Imposing Tariffs Tariff: A Tax

¶ … Imposing Tariffs Tariff: A tax on imports Although they were originally sources of revenue instead of instruments of state economic policy, tariffs have been used by governments from early history. The earliest of custom duties consisted of payments for the use of trade and transportation facilities, including ports, markets, streets and bridges. By the seventeenth century, however, they were levied only at the boundary of a country and normally only on imports. At the same time, European powers set special low tariff rates for trade with their colonial possessions.

These tariffs formed the basis of the trading patterns that later developed throughout the seventeenth and eighteenth centuries. In the mid- to late-nineteenth century, European countries such as England and France began to use preferential tariffs to regulate the flow goods and raw materials from their colonial dependencies and to standardize the export of domestic manufactured products into those areas (InfoPlease). Businesses in Europe and the United States grew considerably during the late 1800s to 1920. As they expanded, some of these businesses wanted to reduce market competition.

It was thus a period of time that federal legislation protected domestic businesses from foreign competitors, usually by imposing high tariffs on imported products. The McKinley tariff of 1890 and the Dingley tariff of 1897 increased tariff rates to levels higher than any since the Civil War. As a result, many businesses profited from limiting foreign competition. Some European nations struck back by increasing their tariffs, which led to relatively high protective tariffs that lasted through the Depression.

Since then, the emphasis has been on freer trade, with decreased tariffs coming from such actions as the most-favored nation clause and reciprocal trade agreement (InfoPlease). Tariffs can be detrimental to the countries on which they are imposed. In fact, in many cases, the tariffs can also be a negative impact on the country that is imposing them. If a country has a small share of the market of a product its demands for imports has little effect worldwide, but it lowers national well-being.

If Costa Rica imposed a tariff, for example, the impact would be minimal. However, if a country has a large enough share of the market for one of its imports, it can affect the world price; this is called monopsony power. If the U.S. imposed a stiff tariff on imported automobiles, the reduction of foreign-bought cars would have a noticeable impact on foreign exporters. Due to the lower demand, the exporting countries would fight to reduce their export prices.

For a large country, a small tariff could be beneficial and raise national well-being. Yet raising these tariffs even further could be detrimental. If the tariff is so high that all imports are unprofitable, the United States could have major loss of gains. This is especially true of other countries retaliate. The objective is to have an "optimal" tariff where gains are made not lost. The present situation with China is a prime example. At.