Tariffs: Meaning and Types | International Trade | Economics

In this article we will discuss about the meaning and types of tariffs imposed on imports and exports.

Meaning of Tariffs:

A tariff is a duty or tax imposed by the government of a country upon the traded commodity as it crosses the national boundaries. Tariff can be levied both upon exports and imports. The tariff or duties imposed upon the goods originating in the home country and scheduled for abroad are called as the export duties. Countries, interested in maximising their exports generally avoid the use of export duties. Tariffs have, therefore, become synonymous with import duties.

The import duties or import tariffs are levied upon the goods originating from abroad and scheduled for the home country. Sometimes a country may also resort to what is called as a transit duty. It is imposed upon the goods originating in the foreign country and scheduled for a third country crossing the borders of the home country. For instance, if India imposes tariffs on goods that Bangladesh exports to Nepal through the Indian Territory, these will be called as transit duties. Such duties are usually a matter of much concern for the land-locked countries.

The imposition of import tariff results in the relative changes in prices of products and factors.

That brings about a significant change in the structure of international trade. High tariffs certainly have the effect of restricting the volume of international trade. A negative tariff or subsidy is often supposed to expand foreign trade over and above its volume in the absence of subsidy.

Types of Tariffs:

Tariffs are of several types and these can be classified into different groups or sub-groups as below:

(1) Classification on the Basis of Criterion for Imposition:

On the basis of the criterion for imposition of tariffs.

These can be of such types as:

(a) Specific tariff,

(b) Ad Valorem tariff,

(c) Compound tariff and

(d) Sliding scale tariff.

(a) Specific Tariff:

Specific tariff is the fixed amount of money per physical unit or according to the weight or measurement of the commodity imported or exported. Such duties can be levied on goods like wheat, rice, fertilisers, cement, sugar, cloth etc. Specific duties are quite easy to administer, as they do not involve the evaluation of the goods.

The determination of the value of the traded goods may be difficult as there are several variants of price such as demand price, supply price, market price, contract price, invoice price, f.o.b, (free on board) price, c.i.f (cost, insurance, freight) price etc. The resort to specific duties enables the government to keep out of complexities of prices.

However, the specific duties cannot be levied on high valued goods such as diamonds, jewellery, watches, T.V. sets, motor cars, works of arts like paintings etc. These articles can be taxed either on the basis of weight, surface area covered or the number of articles.

(b) Ad Valorem Tariff:

‘Ad Valorem’ is the Latin word that means ‘on the value.’ When the duty is levied as a fixed percentage of the value of the traded commodity, it is called as valorem tariff. Such duties are levied on the products the value of which is disproportionately higher compared to their physical characteristics such as weight or measure­ment.

These duties are more equitable as the costly goods, generally consumed by the rich, bear greater burden of duty, while the cheaper goods bought by the poor, bear lesser burden of tariff. For instance, if the import of watches is subject to 70 percent ad valorem tariff, a watch valued at Rs. 1000 will be subject to a duty of Rs. 700 and a watch valued at Rs. 1200 will be subject to a tariff amounting to Rs. 840. The ad valorem duties have an additional advantage that the international comparison of tariffs, in their case, can be easily made.

(c) Compound Tariff:

The compound tariff is a combination of specific and ad valorem tariff. The structure of compound tariff includes specific duty on each unit of the commodity plus a percentage of ad valorem duty. The compound tariffs not only impart a greater elasticity to revenues but also assure a more effective protection to the home industries.

(d) Sliding Scale Tariff:

The import duties which vary with the prices of the commodities are termed as sliding scale duties. These may either be on specific or ad valorem basis. In practice, these are generally on a specific basis.

(2) Classification on the Basis of Purpose for Which Tariff is Imposed:

On the basis of purpose of levying the tariff.

These can be of two types:

(a) Revenue Tariff and

(b) Protective Tariff.

(a) Revenue Tariff:

The tariff, which is imposed primarily for generating more revenues for the government is called as the revenue tariff. In advanced countries, the introduction and diversification of direct taxes has reduced the importance of tariff as a source of government revenues. But in the less developed countries, there is still much reliance of the governments on this source of revenue.

Generally pure revenue tariff is not possible. The imposition of tariff, even for the purpose of securing revenues, does have protective effect when it leads to switch of demand by the domestic consumers from the imported to home- produced goods.

(b) Protective Tariff:

The tariff may be imposed by the government to protect the home industries from the cut-throat competition from the foreign produced goods. The higher the tariff, greater may be the protective effect of tariff. A perfect protective tariff is likely to prohibit completely the import from abroad.

In practice, the perfect protective tariff may not exist. If the domestic demand for import remains strong, there can be the possibility of smuggling imported goods. In addition, such a tariff will not yield any revenue to the government. A high rate of protective tariff can make the domestic producers more lethargic and inefficient and unable to face foreign competition even in the long run.

