an industry thought to be vital to a nation's well-being. Steel is often mentioned as a product vital to a country's national defense. A duty on imported steel would make it less desirable, while encouraging home production. There is also a compensatory tariff. This type of tariff is meant to compensate a particular group or industry for a "sacrifice" made or agreed to. During the Civil War, for instance, the U.S. government levied a tax on manufacturers to help finance the war effort. To compensate manufacturers the government also imposed a tariff on imported manufactured goods, making these imports more expensive and thus lessening their appeal and marketability in favor of home products. An export duty might be imposed by a government wishing to keep scarce or strategic goods within its borders.
Duty rates are determined by a number of factors, agreements, or conditions. A country may have treaties granting most-favored nation (MFN) status to other countries. In such a case, the lowest duty imposed on any one country for a specific import cannot be raised for the same product from a country enjoying MFN status. Customs unions strive to eliminate all tariffs on goods traded between members of the union and mandate a common tariff on goods imported from other countries. A common market is similar to a customs union but economic cooperation is extended beyond the sphere of trade. Free trade areas eliminate tariffs between member countries while leaving each member free to set duty rates with nonmember countries. Preferential tariffs may be granted to specific countries in order to reach certain political or economic goals. Generally speaking, tariffs can be either specific or ad valorem. A specific tariff uses a rate based on a specific quantitative measurement, such as so many cents per pound of the imported product. An ad valorem tariff is based on a percentage of the calculated value of the imported product. A tariff may also be based on a combination of the two.
In the United States, the Tariff Act of 1789 was imposed on imports in order to protect American industry, raise revenue, and coerce trading partners into more equitable tariff agreements. Originally proposed by James Madison as a revenue raiser, the act took a protective bent when various legislative coalitions altered the bill to include ad valorem duties of 5 to 15 percent. These additions to the bill were designed to protect new industries in certain states, most notably Pennsylvania and Massachusetts. The tariffs rose gradually as did the conflict between those who wanted to protect home industry and agriculture and those who wanted less-expensive imports. The conflict took on regional overtones with the industrial North favoring high tariffs to protect industrial production and the agricultural South and West clamoring for cheaper European products. Henry Clay of Kentucky convinced Western legislators that their region would eventually profit from high tariffs, and in 1824 and 1828 (to the further alienation of the agricultural South) tariffs were raised even higher. The Tariff Act of 1824 established duties on cotton and woolen goods at 33 1/3 percent and increased duties on iron, wool, and hemp. The Tariff Act of 1828 increased duties on pig iron, bar iron, hemp, wool, and flax. Few were pleased with these tariffs and in the South the phrase "tariff of abominations" became a rallying cry. In the two decades prior to the Civil War, tariffs see-sawed depending on economic conditions. The high tariffs of 1824 and 1828 were lowered by the Compromise Tariff of 1833 and the Walker Tariff Act following the 1846 economic recovery. Tariffs were again lowered following an 1857 economic resurgence.
The Morrill Tariff Act of 1861 raised duties on wool and iron and tariffs were raised again in 1863 and 1864 during the Civil War. Between the end of the Civil War and the beginning of the 20th century, tariffs went up or down in 1870, 1872, 1875, 1883, 1890, 1894, and 1897 depending on the item in question and prevailing economic conditions. The Payne-Aldrich Tariff Act of 1909 and the Underwood Tariff Act of 1913 lowered tariffs, but in 1922 the Ford-McCumber Tariff Act raised duties again as did the Smoot-Hawley Tariff Act of 1930. The Reciprocal Trade Agreements Act of 1934 allowed the president to reduce tariffs to specific nations and to set tariff rates on specific goods and products, a power previously held by Congress. More recently, the United States was a signatory to the General Agreement on Tariffs and Trade (GATT). GATT is a global tariff reduction plan with more than 100 members. Originally started in 1947, the purpose of GATT is to reduce tariffs and abolish trade discrimination.
Free trade advocates criticize tariffs because the economic burden tariffs put on individual consumers is ultimately greater than the amount of revenue or "protection" generated by the tariff; because tariffs invite retaliation by other countries; and because tariffs often amount to a government subsidy. Tariffs will always remain controversial, with their rewards often being offset by negative side effects. Tariffs are meant to either raise revenue or protect home markets, domestic employment, and new industries, while lessening dependence on foreign goods and combating unfair trade practices such as dumping. Tariffs can also, however, result in higher prices for the consumer, invite retaliation, and lessen competition.
SEE ALSO : Trade Barriers
[ Michael Knes ]
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