Tariffs
Meaning of Tariffs
Tariffs refers to import duties and export duties.
In other words we can say tariffs is a tax or duty
levied on goods when they enter or leave the
national boundary.
Cont’ed
• Why impose tariff?
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•
•
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To discourage consumption
To raise revenue
To discourage imports
To protect domestic industries
Types of Trade
Tariffs are classified in a number of ways.
1. On the basis of purpose
2. On the basis of origin and Destination
3. On the basis of country- wise discrimination
1. On the basis of Purpose
Tariffs are used for two different purpose
1. Revenue Tariffs: Revenue tariffs are meant to
provide revenue to the state. Revenue duties
levied on luxury consumer goods.
2. Protective Tariffs: protective tariffs are meant
“ to maintain and encourage those of home
industry protected by duties”.
Now a days government levy import duties with
the principal objective of discouraging imports
in order to encourage domestic production of
protected industry.
2. On the basis of origin and
Destination
1. Ad Valorem duty: It is levied as a percentage
of the total value of the imported common
duty. The import duty is a fixed percentage of
the c.i.f ( cost, insurance and freight) value of
the commodity. It may be 10%, 20% etc.
2. Specific duty: specific duty are levied per
physical unit of the imported commodity, as
Afs X per TV, as cloth per meter, as oil per
liter etc.
3. Compound duty: Often government levy
compound duties which are a combination of
the ad valorem and the specific duties. For
instance a country may impose an import duty
on a car at the fixed rate of 1 lake afs + 10% on
the price of car.
On the basis of country-wise
discrimination
Single column tariffs: When a uniform rate of
duty is imposed on all similar commodities
irrespective of the country from which they
are imported is called single column tariffs. It
is non discriminatory tariffs which is very
simple and easy to design and administer. But
it is not elastic and adequate. Much revenue
may not be collected by this system.
2. Double column tariffs: Under this system, two different
rates of duty exist for all or some of the commodities. It can
be classified as under,
I: General or conventional Tariffs:
The general tariffs is the list of tariffs which is announced by
the government as its annual tariffs policy at the beginning
of the year. Conventional tariffs based on agreements with
other countries.
II: maximum and minimum Tariffs: Govt. usually fix rate two
rates for importing the same commodity from different
countries. Countries have good relation minimum rates are
imposed like Pakistan and maximum tariffs rate is imposed
on imports from the rest of the countries.
Effects of tariffs
1.Trade Effect:
The impact of the tariff on the quantity
of goods imported and sold in the
domestic market. As demand would
decline due to the tariff imports of the
commodity would also decline
2.Consumtion effect
Refers to the reduction in domestic
consumption as a result of a Tariff
imposed on an imported commodity.
As the price of the commodity would
increase as a result of the tariff its
demand in the market of the
importing country would decline
3.Revenue Effect
The revenue collected by the
government as a result of the
imposition of the tariff on the
imported commodity.
4. Production Effect
• The increase in domestic production
of the commodity as a result of the
tariff imposed on the imported
commodity.
The Government Imposes a Tax/Tariff
We could describe this as a shift in the demand
function.
Or
We could think of this as an increase in the price
of imports
Before Tariff
Domestic Supply
Price
World Supply
Domestic Demand
Quantity
After Tariff
Domestic Supply
Price
World Supply with Tariff
World Supply
Domestic Demand
Quantity
Who gains who loses?
Domestic Supply
Price
Tariff
World Supply
Domestic Demand
Quantity
Consumers lose this
Domestic Supply
Price
Tariff
World Supply
Domestic Demand
Quantity
Producers gain this
Domestic Supply
Price
Tariff
World Supply
Domestic Demand
Quantity
Government gains this much tax
Domestic Supply
Price
Tariff
World Supply
Domestic Demand
Quantity
Net the country loses
Domestic Supply
Price
Tariff
World Supply
Domestic Demand
Quantity
Key Words
• Taxes levied on imports (also sometimes on exports)
– Specific tariff: fixed charge for each good imported
– Ad valorem tariff: a % of imported goods value
• Who gains:
– Government
– Domestic producers (at least in the short run)
– Employees of protected industries keep their jobs
• Who loses:
– Consumers who pay higher prices
– The economy which remains inefficient
– Employees of protected industries who don’t develop new skills