Differences between a programmed economy and a market economy

What is the tariff?

A tariff is an import duty on goods entering the country. So when an item arrives at customs by sea, plane, or car, the import duty is due based on the current "list". This list is essentially a list of items that are taxed differently. For example, an Apple MacBook from China may be subject to a 10% duty, while a Sony TV may only be subject to a 5% duty.

The money collected then goes to the government, as with any other tax, but instead, it is considered an indirect form of taxation where consumers are not taxed directly but through the importation process.

Sometimes higher tariffs are imposed to prevent cheaper products from entering the market, which can protect domestic jobs from international competition. For example, the US auto industry has been undermined for years by cheap imports, and recent tariffs have helped.

The new tariffs have made imported goods more expensive, creating more incentive for manufacturers to avoid tariffs and produce in the United States.

Who pays the tariffs?

Technically, duties are paid by importers upon entry into the country. However, these costs are usually passed directly on to customers in the form of higher prices and, at later points, to the people who ultimately bear the tariffs:

Consumers

As we saw during the China-US trade war, companies have no choice but to raise prices for consumers. The cost of moving and investing in another country will cost businesses billions, as many have already moved to China and other countries, and this has prompted several companies to announce that prices will rise, jobs will be lost and profits will be reduced in 2019.

The logic is quite clear, with a higher tariff, there is an additional cost to the supplier, which works in the same way as higher input or labor costs: if it costs more to supply the product, this will be reflected in the price.

Company

Some companies do not necessarily pass on 100% of costs and internally may pass some costs on to profits to maintain consumer demand; if prices are sensitive to changes, a price increase may significantly affect demand for the company's products, so it may be more profitable to make a small profit in return, so if consumers pay more, some companies will also be affected.

Types of tariffs

Ad valorem duties

This type of tariff is charged as a percentage rather than a specific amount of money. For example, there is a 10% duty on imported cars. If the car is worth $10,000, the fee is $1,000. However, if the car is worth $20,000, it is $2,000.

Special definitions

A specific duty is a duty that is imposed directly on an individual product and does not depend on its value. It is usually charged on a weighted unit or per unit basis. For example, in the USA a duty of 3.2 cents per liter is levied on certain types of milk. It is easy to confuse specific charges of taxes. However, the main difference is that a special tariff refers to the number of units received, as opposed to ad valorem definitions which refer only to value.

Composite invoices

A composite tariff is essentially a combination of value-added and fixed duties, i.e. it includes both a unit price, e.g. $1 per kilogram, and a percentage of the value of the goods, e.g. 10%.

Proportional tariff

A proportional tariff combines two trade policy measures in the form of tariffs and quotas, whereby a specific duty is imposed on imported goods up to a certain quantity, e.g. a 10% duty on imports up to 1 000 units, but the duty is increased for imported goods exceeding 1 000 units.

Why use invoices

Tariffs are used for a variety of reasons and some countries focus on a single factor, while others take it into account. Reasons for using tariffs include:

Protection of domestic workers.

By imposing costs on importers, their products become more expensive, giving local suppliers a competitive advantage. For example, a Chinese manufacturer wants to import shoes into the U.S. market and the price is $80, while local competitors sell a similar product for $100. A 30 percent tariff raises the price to $104, while Chinese shoes are in increasingly low demand.

Without tariffs, Chinese shoes are cheaper and considered desirable by many consumers, which in turn reduces demand among local suppliers, forcing them to produce fewer shoes. As a result, local suppliers will need fewer workers in their factories and offices.

In large markets such as manufacturing, job losses are felt, so governments try to gain public support by protecting such industries. While this may not affect the voting intention of a wider population, it can play an important role in winning the votes of workers.

Protecting emerging industries

In new and emerging industries, some countries seek to protect small businesses from international competition, usually in developing countries, but occasionally used in developed countries as well.

The concept of emerging industries goes back to the idea that new firms need protection in order to thrive. For example, South Africa is not known for its car production, but it can import major brands such as Ford, which makes it very difficult for local manufacturers to compete, as they have to compete not only on brand but also on price and efficiency.

Some countries see the industry and believe it should be encouraged to grow. This may be because the industry is necessary for the defense of the prosperity of the country or because the country wants to create new jobs.

Maintaining national security

Industries such as steel, technology, and aerospace are seen as key to national security. There are even good arguments for agriculture. If a country, for example, gets involved in a war, it may depend on its internal food production capacity. Consequently, these industries are seen as key elements to be protected.

Usually, not only tariffs are imposed, but also subsidies or even nationalization industries.

Retaliation

As we have seen in the US-China trade war, countries can impose retaliatory measures. For example, the US imposed tariffs on China because of its high tariffs on its exports in order to force China to reduce its tariffs.

Countries can also impose tariffs in retaliation for aggressive practices of foreign powers. For example, the United States increased its steel tariffs to 522% in response to Chinese dumping on steel. [1]