Tariffs are taxes, or the amount of money a country needs to pay for trading products.

Quotas are the limitations on what is traded, how much is traded, how much is paid for each product traded,and where its traded. Tariffs are more beneficial to a country's economy because the amount of money paid for their products raises their country's GDP. Quotas aren't because they put limits on how much is paid, and that is what makes GDPs neutral.

T ARIFF - RATE QUOTA

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A tariff-rate quota (TRQ) is a trade policy tool used to protect a domestically-produced commodity or product from competitive imports.[1] A TRQ combines two policy instruments that nations historically have used to restrict such imports: quotas and tariffs. In a TRQ, the quota component works together with a specified tariff level to provide the desired degree of import protection. Imports entering during a specific time period under the quota portion of a TRQ are usually subject to a lower, or sometimes a zero, tariff rate. Imports above the quotas quantitative threshold face a much higher (usually prohibitive) tariff.[1] As part of the 1995 Uruguay Round Agreement on Agriculture, the World Trade Organization prohibited agricultural trade quotas among its member nations. TRQs, however, were permitted as a form of transition to simple tariffs.[2] As of 2005, TRQs apply to U.S. imports of certain dairy products, beef, cotton, green olives, peanuts, peanut butter, sugar, certain sugar-containing products, and tobacco.[1] A TRQ was applied to US steel imports in 2002

G LOBAL E CONOMIC A NALYSIS - T ARIFFS

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Q UOTAS

Tariffs Tariffs are taxes imposed on imported goods; they will increase the price of the good in the domestic market. Domestic producers benefit because they receive higher prices. The government benefits by collecting tax revenues. In the graph below, S0 and D0 represent the original supply and demand curves which intersect at (P0, Q0). St shows what the supply curve is with the introduction of the tariff. The market then clears at (Pt, Qt). Less of the good is produced, and consumers pay higher prices. Figure 5.5: Effect of a Tariff on a Supply Curve

Quotas Quotas are numerical limits imposed on imported goods. Consumers are harmed by quotas, while domestic and foreign producers benefit by receiving higher prices. In the graph below, the market initially clears at P0, Q0. The supply curve Sd+i0 represents the quantity supplied by both domestic and foreign producers before the imposition of the quota. D0 is the domestic demand curve. After the quota, the supply curve looks like Sd+i1. Both foreign and domestic producers receive higher prices while consumers lose out. Advertisment - ExamPrep continues below.

Figure 5.6: Effect of Quotas on the Supply Curve

Voluntary Export Restraints (VERs) These restraints limit the quantity of goods that can be exported from the country to one or more of its trading partners. They are usually "voluntarily" negotiated so that quotas or tariffs are not imposed. Exchange Rate Controls Exchange rate controls set the exchange rate of a nation's currency above the market rate. This makes the nation's exports artificially expensive, which reduces the quantities of the nation's goods that foreigners are willing to buy. This means that the country's citizens have little foreign currency available to buy imported

goods. With exchange rate controls, black markets usually exist where currency exchange occurs at a market rate. Exchange rate controls are declining in popularity, although some developing nations still use them. "Hidden" Methods Hidden methods of limiting imports include special regulations and licensing requirements that restrict imports. For instance, the Japanese government imposes special quality requirements on food to restrict food imports and protect Japanese farmers.

