Question

Whether imposed for protective purposes or to raise revenue, tariffs can be imposed in two different ways. Define these two methods of imposing tariffs, and give an example of each.

Short answer

Tariffs can be imposed in two ways: specific tariffs and ad valorem tariffs. Specific tariffs are taxes imposed on imported goods based on a fixed amount per unit, such as weight, volume, or quantity. For example, a country might impose a specific tariff of \(5 per kilogram on imported apples. Ad valorem tariffs are taxes imposed on imported goods based on a percentage of the value of the goods. For example, a country might impose an ad valorem tariff of 15% on imported cars, in which case a car worth \)25,000 would have a tariff of $3,750 applied.

Step-by-step solution

Introduction to Tariffs

Tariffs are taxes imposed on imported goods and services. They can be implemented for two main reasons: protecting domestic industries or raising revenue for the government. Tariffs can be imposed in two ways: specific tariffs and ad valorem tariffs. We will now explain each method in detail and provide examples.

Specific Tariffs

Specific tariffs are taxes imposed on imported goods based on a fixed amount per unit, such as weight, volume, or quantity. This means that a specific amount of tax is applied per unit of the imported good, regardless of the value of these goods. Example: A country decides to impose a specific tariff of \(5 per kilogram on imported apples. This means that for every kilogram of apples imported, \)5 will be paid as a tariff to the government.

Ad Valorem Tariffs

Ad valorem tariffs are taxes imposed on imported goods based on a percentage of the value of the goods. This means that the tax charged depends on the monetary value of the imported goods, rather than being a fixed amount per unit. Example: A country decides to impose an ad valorem tariff of 15% on imported cars. If a car worth \(25,000 is imported, the tariff applied would be 15% of \)25,000, which is $3,750.

Key concepts

Understanding Specific Tariffs

Specific tariffs are a straightforward method of taxing imports. These tariffs impose a fixed fee on each unit of an imported good, such as per item, per kg, or per liter. The great thing about specific tariffs is their simplicity. They are easy to calculate and implement because the amount does not change with the market price of the product. Instead, you pay the same fee per unit whether the goods are expensive or cheap.
For example, a country might impose a tariff of $10 on every barrel of imported oil. Whether the oil price is $50 per barrel or $150, the fixed tariff remains $10 per barrel. This method provides steady revenue and predictability for businesses and governments.

• Easy to understand and collect
• Stable revenue regardless of price volatility
• Impact more noticeable on inexpensive goods

Exploring Ad Valorem Tariffs

Ad valorem tariffs offer a dynamic way of taxing imported goods, basing the tariff amount on a percentage of the good's total value. This means as the price of the good changes, so does the tariff. These tariffs are particularly useful for goods with prices that fluctuate widely, allowing the government to capture more value when prices are high but naturally collecting less when prices dip.
For instance, if a car is worth $30,000 and subject to an ad valorem tariff of 10%, the tariff due would be $3,000. However, if another car is valued at $20,000, the tariff would adjust to $2,000. This method allows governments to earn more from high-value items, aligning tariff revenues with market conditions.

• Reflects value changes automatically
• Collects more revenue from luxury or expensive items
• May result in less predictable revenue streams

What Are Protective Tariffs?

Protective tariffs are crafted with the well-being of domestic industries in mind. By imposing these tariffs, governments aim to shield local businesses from foreign competition. The idea is to make imported goods more expensive, thereby encouraging consumers to purchase domestically produced products.
When imports face heavy tariffs, their prices increase, providing an artificial cushion for local industries to grow and maintain jobs without the pressure of competing against cheaper foreign products. This can help emerging sectors develop domestically.

• Supports local industries against international competitors
• May help maintain local employment levels
• Could lead to higher consumer prices

Digging Into Revenue Tariffs

Revenue tariffs are primarily implemented to generate money for the government. Unlike protective tariffs, their main goal isn't to ward off foreign competition but to add to the government's coffers. This is particularly important in economies where other tax revenue sources are insufficient.
Governing bodies often find revenue tariffs straightforward to enforce, making use of border control mechanisms to collect these tariffs directly at ports of entry. As a result, they require less administrative complexity than other forms of taxes.

• Primary aim is revenue generation
• Simple to collect using existing border controls
• Less impact on market competition compared to protective tariffs