A tariff is a tax or duty imposed on goods imported into a nation. Tariffs increase the price of imported PRODUCTs. The U.S. Constitution authorizes Congress to levy uniform tariffs on IMPORTS. There are several types of U.S. tariffs, the most common being an ad valorem (“according to the value”) rate. Ad valorem rates are assessed in proportion to the value of the good, for example 10 percent of the value. Tariffs may also be assessed at specific or compound rates. Specific rates are based on weight measures (i.e., pounds, ounces), while a compound rate is a mixture of an ad valorem and a specific-rate tariff. Tariff-rate quotas impose a limit on imports at a specific rate up to a certain amount. Imports in excess of that amount are subject to a higher rate of tariff. Thus tariff-rate quotas discourage imports in excess of the specified quota at the lower tariff level.
In the 18th century, tariffs were initially used to generate revenue for the federal government. In many developing countries, where government oversight of INCOME and sales activities is minimal, tariffs continue to be used for revenue generation, but by 1816 the United States had begun using tariffs for openly protectionist goals. Raising the price of imported goods protected American producers from foreign COMPETITION.
Throughout the 19th century, the United States legislated heavy tariffs, justified as being needed to protect “infant” industries, and to force the South to engage in more trade with the North rather than with Europe. Exceptions to the tariff laws were granted through mostfavored- nation RECIPROCITY treaties. The first of these treaties involved Canada (Elgin-Marcy, 1854) and Hawaii (1875). Pressure from U.S. manufacturers (mostly northern) and the perception that Britain had been sympathetic to the Confederacy led to abrogation of the 1854 treaty with Canada in 1866.
In the late 19th century, additional “countervailing duties” were created to combat export subsidies of European countries, particularly Germany. After 1916, additional tariffs could also be imposed if foreign countries were found to be DUMPING, selling goods at unfairly low prices in the United States. Most early American dumping legislation was a response to the practices of foreign CARTELs. On many occasions, the U.S. Supreme Court debated the constitutionality of protective tariffs, finally ruling they were constitutional in 1928. This decision, along with the STOCK MARKET crash in 1929, led to enactment of the infamous SMOOT-HAWLEY TARIFF ACT of 1930. Smoot-Hawley raised tariffs on over 12,000 products to an average of approximately 60 percent of their import values. President Herbert Hoover, ignoring a petition signed by more than 1,000 economists warning of the act’s harmful effects, signed the legislation. A trade war resulted as foreign countries quickly enacted retaliatory legislation. Many economists believe the Smoot-Hawley Tariff Act contributed significantly to the GREAT DEPRESSION. This would be the last time the U.S. passed tariff legislation without international negotiations.
Since 1930, Congress has achieved changes in the levels of tariffs for goods entering the United States through international trade agreements negotiated by the president. The Reciprocal Trade Agreements Act of 1934 gives the president the authority to negotiate bilateral agreements, reducing Smoot-Hawley tariffs with selected countries. The Trade Agreements Extension Act of 1945, anticipating the creation of the General Agreement on Tariffs and Trade (GATT), authorized the president to conduct multilateral trade negotiations.
GATT became effective in 1948 and was implemented in the United States by executive order. Even though the U.S. Congress never ratified GATT, which was replaced by the WORLD TRADE ORGANIZATION in 1997, it resulted in significant reductions in U.S. tariffs. Under GATT, duties known as most-favored-nation (MFN) tariffs or “Column 1 tariffs” have been successively reduced through “rounds” of trade negotiations. Since 1948, multilateral tariff agreements have been the predominant basis for tariff negotiations.
The term most-favored-nation is misleading, suggesting special tariff arrangements. It is more appropriate and, since 1998, officially correct to consider MFN tariffs as the normal level of U.S. tariffs, to which there are exceptions resulting in higher or lower tariffs. After the Tokyo Round of GATT negotiations in 1978, the average MFN tariff applied to manufactured imports into the United States was approximately 5.6 percent. The Uruguay Round in 1994 reduced MFN tariffs to an average of 3.5 percent.
See also MOST-FAVORED NATION CLAUSE; NONTARIFF BARRIERS.