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Tariff

Definition, Examples, Pros and Cons

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chocolate-croissants.jpg

Imported French chocolate costs twice as much thanks to tariffs.

Photo: Funkystock/Getty Images
Tariff

The Smoot-Hawley Tariffs worsened the Depression by depressing global trade.

Photo: Dorothea Lange/Getty Images

Definition: Tariffs are custom taxes that are levied on imported goods. The tax is usually applied as a percentage of the total cost of the product, including freight and insurance. This raises the price of the import and gives an advantage to domestic products within that market. Tariffs are a barrier to trade and are used to protect a domestic industry. Tariffs are also known as customs or import duties, or import fees. They are very rarely levied on exports.

On average, tariffs are usually around 5%. However, different countries charge different tariff rates depending on what product they are trying to protect. They will also charge sales taxes, and various local taxes, and even additional customs fees. All of this is collected at the time of customs clearance.

Tariffs are either partly or completely waived between countries that have free trade agreements with each other. The U.S. has trade agreements with more than 20 countries. Targeting FTA countries is a good market entry strategy because buyers pay less tariff for goods made in the U.S. compared with similar goods from countries without FTAs.(Source: Tariffs and Import Fees)

Pros and Cons

The U.S. has gone back and forth on whether it wants tariffs. Generally, whenever a domestic industry feels threatened, it pressures its local Congressman to establish a tariff for its products. This helps that industry, but raises prices for consumers. In other words, tariffs always require a trade off between protecting industries and increasing U.S. jobs, or raising prices. 

Another con is that other countries usually raise tariffs on similar products in retaliation to protect their own domestic industries. This can lead to a downward spiral, as it did during the Great Depression.

Examples

These examples of U.S. tariffs illustrate best what they are, and their advantages and disadvantage throughout history.

Harmonized Tariff ScheduleThe HTS lists the specific tariffs for every category of imports into the U.S. (there's 99). It's called the Harmonized schedule because it's based on the international Harmonized System that describes most of the world's trade goods. The Schedule is published by the International Trade Commission, but the tariffs themselves are set by the U.S. Congress. The HTS is a guide. The only agency that can actually provide legal advice, help in determining the classification of your import, or make a final determination of the actual tariff is U.S. Customs and Border Protection (or the customs office in a foreign country. For details on the actual schedule, go to U.S. ITC.

Smoot-Hawley Tariff - In June 1930, the Smoot-Hawley act raised already-high tariffs on agricultural imports. The purpose was to support U.S. farmers, who had been ravaged by the Dust Bowl. The resultant high food prices hurt Americans who were already suffering from the Great Depression. It also compelled other countries to retaliate with their own protectionism. As a result, world trade dropped 65%, severely worsening the Great Depression of 1929. (Source: About Logistics, Foreign Trade Zone; About U.S. History, Smoot Hawley Tariff)

Fordney-McCumber Tariff - This tariff was imposed in 1922 on imported products, especially agriculture. It was a response to a glut farm products, thanks to World War I. During the war, European farmers couldn't produce. Their supply was replaced by others. When the European farmers returned to production, it increased supply beyond global demand. As prices dropped, U.S. farmers complained.

Tariff of Abomination - On April 22 1828 the Federal government levied tariffs on most imports. It was designed to protect Northeast manufacturers, but actually hurt the South. That's because it did two things by raising prices on imports. First, it increased costs for most goods, which hurt the agrarian South the most. Second, it reduced trade with England, which was the South's primary buyer of cotton. When England businesses couldn't compete with New England manufacturers, they bought less cotton. As a result, the South's costs rose but its income fell. That's why Southerners called this tariff an abomination.

Feelings were so intense that it helped spirit Andrew Jackson to the Presidency, beating John Quincy Adams who had approved the tariff. It also led Vice President John C. Calhoun of South Carolina to anonymously draft the South Carolina Exposition and Protest, which said that states should have the right to nullify any Federal law they didn't like. In fact, the South Carolina legislature did nullify the tariff in November 1832,creating a constitutional crisis over states' rights. It backed down in January 1833, but tensions remained perhaps leading to the Civil War. (Source: About 19th Century History, Tariff of Abominations; U.S. House of Representatives, History and Archives) Article updated April 4, 2013

Also Known As: Custom tax, Custom fee, Trade tax, Import tax, Trade barrier

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