A tariff is either (1) a tax on imports or exports (trade tariff) in and out of a country, or (2) a list or schedule of prices for such things as rail service, bus routes, and electrical usage (electrical tariff, etc.).[1] The word comes from the Italian word tariffa "list of prices, book of rates," which is derived from the Arabic ta'rif "to notify or announce Tariffs have played different roles in trade policy and the nation's economic history. Tariffs (often called customs) were by far the largest source of federal revenue from the 1790s to the eve of World War I, until they were surpassed by income taxes. Tariffs are import tax rates and the collected income is called customs or custom duties or Ad valorem taxes, by responding to an urgent need for revenue following the American Revolutionary War, after passage of the U.S. Constitution the F.U.S.C First United States Congress passed, and President George Washington, signed the Hamilton tariff act of July 4, 1789, which authorized the collection of duties on imported goods. Customs duties as set by tariff rates up to 1860 were usually about 80-95% of all federal revenue. Having just fought a war over taxation (among other things) the U.S. Congress wanted a reliable source of income that was relatively unobtrusive and easy to collect. Tariffs and excise taxes were authorized by the United States Constitution and recommended by the first United States Secretary of the Treasury, Alexander Hamilton in 1789 to tax foreign imports and set up low excise taxes on whiskey and a few other products to provide the Federal Government with enough money to pay its operating expenses and to redeem at full value U.S. Federal debts and the debts the states had accumulated during the Revolutionary War. Hamilton thought it was important to start the U.S. Federal government out on a sound financial basis with good credit. The first Federal budget was about $4.6 million dollars and the population in the 1790 U.S. Census was about four million. Hence the average federal tax was about $1/person per year. Then tradesmen earned about $0.25 a day for a 10-12 hour day so federal taxes could be paid with about four days work. Paying even this was usually optional as taxed imports listed on the tariff lists could usually be avoided if desired. The Congress set low excise taxes on only a few goods, such as, whiskey, rum, tobacco, snuff and refined sugar. Tariff rates from 1792 to 1860 were usually about 80-95% of all federal revenue. The excise tax on whiskey was so despised it led to the Whiskey Rebellion which had to be quelled by Washington calling up the militia and repressing the rebellious

farmersall were later pardoned. The whiskey excise tax collected so little and was so despised it was abolished by President Thomas Jefferson in 1802. All tariffs were on a long list of goods (dutiable goods) with different customs rates and some goods like books, newspapers, models of inventions, etc. on a "free" list. Congress spent enormous amounts of time figuring out these tariff import tax schedules. Tariffs for many years were primarily to collect Federal revenue and only secondarily to protect start-up industries. Since the government largely restricted its activities to maintaining order and protecting property via the army, navy and courts tariffs raised enough revenues to finance the government. The U.S. Mail was largely self supporting. During wars or to meet other needs additional income was secured by raising the tariff and excise tax rates. Short term and unanticipated capital needs (budget deficits) were usually covered by borrowing. The first unexpected cost was the Northwest Indian Wars in the Northwest Territory in the 1790s which required rebuilding the U.S. Army which had largely been disbanded after the Revolutionary War. Tariffs were adjusted up to cover these costs even as increased imports reduced the average tariff rates. A protective Tariff is often used by governments to attempt to control trade between nations to protect and encourage their noncompetitive or undeveloped local industries, businesses, unions etc. giving them time to become competitive. In addition it was thought under the theory of mercantilism generally believed by many countries in this era that exclusive trade with the colonies should be nearly all on ships of the parent country and all advanced industries etc. should be restricted to the mother country. Raw materials should be exported to the parent country and finished goods exported to the colonies. The United States starting out as a colony had these and other handicaps. The advantages they had were a free, independent, innovative and lightly taxed populace with close ties to the British Industrial Revolution. The reasons for an industry or business being noncompetitive are basically four:

Their average wages may be higher than is typical in the competitor's country. They do not have the innovations or inventions that their competitors have. They do not have the skill sets or organization their competitors have. They lack raw materials needed to make some product.

In the U.S. all these conditions applied except for the lack of raw materials. The new textile producing machines (the start of the Industrial Revolution) developed by Britain were prohibited to be imported to what would become the United States (and elsewhere), skilled mechanics and engineers knowledgeable about these machines were prohibited from emigration and the U.S. had significantly higher wages due to the lack of peopleone of the main reasons people immigrated to the U.S.. A protective tariff was proposed by Secretary of Treasury Alexander Hamilton to help overcome these handicaps while knowledge and organization skills were accumulated to build competitive industries and to allow higher wages to be paid in these industries. These protectionist ideas were essentially ignored for many years as Federal tariff revenue was the main goal of tariffs. More imported goods could easily be paid for by exporting more raw products. Major problems occurred in this state of affairs starting in the Napoleonic Wars when both France and Britain tried to interfere with each other's trade by blockading U.S. (and other) shipping. In 1807 imports dropped by more than half and some products became much more

