Page 100 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes If the quantity imported under a quota is less than would be imported in the absence of a quota, the
domestic price of the commodity in question may rise. Unless the government maintains some system
of licensing importers in order to capture as revenue the difference between the higher domestic price
and the foreign price, the importing of such commodities can prove a lucrative source of private profit.
Quantitative trade restrictions were first imposed on a large scale during and immediately after
World War I. During the 1920s quotas were progressively abolished and replaced by tariffs. The next
great wave of quota protection came during the Great Depression in the early 1930s, with France
leading the European countries in introducing a comprehensive quota system in 1931. After World
War II, the western European countries began a gradual dismantling of quantitative import restrictions,
but the United States tended to make more use of them.

8.1 Definition

Tariffs, which are taxes on imports of commodities into a country or region, are among the oldest
forms of government intervention in economic activity. They are implemented for two clear economic
purposes. First, they provide revenue for the government. Second, they improve economic returns to
firms and suppliers of resources to domestic industry that face competition from foreign imports.
Tariffs are widely used to protect domestic producers’ incomes from foreign competition. This
protection comes at an economic cost to domestic consumers who pay higher prices for import-
competing goods, and to the economy as a whole through the inefficient allocation of resources to the
import competing domestic industry. Therefore, since 1948, when average tariffs on manufactured
goods exceeded 30 percent in most developed economies, those economies have sought to reduce
tariffs on manufactured goods through several rounds of negotiations under the General Agreement
on Tariffs Trade (GATT). Only in the most recent Uruguay Round of negotiations were trade and
tariff restrictions in agriculture addressed. In the past, and even under GATT, tariffs levied on some
agricultural commodities by some countries have been very large. When coupled with other barriers
to trade they have often constituted formidable barriers to market access from foreign producers. In
fact, tariffs that are set high enough can block all trade and act just like import bans.
8.2 Types of Tariffs

Tariffs can be expressed in absolute or in relative terms, they may be discriminatory or non-
discriminatory, they can be imposed on imports or on exports, and they may be prompted by
considerations of revenue or protection to domestic industries.
They are expressed in absolute terms of dollars and cents per unit e.g. per tonne, or per pound of
weight of the imported (or exported) quantity. Specific duties can be levied on goods like wheat or
rice or sugar, but they can not be adopted for all goods and services especially in the case of valuable
goods. For instance, specific tariffs can not be levied in the case of, say, diamonds, modern art paintings,
transistors, television sets, etc. We cannot estimate duties on the articles by weighing them physically.
The duty has to be estimated on the basis of the value of these products, rather than their physical
weight. When, therefore, duty is levied on the basis of the value of the product measured by their
money price, we have what are called as ad valorem tariffs (ad valorem is a Latin word which means
“on the value”). Ad valorem tariff is a percentage tax.

Specific tariffs are those which are assessed on the basis of the physical weight of the
product which is imported or exported.

There may also be a compound tariff which combines a specific duty with an ad valorem duty. The
distinction between the two types of tariffs is of some significance. As the prices of imported goods
rise, the ad valorem tariff based on a given fixed percentage brings greater revenue to the tariff imposing
country, whereas specific tariffs lack such revenue elasticity with respect to import price changes.

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