(3) Classification on the Basis of Discrimination:

If the tariff is influenced by the consideration of discrimination.

There can be two types of tariffs-

(a) Non-discriminatory and

(b) Discriminatory.

(a) Non-Discriminatory Tariff:

If the uniform tariff rates are applicable to all the commodities irrespective of the country of origin, these are known as non-discriminatory tariffs. It is possible that low rates of tariffs on certain commodities exist because of commercial agreements with some countries but the tariff-imposing home country extends the same low tariff rates to the commodities of all the countries.

Such a system of non­discriminatory tariff is called as single column tariff. This system of tariff is easy and simple to administer. There is, however, one deficiency that it is not elastic enough to adjust according to the changing needs of the industries of the home country. From the viewpoint of revenues too, it may not be satisfactory for the tariff-imposing country.

(b) Discriminatory Tariff:

In case of discriminatory tariff, the varying tariff rates exist for different commodities. The products originating from favoured countries are subject to a lower tariff rate than those of other countries. The discriminatory tariffs can be double or multiple column tariffs.

In case of the double column tariff, two different rates of duty exist for all or some commodities. Both the rates are either announced by the government right from the beginning and the two rates come into existence after the country enters into favoured-nation commercial agreement with some foreign countries. The favoured rates of tariff may either be on a unilateral basis or on a reciprocal basis.

The double column tariff can be further classified as:

(i) General and conventional tariff

(ii) Maximum and minimum tariff

(iii) Multiple Column Tariff.

(i) General and Conventional Tariff:

The general tariff schedule is determined by the state legislature. It also makes provision for the adjustment in tariff rates as and when required to fulfill the obligations of international commercial agreements. The conventional tariff schedule is evolved through the commercial agreements of the home country with other countries. It does not permit changes in tariff rates according to the changes in domestic conditions or requirements.

The changes can be possible only after negotiations and agreements are reached between the concerned countries or after the expiry of the existing agreement. It is clear that there is some rigidity in the conventional tariff schedule. In contrast, the general tariff schedule is more flexible

(ii) Maximum and Minimum Tariff:

Under this system, a country has maximum and minimum tariff rates for every commodity. These tariff rates are fixed by the legislature and the government is authorised to apply specific rates of tariff to the goods imported from the different countries. The minimum tariff rates are applied to the products originating from the countries treated as ‘The Most Favoured Nations’. The maximum tariff rates are applied for the purpose of improving the bargaining position of the home country vis-a-vis the foreign countries.

(iii) Multiple Column Tariff:

The multiple column tariff consists of three different rates of tariff – a general rate, an international rate and a preferential rate. The general and international tariff rates can be considered equivalent to the maximum and minimum tariff rates discussed above. The preferential tariff is generally applied by a subject country to the products originating from the colonial countries.

The preferential tariff rate is kept lower than the general rate of tariff. For instance, the goods imported by India from Britain before independence were subjected to a lower tariff or duty free on account of Imperial Preferences. On the other hand, the goods imported from other countries such as Japan, Germany and others were subject to higher rates of tariff.

(4) Classification on the Basis of Products:

Whether a product is imported or exported can be the basis of tariff.

On this basis, the tariffs can be of the types of:

(a) Import duties and

(b) Exports duties.

(a) Import Duties:

If the home country imposes tariff upon the products of the foreign countries as they enter its territory, the tariff is known as import tariff or import duty.

(b) Export Duties:

If the products of the home country become subject to tax as they leave its territory to be sold in the foreign market, the tax or duty is called as export tariff or export duty.

The import tariffs have remained the matter of deep interest both for analytical and policy reasons. These are far more wide-spread, and almost every country takes resort to them. In contrast, the export duties are applied to a very limited extent. Some countries like the USA have prohibited export duties by law. Even in those countries, where these are in vogue, the basic purpose is to secure larger revenues.

(5) Classification on the Basis of Retaliation:

On this basis, the tariffs can be of the types of

(a) Retaliatory tariffs and

(b) Countervailing tariffs.

(a) Retaliatory Tariffs:

If a foreign country has imposed tariffs upon the exports from the home country and the latter imposes tariffs against the products of the former, the tariffs resorted to by the home country will be regarded as the retaliatory tariffs. The home country, while adopting this measure does not either has the object of raising revenues or protecting home industries but of acting in retaliation.

(b) Countervailing Tariffs:

If the foreign country has been exporting large quantities of its products in the market of the home country on the strength of export subsidies, the home country can neutralise the ‘unfair advantage’ enjoyed by foreign products through imposing duties upon them as they enter the territory of the home country. The latter has full justification for resorting to these countervailing duties in order that the unfair advantage given by exports subsidies to the foreign products is offset and the competition takes place on equal footing between the foreign and home produced goods.