In the year 400 BC, the city state of Athens levied taxes on grains and other products brought to them from other regions through the port of Piraeus. This constituted the first known usage of tariffs to raise revenues for a government. The Athenians went a step further and blocked all other entry points, requiring grain in particular to be shipped through the port. But the tool of tariffs has had a long, illustrious, life in the history of world economics and trade.
Definition of a Tariff: A tariff is nothing more than a tax placed upon imported cargoes by the government of the receiving country. It is usually paid before the cargo passes through the point of entry (ie. seaport, airport, rail crossing, etc.). The company that is importing the goods pays the tariff and typically passes the cost along as a part of the price to the end recipient of the merchandise. Freight forwarders usually facilitate the transaction enabling the product to move along without delay. The tax is either a flat fee (specific tariff) or a percentage of the value of the product being imported (ad valorem tariff). Tariffs have their place in the world economy to help balance out trade arrangements between countries. They also act as a revenue generator for the issuing government, but are usually inflationary in that the cost of the tariff in final analysis is paid in the form of higher prices by the consumer of the merchandise.
Government Revenues: The Continental Congress did not have the authority to raise revenues via taxation until 1789 when the new United States Constitution, passed in 1788, took effect. The Constitution granted the authority for taxation and other fiscal policy powers to the Congress. The new government needed money badly and in spite of having some revenue from duties, it relied upon the Tariff Act of 1789 to provide revenues to help run the government and pay down the massive amount of debt carrying over from the Revolutionary War. The British had other problems, however, and British/American relations deteriorated sharply when the British Navy kidnapped merchant seamen from America’s large merchant fleet to fill their ranks to fight Napoleon. In 1806, the U.S. Congress passed an act blocking the importation of a list of British materials and consumer goods in response to the impressment of neutral seamen. Other steps were needed and taken, but it wasn’t until war was declared by Congress on June 18, 1812, that actions to rectify these problems began to take shape. When the war ended American tariff policy continued albeit modified in certain respects. Until the fiscal demands of the Civil War arose, tariffs remained the dominant source of revenue for the federal government. During the Civil War income taxation appeared for the first time, and combined with sources of revenue other than tariffs equaled about 50% of all federal revenues. The income taxation went away and tariffs returned to significance sometime after the war ended, but tariffs receded again in 1913 when income taxes became permanent. Tariffs as a revenue source remained dominant until World War II. From then on, income taxation generally supplanted tariffs as the federal government’s main source of revenue.
Protecting Industries: Throughout history tariffs have been used to protect fledging industries in emerging economies from facing “dumping” into their marketplaces of products that are priced lower by foreign competitors. The cheaper prices would drive the customers away from their country’s own industries’ products creating current account issues (when more merchandise is imported than exported) and perhaps causing the local industries to fail. During the American Revolution the prices of goods sold in America but made in countries other than Britain were increased by British tariffs. After the revolution ended, the shoe was on the other foot, as the new American government applied tariffs to nearly, if not all, imported merchandise to enable its own infant industries to grow. This protective feature of tariffs was prominent throughout the next 150 years or so in the U.S. in various shapes and forms. It is considered to be one of the causative factors of the American Civil War, as the northern states wanted tariffs to protect their industries from foreign dumping. But the southern states wanted the tariffs to go away as retaliatory tariffs were placed on cotton and other products that they were exporting thereby hurting their industries. Protecting industries remained a high priority at this point in time as industries grew in America, and powerful lobbies also grew to pressure Congress into maintaining protection for their clients’ businesses. During the great depression of 1929-1933, the already high tariffs were raised even higher by the 1930 Smoot-Hawley Act. In addition to nearly crushing world-wide trade, these tariffs had a negative impact on this country’s own economic growth. In 1934 during the Roosevelt Administration, Congress passed the Reciprocal Trade Agreements Act, in effect handing the control over tariffs to the Executive Branch of government with the mandate of negotiating fair trade agreements for the country. After World War II ended, tariffs were lowered to avert reducing trade and providing higher costs to consumers. Tariffs are still employed today on certain merchandise and still provide some revenues to the federal government, but their main purpose is that of trade reciprocity in the world economy.
Trade Reciprocity: The third pillar of tariffs is the matter of trade reciprocity—that is creating an equal and fair trading climate on the part of both participants. As a tool of foreign relations, trade agreements and reciprocity have helped establish lasting relations among allies and other friendly countries. It further has assisted in creating the climate of better relations between countries that are not necessarily allies or are even unfriendly. Trade reciprocity is often enforced with embargos and sanctions that are set to interrupt trade for purposes of steering a country’s trading partner away from actions that do not conform with international law or customs. In the 1930’s this aspect of trade reciprocity was made acute with the aggressive military actions taken by Japan against its neighboring countries. The response from American came in the form of a series of trade embargoes and sanctions set to restrict Japanese encroachment upon its neighbors. However, the more sanctions and embargoes that were levied, the more aggressive actions Japan took to circumvent them. Finally, the U.S. government issued a complete embargo of crude oil and petroleum products that Japan needed for its large, powerful navy, and its continental war machine. Trade negotiations continued all the way up until December 7, 1941, when war broke out between the two former trading partners. Peace in 1945, lead to a turnabout of trade relations as the U.S. opened its shores to Japanese industries to help the country get back on its feet.
Tariffs in Today’s Geopolitical Climate: In this day and age from a fiscal perspective, tariffs have had lesser significance, but they nonetheless have made much in the way of news owing to trading rivalries between the world’s top two economies—United States of America, and the Peoples Republic of China. Further, the war in Ukraine and conflict in the middle east have likewise made news impacting the worldwide trade of crude oil and energy products. Worldwide trade of wheat faced shortfalls, but even the two belligerents in the Ukraine war were able to agree to permit shipping of wheat to other countries from Black Sea ports on both sides. It is questionable as to how effective the usage of tariffs and trade embargoes are in resolving issues that could lead toward hostilities between countries. In some respects, these trade actions have been effective, but in others they have not. Other political maneuvering concerning tariffs can be found internally in some countries such as America. If tariffs are increased, government revenues will be increased. Could a politician then quietly cut income taxes for select segments of the economy and offset the fiscal impact with increased tariffs? It’s good to remember always that the implementation of tariffs impacts the consumer negatively with higher prices and inflation. Then there could be monetary policy impacts in the way of increasing interest rates to deal with the ensuing inflation that would reach through all parts of the economy.
Conclusions: The main function of tariffs breaks down into three segments: raising revenue for the government, protecting fledgling industries, and facilitating trade reciprocity. It is not perfectly clear how trade embargoes and sanctions impact belligerent governments, in light of using them in the numerous attempts over the last century to coerce changes in political behavior of belligerents.
Sources:
Wikipedia, Tariff.
History.com, What is a Tariff? by Sarah Pruitt, August 6, 2024.