BRITANNICA RESEARCH REPORT
Tariffs
Taken from the Encyclopaedia Britannica
and other research sources.
Tariffs are taxes levied on imported goods. In the United States they
originally supplied the major share of the federal government's revenue.
Revenues from the first tariff of 1789 provided all the nation's fiscal needs,
and until late in the 19th century, customs receipts accounted for about half
By the 1960s that figure had fallen to 1.5 perof the government's income.
Most U.S. revenue now comes from income taxes.
cent.
There are still countries in which tariffs provide a significant proportion
In Greece, for example, about a fourth of the governof government receipts.
ment's income comes from customs duties, and in Israel the figure is about
Many of the less developed countries obtain more than a fifth of
20 percent.
In most industrialized countries, however,
their receipts from import duties.
tariffs are relatively unimportant as revenue producers.
In addition to raising revenue, tariffs have been used by governments to
Since World War II the
protect domestic industries from foreign competition.
trend among industrialized countries has been away from tariffs and toward
However, many less developed countries maintain
free trade between nations.
high tariffs to protect their infant industries.
TARIFFS IN THE U.S.
By 1808
The first U.S. tariffs were successful revenue producers.
import duties were raising nearly twice the amount of money expended by the
federal government, creating an embarrassing surplus in the national treasury.
These were
In 1816 the first protectionist tariffs were put into effect.
The
duties of 30-40 percent on cotton, woolen goods, and some iron products.
protected list was expanded in the years that followed, despite some opposition.
The Panic of 1857 precipitated a demand for greater protection which resulted
Subsequently, even higher
in the Morrill tariffs of 1861 and succeeding years.
rates were established, culminating in the Payne-Aldrich Tariff of 19O9 and the
S moot-Haw Ley Tariff of 1930.
Smoot-Hawley, which established the highest import duties in U.S. history,
Hard hit
coincided with a period of high tariffs throughout the Western world.
by the Great Depression, countries tried to protect their own industries from
Since most countries
imports while at the same time expanding exports.
adopted the same policies, the result was to stifle trade.
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In 1933 a shift from protectionism to a philosophy of free trade was initiated
by Cordell Hull, secretary of state under President Franklin D. Roosevelt. Hull
secured passage of the 1934 Reciprocal Trade Agreements Act, which resulted in a
series of agreements between the U.S. and 21 foreign nations reducing tariffs on
U.S. imports and exports by up to 50 percent. These arrangements were extended
to other nations on the basis of most-favored-nation treatment.
THE POSTWAR WORLD
After World War II, in an effort to avoid the "beggar-my-neighbor" protectionist policies of the 1930s, the world's major trading nations established a
reciprocal trade program known as the General Agreement on Tariffs and Trade,
or GATT.
Some 23 countries, accounting for four-fifths of international trade, signed
the General Agreement in 1947 in Geneva, Switzerland. The signers included the
U.S., France, Britain, Belgium, and The Netherlands. The GATT came into force
on Jan. 1, 1948, and by 1976 there were no less than 83 full-contracting parties
to it.
GATT has been described as the most effective instrument of world trade
liberalization.
It is an integrated set of bilateral trade agreements aimed at
the abolition of quotas and the reduction of tariff duties among contracting nations.
GATT includes a long schedule of specific tariff concessions for each contracting nation, representing tariff rates that each country has agreed to extend to others.
It also sets forth general rules that are, in effect, a code of commercial policies.
Over the years GATT has been successful far beyond expectations.
It has made
a major contribution to the growth of world trade.
Other multinational institutions aimed at promoting international trade were
established during the same period. In April 1948, 16 European nations responded
to a U.S. offer of economic aid under the European Recovery Program by setting up
the Organization for European Economic Cooperation (OEEC).
The purpose was
to distribute U.S. credits and to foster free trade among the members.
By
1955 OEEC members included Britain, France, West Germany, Italy, Spain,
Austria, Greece, Turkey, and others.
In September 1961 the OEEC was converted into the Organization for Economic Cooperation and Development (OECD), and its membership was expanded
to include the U.S. and Canada.
Japan became a member in 1964, Finland in
1969, Australia in 1971, and New Zealand in 1973. The OECD aims to stimulate
world economy, in part by liberalizing international trade and capital movements,
and to coordinate economic aid to less developed countries. It is essentially a consultative group, and its decisions are not binding on the members.
