Functions of Tariffs by Definition
Tariffs are considered to have three primary functions: to serve as a source of revenue, to protect domestic industries, and to remedy trade distortions (punitive function for product dumping). The revenue function income from tariffs provides governments with a source of funding. In the past this was the main function and reason for applying tariffs, but economic development and the creation of systematic domestic for instance it only accounts for about 2% of tax revenue. Nevertheless, revenue may still be an important tariff function in underdeveloped countries. In our time tariffs are more of a trade policy tool to protect domestic industries by altering the conditions under which goods compete. A case in point are “tariff quotas” that are used to strike a balance between market access and protecting domestic industry. Tariff quotas normally work by applying low or no duties to imports up to a certain volume and then higher rates to imports that exceed that the quota level.
The short answer from US Customs:
“Customs Duty is a tariff or tax imposed on goods when transported across international borders. The purpose of Customs Duty is to protect each country’s economy, residents, jobs, environment, etc., by controlling the flow of goods, especially restrictive and prohibited goods, into and out of the country.
The Anti-subsidy Duty
The anti-subsidy duty, also known as the countervailing duty, is a kind of import surtax levied to countervail the bonus or subsidy received directly or indirectly at the manufacture, production and output stage of the imported commodities.
Tax-free imports might relate to other things as follows:
· Imports of goods used in the manufacture of other goods for local consumption,
· Imports of goods used in the manufacture of other goods for export,
· Imports of goods which are only temporarily in the country for adjustments, repair, etc which is then re-exported.
· Imports of goods for local consumption
There are vast differences in the rules that apply to each of these refunds and importers will not automatically receive the refunds. Instead importers have to apply for these refunds, preferably before the goods were imported, in order to receive these refunds.”
What effect do tariffs have on a given economy? It depends mainly on two broad issues:
1. Its traded volume
2. Its trade-price
There are however many secondary issues that can effectively affect the performance of a given economy.
· Its protective effect: import duty raises the price of imported goods. This increase in the price of imports reduces imports and increases the demand for domestic goods.
· Its consumption effect: increase in price of the taxed commodity reduces the consumption capacity of the country
· Its distribution effect: an increase in the price of domestically produced goods amounts to redistribution of income between the consumers and producers in favor of the producers.
· Its revenue effect: an import duty means increased revenue of the government
· Its income and substitution effects: the duty may cause a switch over from spending on foreign goods to spending on domestic goods which should result in higher domestic income and employment.
· Its competitive effect: overprotecting the domestic industries from foreign competition may enable the domestic producers to become a monopoly in the domestic industry.
· Its terms of trade effect: in order to maintain previous levels of sales to the duty imposing country exporter will reduce prices making imports to be purchased at a lower price.
· Its balance of payment effect: reducing the volume of imports helps the imposing country improve its balance of payment position.
In conclusion, tariffs can have multiple functions that have marked effect on pricing for any economy which will also affect terms of trade, employment, income, government revenue, balance of payments and so on.