expensive or unobtainable. Congress passed the Embargo Act of 1807 and the NonIntercourse Act (1809) to punish British and French governments for their actions; unfortunately their main effect was to reduce imports even more. The War of 1812 brought a similar set of problems as U.S. trade was again restricted by British naval blockades and Congress needed additional funds to expand the U.S. Army and rebuild the U.S. Navy which had largely been disbanded after the Revolutionary War. Tariffs were adjusted and the excise tax on whiskey reinstated to cover most of these costs. The lack of imported goods relatively quickly gave very strong incentives to start building several U.S. industries. Slowly but surely many of the initial handicaps were overcome as knowledge about the machinery and the organization of industries were released by Britain or "emigrated from" the British isles, the Netherlands or wherever they were more developed. Many new industries were set up and run profitably during the wars and about half of them failed after hostilities ceased and normal imports resumed. Industry in the U.S. was advancing up the skill set, innovation knowledge and organization curve. Tariffs soon became a major political issue as the Whigs and later the Republicans wanted to protect their mostly northern industries and constituents by voting for higher tariffs and the Democratic Party (United States), dominated by Southern Democrats, which had very little industry but imported many goods voted for lower tariffs. Each party as it came into power voted to raise or lower tariffs under the constraints that the Federal Government always needed a certain level of revenues. The United States public debt was paid off in 1834 and President Andrew Jackson, a strong Southern Democrat, oversaw the cutting of the tariff rates roughly in half and eliminating nearly all federal excise taxes in about 1835. The American Civil War (186065) with its tremendous costs built up an even stronger case for higher tariffs and the opposing Southern Democrats had nearly all left office so tariffs zoomed. The Morrill Tariff significantly raising tariff rates was signed by Democratic President James Buchanan in early March 1861 shortly before President Abraham Lincoln took office. The Civil War began in April 1861. To help pay for the war, tariff rates were increased, excise taxes on a wide range of products were reintroduced and the income tax (a new revenue "invention" later declared unconstitutional) was introduced. By about 1900 it had become clear that the U.S. industries were competitive (or more) in nearly all areas and as the need for protection tariffs to pay for the Civil War receded, tariffs were gradually reduced. The next peak in tariffs was in about 1918 when World War I expenditures had to be paid for. The next peak in tariffs was due to the SmootHawley Tariff Act of 1930 at the start of the Great Depression. It is generally believed this act with its high tariff rates prolonged the Great Depression under President Franklin D. Roosevelt of 19291939. Tariff rates are set up many times to "punish" trade tariffs, etc., on U.S. goods passed by other countries who are trying to protect their uncompetitive industries and businesses. It is unclear whether this policy works very well because the lack of competition often encourages companies (and governments) to keep inefficient and out dated equipment or business practices. These protected industries are often uncompetitive on the non-domestic market. Without the tariffs the customers can buy imported products cheaper and force the local companies to become more competitive. Tariffs are nearly always imposed on imported foreign goods and very seldom on exported goods and nearly always cost the consumer extra money. Historically U.S. tariffs on imported goods and products till 1913 ranged from 8% to 45% (averaging about 22%) and the collected tariff income supported nearly all the Federal