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The most far-reaching attempt at economic integration and free trade
among sovereign nations has been the European Economic Community (EEC)
or Common Market. On March 25, 1957, the governments of France, West
Germany, Italy, and the three Benelux countries signed the Treaty of Rome,
The Community came into
under which they agreed to establish the EEC.
In 1973 it was enlarged by the entry of Britain, Ireland, and
being in 1958.
Denmark.
Among the purposes of the EEC were the removal of trade barriers
among the member nations and the establishment of a single commercial policy
toward nonmember countries. By mid 1968 ail tariff barriers had been abolished
for agricultural as well as industrial products, and most quota restrictions had
In 1970 a common Community tariff was put into effect on imports
been lifted.
Thus much of the EEC's goal of "progressively bring
from outside the EEC.
The
(ing) the economic policies of members into alignment" has been reached.
Community, of course, involves much more, including free movement of persons, services, and capital within the EEC, the removal of private and public
measures restricting free competition, and the eventual coordination of transportation systems, agricultural policies, and general economic policies.
THE KENNEDY ROUND AND AFTER
Foreseeing that the European Economic Community, as an entity, would
be stronger economically than its individual members, President John F.
Kennedy sought new U.S. trade legislation that would give him greater freedom
The result was
in pursuing his goal of an economic partnership with Europe.
the Trade Expansion Act of 1962, which authorized tariff reductions of up to
This act
50 percent subject to reciprocal concessions from European partners.
marked a fundamental shift away from protectionism and led to the so-called
Kennedy Round negotiations, held in Geneva from 1964 to 1967 under GATT.
The result was an average reduction of 35 percent in the duties levied on indusLittle change was
trial products, to be implemented over a five-year period.
made in steel and textile tariffs, however, and there were other problems.
In succeeding years, pressures developed in some industrial circles and in
For instance, Richard
Congress for a return to a more protectionist stance.
Nixon, campaigning in 1968, pledged to restrict entry of Japanese textiles to
Proposals were made in Congress to impose quota restricthe U.S. market.
tions on other products.
In August 1971 President Nixon called upon the major trading partners of
the U.S. to revalue their currencies upward, on the ground that the dollar, as
the currency in terms of which all others were expressed, could not be unilatHe also announced that the U.S. was suspending the free
erally devalued.
convertibility of the dollar into gold and imposing restrictions on imports
including a 10 percent surcharge (later rescinded) on those covered by tariff
regulations.
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Despite these difficulties, the Trade Act of 1974, passed in anticipation
of the forthcoming ""Tokyo Round" of GATT negotiations, continued the trend
toward free trade. Under its provisions, the president was empowered, for five
years, to enter into trade agreements with other countries that would harmonize, reduce, or eliminate tariff and nontariff trade barriers.
At the same
time, the criteria for providing relief to affected U.S. industries and adjustment
assistance to workers who had been displaced by imports were eased.
The
president was also empowered to take retaliatory action against unreasonable
restrictions imposed on U.S. exports by foreign countries.
Today President Jimmy Carter faces many of the problems confronted by
Nixon, including growing demand for more protectionist policies. More companies
are seeking shelter from foreign competition through temporary import controls.
In April 1977, for instance, as the result of a suit brought by a U.S. firm,
the U.S. Customs Court in New York ordered the government to impose additional duties on imports of Japanese electronics products.
The decision was
appealed by the Carter Administration.
By a three-to-two vote in late July,
the Court of Customs and Patent Appeals said the Department of the Treasury
had acted correctly in rejecting the duties.
It overturned the ruling of the
Customs Court ordering imposition of the duties.
This decision is to be
appealed to the Supreme Court.
If it is overturned, other U.S. industries
undoubtedly will seek to have similar duties applied to protect their products.
Meanwhile, in late May, the Japanese agreed to restrict exports of color TV
sets to the U.S.
Like the electronics industry, the U.S. textile industry is complaining
bitterly about the explosive growth in imports over the last 15 years.
In 1976
textile imports rose 39 percent in value above 1975 levels.
If present tariff
and quota arrangements remain unchanged, this trend is expected to continue.
Industry experts say this will lead to a loss of jobs and to mill closings. Textile
import quotas are set by the so-called multifiber agreement established in 1974.
