A tariff is a tax or duty imposed by one nation on the imported goods or services of another nation. Tariffs have been used throughout history to control the amount of imports that flow into a country and to determine which nations will be granted the most favorable trading conditions. High tariffs create protectionism, shielding a domestic industry's products against foreign competition. High tariffs usually ensure that a given product will not be imported into a country because the high tariff would lead to a high price for the customers of that product, be they other businesses or consumers.
Throughout the 1990s, the trend has been decreased tariffs on a global scale, as evidenced by the passage of well-known treaties such as the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA), as well as the lowering of trade barriers in the European Economic Community, reducing or even abolishing tariffs. These changes reflect the conviction among some politicians and economists that lower tariffs spur growth and reduce prices.
For the most part, the issue of tariffs is of greater concern to businesses in the United States than those outside it. That is because the U.S. generally has lower tariffs for goods coming into this country than other countries do for U.S. goods being imported there. Prior to the passage of NAFTA, for example, Mexican tariffs on U.S. goods entering that country were, on average, 250 percent higher than U.S. duties on Mexican goods.
Lower tariffs especially benefit small businesses because they level the playing field and make it easier for them to compete with larger companies. The majority of small business owners, then, tend to lobby hard for them. As one small manufacturer told Nation's Business: "Anytime you make a movement toward more free trade, I know we're going to benefit from it." Conversely, large corporations are in the best position to absorb higher tariffs for the sake of gaining market share—they have the cash to spend up front, even if it means initially taking a loss. Small companies cannot afford making such large initial investment in the hopes that their product will eventually prove successful.
GATT is especially beneficial to the small businessman. This treaty has spurred significant drops in tariff rates in many areas of the globe. This trend makes it easier for U.S. companies to sell their products abroad, and gives them more options when purchasing products or materials here in the United States. Even small businesses that do not engage in exporting themselves can benefit from this environment, for they can register increased sales to companies engaged in higher volumes of itnernational trade. It is important to note that the current move towards lower tariffs is a gradual one, however. While NAFTA and GATT did eliminate some tariffs immediately, most are designed to be phased out over a period of years, even decades. Every small business-person should study the provisions of major trade agreements that pertain specifically to their industry before moving ahead with plans to increase exports.
One key area to keep an eye on in the coming year is the idea of Internet tariffs. The United States is pushing hard for international agreements that will ensure that there are no tariffs on equipment used to build the Internet nor on products or services sold over it. This would make the Internet a duty-free zone, which has huge implications for small businesses engaged in business activities on the Net.
DeMott, John S. "What GATT Means to Small Business." Nation's Business. March 1995.
Holzinger, Albert G. "Why Small Firms Back NAFTA." Nation's Business. November 1993.
Jacobson, Ken. "U.S. Pushing for Accord Heading Off Internet Tariffs." New Technology Week. August 4, 1997.
Santinelli, Angelo. "Achieving Cost Savings Through Tariff Management." Telecommunications. December 1997.
Wilhelm, Steve. "Banning Tariffs Sector-by-Sector." Puget Sound Business Journal. November 7, 1997.
SEE ALSO: Exporting