Governments expenses until the Sixteenth Amendment to the United States Constitution allowing Federal Income Taxes was passed in 1913. In the 18th and 19th centuries, many countries primary source of income was import tariffs. Tariffs tended to be lowered as other sources of tax income like income taxes, payroll taxes, value-added taxes (VAT), property taxes, sales tax, etc. have been enacted. In the United States property taxes and sales tax have nearly always been reserved for state and local government income sources. Various Income Tax rates and schedules are also common in many states but tariffs are not. Tariffs in the U.S. can only be imposed only by the Federal government at a uniform rate and not by state or local governments. Tariffs up to the SmootHawley Tariff Act of 1930, were set by Congress with many hours of bickering and testimony. In 1934, the U.S. Congress, in a rare delegation of authority, passed the Reciprocal Tariff Act of 1934 which authorized the executive branch to negotiate bilateral tariff reduction agreements with other countries. The prevailing view then was that trade liberalization may help stimulate economic growthmuch depressed by the Great Depression. However, no one country was willing to liberalize its tariff rates unilaterally. Between 1934 and 1945, the executive branch negotiated over 32 bilateral trade liberalization (reciprocal tariff reductions) agreements with other countries. The belief that low tariffs lead to a more prosperous country are now the predominant belief with some exceptions. Multilateralism is embodied in the seven tariff reduction rounds which occurred between 1948 and 1994. In each of these "rounds", all General Agreement on Tariffs and Trade (GATT) members came together to negotiate mutually agreeable trade liberalization packages and reciprocal tariff rates. In the Uruguay round in 1994, the World Trade Organization (WTO) was established to help establish uniform tariff rates. Presently only about 30% of all import goods are subject to tariffs in the United States, the rest are on the free list. The "average" tariffs now charged by the United States are at a historic low. The list of negotiated tariffs are listed on the Harmonized Tariff Schedule as put out by the United States International Trade Commission.[13] Historically, high tariffs have led to high rates of smuggling. The United States Revenue Cutter Service, the oldest naval unit in the United States, was established by Secretary of the Treasury Alexander Hamilton in 1790 as an armed maritime law and customs enforcement service. In 1915 the Service merged with the United States Life-Saving Service to form the United States Coast Guard. In 1939 the U.S. Coast Guard merged with the United States Lighthouse Service to form what is today the primary maritime law enforcement force in the United States. In addition, the Coast Guard has roles in maritime homeland security, maritime law enforcement (MLE), search and rescue (SAR), marine environmental protection (MEP), and the maintenance of river, intracoastal and offshore aids to navigation (ATON). The U.S. Customs and Border Protection (CBP) is a federal law enforcement agency of the United States Department of Homeland Security charged with regulating and facilitating international trade, collecting customs (import duties or tariffs approved by the U.S. Congress), and enforcing U.S. regulations, including trade, customs and immigration. They man most border crossing stations and ports. When shipments of goods arrive at a border crossing or port, customs officers inspect the contents and charge a tax according to the tariff formula for that product. Usually the goods cannot continue on their way until the custom duty is paid. Custom duties are one the easiest taxes to collect, and the cost of collection is small. Traders seeking to evade tariffs are known as smugglers and can be fined or sent to prison if caught.

[edit] Economic analysis

Neoclassical economic theorists tend to view tariffs as distortions to the free market. Typical analyses find that tariffs tend to benefit domestic producers and government at the expense of consumers, and that the net welfare effects of a tariff on the importing country are negative. Normative judgments often follow from these findings, namely that it may be disadvantageous for a country to artificially shield an industry from world markets, and that it might be better to allow a collapse to take place. Opposition to all tariffs is part of the free trade principle; the World Trade Organization aims to reduce tariffs and to avoid countries discriminating between differing countries when applying tariffs.

The diagram to the right shows the costs and benefits of imposing a tariff on a good in the domestic economy, Home. When incorporating free international trade into the model we use a supply curve denoted as Pw. This curve makes the assumption that the international supply of the good or service is perfectly elastic and that the world can produce at a near infinite quantity at the given price. Obviously, in real world conditions this is somewhat unrealistic, but making such assumptions is unlikely to have a material impact on the outcome of the model. At world equilibrium, Pw, Home produced only S amount of the good, but had a demand of D. The difference between S and D, SD was filled by importing from abroad. After the imposition of tariff, domestic price rises from Pw to Pt but foreign export prices fall from Pw to Pt* due to the difference in tax incidence on the consumers (at home) and producers (abroad). At the new price level at Home, Pt, which is higher than the previous Pw, more of the good is produced at Home it now makes S* of the good. Due to the higher price, only D* of the good is demanded by Home. The difference between S* and D*, S*D* is filled by importing from abroad. Thus, imposition of tariffs reduce the quantity of imports from SD to S*D*.