Under this arrangement, textile imports into the U.S. from a number of less
developed countries are generally allowed an annual growth amounting to 6 percent of the previous year's imports.
Countries are allowed to pick up portions
of their quotas not used in previous years.
Tariffs, of course, add to the cost of imported products to the consumer.
As an example, a four wheel passenger vehicle is subject to a tariff of 3 percent, which is added to the value placed upon it by the U.S. Customs Service.
The value is generally the wholesale price for the automobile in the U.S.
It
may, however, be the wholesale price in the exporting country or a value
established by the Customs Service.
A good color television set may have a wholesale price of $200, to which
a tariff of 5 percent is added.
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Other examples of tariff added onto the cost include:
*
Shoes range from 2^ to 20 percent.
sewn sole is 10 percent.
A leather shoe with a McKay-
*
Bicycle, over 25 inches and 36 pounds, 5/£ ^percent.
*
China, more than $56 per set
percent of the value.
*
Wool suit, with a cost of more than $4 per pound
pound plus 21 percent of the value.
five cents per dozen pieces plus 18
37/£ cents per
The Emergency Committee for American Trade is one of several groups
that advocate an expansion of international trade and investments. The committee
was formed in October 1967, in opposition to proposals to impose quotas on
imports into the United States. The committee vigorously supported enactment of
the Trade Act of 1974.
ARGUMENTS FOR AND AGAINST TARIFFS
Advocates of protection often argue that new and growing industries, particularly in less developed countries, need to be shielded from foreign competition
until they become internationally competitive.
In many less developed countries,
however, industries have failed to attain international competitiveness even after
15 or 20 years of operation, and might not survive if protective tariffs were
removed.
Many argue that the infant industry is probably better aided by production subsidies than by tariffs.
By raising the prices of imported goods, tariffs can encourage domestic
producers to increase production. As more domestic goods are bought, domestic
employment tends to rise.
However, the tariff can encourage tendencies toward
a monopolistic market structure to the extent that it lessens foreign competition,
with a resulting decrease in the incentive to modernize or innovate.
Furthermore, in trade among developed countries, imposing tariffs for
employment reasons means exporting unemployment and thus inviting retaliation.
A country may be able to use tariffs to improve its terms of trade in the short
run, but if other countries retaliate, this remedy will not be available over a long
period.
Some protectionists argue that workers in a country where wages are high
must be protected from competing products made by foreign workers who receive
low wages. On the other hand, tariffs, by raising the prices of imports, may
add to inflation or if consumers resist the higher prices reduce consumption
of the product. An alternative is to encourage free trade while assisting workers in
seriously affected industries.
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In advanced industrial countries, tariffs result mainly from the political
The costs of such
pressures brought by manufacturers in particular industries.
protection are borne by consumers in general, but the pressures of special
interests on governments are far more intense than the counterpressures from
consumers.
To the extent that they restrict imports, tariffs reduce the outflow of funds
A serious deficit in
and thus may help remedy balance of payments deficits.
the balance of payments, however, calls for more fundamental treatment, such
as devaluation of the currency.
TRADE TERMS
Protective tariffs are deRevenue tariffs are designed to obtain revenue.
signed to shield domestic production from foreign competition by raising the
However, protective tariffs yield revenue,
price of the imported commodity.
unless they are so high as to discourage imports altogether, and revenue tariffs
give protection to domestic producers of duty-bearing goods.
Specific tariffs are imposed on imports according to physical quantity so
much per ton, per yard, per item, etc.
Ad valorem tariffs are levied according to the value of the import.
Nontariff barriers are restrictions, other than tariffs, that are placed on
They include:
imports.
Quotas, which prohibit the importing of certain commodities or limit
Quotas are used to regulate oil
the amount that may be imported.
imports into the U.S.
Sales and turnover taxes imposed on imports but rebated on goods
destined for export.
Other barriers include trading organizations, government procurement
practices, customs classification, health regulations, and marking requirements.
Dumping is the practice of flooding the world market with cheap goods,
generally at prices below those charged in the domestic market.
Most-favored-nation treatment guarantees quality of trading opportunity; a
country that has been granted most-favored-nation status by another will receive
trading opportunities as favorable as those offered to any third country.
Terms of trade refers to the relative prices of a country's imports and
exports; if the prices of its exports are rising and the prices of its imports are
falling, its terms of trade are moving in a favorable direction.