Domestic producers enjoy a gain in their surplus. Producer surplus, defined as the difference between what the producers were willing to receive by selling a good and the actual price of the good, expands from the region below Pw to the region below Pt. Therefore, the domestic producers gain an amount shown by the area A. Domestic consumers face a higher price, reducing their welfare. Consumer surplus is the area between the price line and the demand curve. Therefore, the consumer surplus shrinks from the area above Pw to the area above Pt, i.e. it shrinks by the areas A, B, C and D. The government gains from the tariffs. It charges an amount PtPt* of tariff for every good imported. Since S*D* goods are imported, the government gains an area of C and E. Interestingly, the triangles B and D are lost by the consumers without any gain by any other party within the society. Therefore, areas B and D represent the dead weight lost to the society. The net loss to the society due to the tariff would be given by the total costs of the tariff minus its benefits to the society. Therefore, we can conclude that the net welfare loss due to the tariff is equal to: Consumer Loss Government revenue Producer gain or graphically, this gain is given by the areas shown by: (A + B + C + D) (C + E) A =B+DE that is, tariffs are beneficial to the society if the area given by the rectangle E more than offsets the losses shown by triangles B and D. Rectangle E is called the terms of trade gain whereas the two triangles B and D are also called efficiency loss, as this cost is incurred because tariffs reduce the incentives for the society to consume and produce. The model above is only completely accurate in the extreme case where none of the consumers belong to the producers group and the cost of the product is a fraction of their wages. If instead, we take the opposite extreme, and assume all consumers come from the producers' group, and also assume their only purchasing power comes from the wages earned in production and the product costs their whole wage, then the graph looks radically different. Without tariffs, only those producers/consumers able to produce the product at the world price will have the money to purchase it at that price. Note also, that with or without tariffs, there is no incentive to buy the imported goods over the domestic, as the price of each is the same. Only by altering available purchasing power through debt, selling off assets, or new wages from new forms of domestic production, will the imported goods be purchased. Or, of course, if its price were only a fraction of wages.[citation needed] In the real world, as more imports replace domestic goods, they consume a larger fraction of available domestic wages, moving the graph towards this view of the model. If new forms of production are not found in time, the nation will go bankrupt, and internal political pressures will lead to debt default, extreme tariffs, or worse.[citation needed]

Establishing tariffs inefficiently slows down this process at the expense of the consumer's real wages, allowing more time for new forms of production to be developed, but also buttresses industries which may never regain competitive prices.[citation needed]

[edit] Political analysis

The tariff has been used as a political tool to establish an independent nation; for example, the United States Tariff Act of 1789, signed specifically on July 4, was called the "Second Declaration of Independence" by newspapers because it was intended to be the economic means to achieve the political goal of a sovereign and independent United States.[14] In modern times, the political impact of tariffs has been seen in a positive and negative sense. The 2002 United States steel tariff imposed a 30% tariff on a variety of imported steel products for a period of three years. American steel producers supported the tariff,[15] but the move was criticised by the Cato Institute.[16] Tariffs can occasionally emerge as a political issue prior to an election. In the leadup to the 2007 Australian Federal election, the Australian Labor Party announced it would undertake a review of Australian car tariffs if elected.[17] The Liberal Party made a similar commitment, while independent candidate Nick Xenophon announced his intention to introduce tariffbased legislation as "a matter of urgency".[18]

[edit] Tariffs within technology strategies

When tariffs are an integral element of a country's technology strategy, the tariffs can be highly effective in helping to increase and maintain the country's economic health. As an integral part of the technology strategy, tariffs are effective in supporting the technology strategy's function of enabling the country to out maneuver the competition in the acquisition and utilization of technology in order to produce products and provide services that excel at satisfying the customer needs for a competitive advantage in domestic and foreign markets. In contrast, in economic theory tariffs are viewed as a primary element in international trade with the function of the tariff being to influence the flow of trade by lowering or raising the price of targeted goods to create what amounts to an artificial competitive advantage. When tariffs are viewed and used in this fashion, they are addressing the country's and the competitors' respective economic healths in terms of maximizing or minimizing revenue flow rather than in terms of the ability to generate and maintain a competitive advantage which is the source of the revenue. As a result, the impact of the tariffs on the economic health of the country are at best minimal but often are counter-productive. A program within the US intelligence community, Project Socrates, that was tasked with addressing America's declining economic competitiveness, determined that countries like China and India were using tariffs as an integral element of their respective technology strategies to rapidly build their countries into economic superpowers. It was also determined that the US, in its early years, had also used tariffs as an integral part of what amounted to technology strategies to transform the country into a superpower.