The two most important motives which prompt governmental authorities to levy customs duties are to secure revenue, and to protect home industries from foreign competition. These duties are known, respectively, as revenue duties and protective duties, or tariff for revenue only, and protective tariff. Other motives sometimes prompt the levy of tariffs, but they usually sink into insignificance when compared with these two.
Revenue Duties. - The most evident tariffs for revenue only are those placed upon goods which could not be produced within the country, or which could not be produced without great disadvantage. It might be possible to place such a high tariff upon coffee that it would become profitable to build greenhouses and grow coffee in the United States. Until such a result would begin to transpire, however, the tariff would be one for revenue only. The rates might be raised to a point where little revenue would be received because of the small amount of goods imported, but still it has given no protection to the coffee industry because it has resulted in the establishment of no coffee industry in this country.
If the maximum amount of revenue be desired, concern must be had as to how much an increase in duties will cause a decrease in the amount of goods imported. If the duties were placed upon a good which could not be produced at home, and for which the demand were absolutely inelastic, there would be no limit to the tax that could be placed with an ever-increasing return.
Goods only possess the above characteristics in degree, however, and some to only a very small degree. Increase in prices, then, to recover the increase in duties, will sooner or later drive the marginal consumer to go without the taxed goods, or to use substitutes, either of which will lessen the demand for the goods, hence lessen the imports and the amount of revenue. The problem of levying a tariff so as to get the highest revenue is much the same as the problem of monopoly price, for exactly the same principles must be considered.
Revenue Tariff and Industry. - While a tariff for revenue only is not calculated to affect industry, it cannot escape doing it to a greater or less degree. Consider again the example of coffee. It has been coming into the country without duty; there was a certain demand, and a price established. If the duty is increased, and the price raised to meet it, the marginal coffee drinkers will begin to drink tea, postum, or cocoa. This creates a demand for products of another industry - the duty in effect is protecting it from the former competition of the coffee industry.
The above situation would be different if the demand for coffee were inelastic or nearly so. As the price of coffee would rise, more of the consumer's purchasing power would be needed to supply his want for coffee, and he would have a smaller remainder with which to buy wool-ens, cottons, and other goods. These industries would suffer because of a revenue tax on coffee. It is easily seen, then, that no matter how purely a tariff is for revenue it must have some indirect effect upon industry through the action of the laws of price.
Protective Duties. - The levy of a protective duty is motivated, primarily, by its anticipated effect upon industry, rather than by any considerations of revenue. The purpose is to lessen the importation of foreign goods, cause a rise in prices, and thereby stimulate the development of such an industry at home. It is expected to drive industry into fields which would be unattractive if no such duty existed.
The diversification of industry secured by a protective tariff comes at the expense of other industries. As the price which must be paid for the protected product goes up, the consumer has a smaller remainder with which to purchase other commodities. At the same time the tendency will be to raise wages in these other industries by taking away a part of their supply of labor to work in the new industry. The direct effect of a protective tariff is easily seen- it produces a new industry in the country. The indirect effects, however, are just as certain, yet not so easily seen, while they are often impossible to calculate. It is a safe assertion, moreover, that a protective tariff is not an institution which gives something for nothing.
Protective and Revenue Duties. - In most modern tariff duties the ideas of revenue and protection are not entirely separated. A duty may bring a large amount of revenue and give a small amount of protection, or give a large amount of protection and continue to produce some revenue. The more protection a duty gives, however, the less will be the revenue received, while a duty which would give absolute protection, by eliminating the importation of goods, would destroy revenues.
Suppose that woolen cloth of a certain grade, produced under competitive conditions in England, can be sold in this country for fifty cents a yard in a sufficient amount to supply the need. A small amount could be produced by the most favored producer here at seventy-five cents a yard, and enough to supply the need at ninety cents a yard. To simplify calculations, assume an absolutely inelastic demand for the cloth. With no tariff whatever, it is evident that no cloth will be produced here, but will be imported, and sell for fifty cents a yard. The fiscal authorities decide that some revenue should be obtained from the importation of this commodity, and levy a duty of twenty cents a yard. This is purely a revenue tariff, because the increase in price that is likely to follow is not sufficient to allow production at home.
If the duty is raised to thirty cents a yard it becomes partially protective, for it allows the most favored producer to market his small amount of cloth. Upon this, however, the government receives no revenue, since it is not imported. The buyer of the cloth is paying the higher price caused by the duty, but to the home producer rather than to the government. Now assume a wholly protective duty, say of forty-five cents a yard. The English producers cannot now compete with the home producers, who can supply the desired quantity at ninety cents a yard. The government gets no revenue, since importation has ceased. The buyers of cloth pay forty cents more a yard for the cloth, but to the new industry rather than to the government.
It is sometimes pointed out that the government does not wholly destroy the possibility of revenue by granting an absolutely protective tariff, because the patrimony of the state is increased to the extent of the protected industry, upon which the government can draw for support. This is true only when the protected industry is given a start, and can soon stand on its own feet. As long as an artificial price is maintained by protection, however, the patrimony represented by the new industry simply represents a patrimony subtracted from other industries.
Other Tariffs. - Tariffs are sometimes levied to retaliate for the duties laid by another country, are sometimes modified to reciprocate for favors shown by another country, and are sometimes used to attempt to equalize the costs of production between countries. Many of the European duties which are levied against American goods are to retaliate for the high tariffs levied by this country. The proposed reciprocity treaty with Canada a few years ago was an attempt to make concessions between the two countries. An agreement was not reached because of the strong protectionist sentiment.
The French tariff represents a system based upon the reciprocity principle. It is known as a maximum-minimum tariff - that is, a certain maximum tariff is levied from which concessions are made to countries which grant favors to France. A somewhat similar provision is found in our tariff law of 1909, except that it partakes more of the nature of a retaliatory measure. Certain minimum tariffs are levied, which are increased against those countries which have tariff legislation unfavorable to the United States.
When a tariff to equalize costs is used, it is expected that neither home nor foreign producer will have any advantage over the other, and that healthy competition can continue between the two. In the example of woolen cloth used above, a forty cents a yard duty would be such a tariff. In actual practice, however, because of the continual changing aspects of industry, the maintenance of such a scheme is next to impossible.
Another attempt to use the tariff as an equalizer of costs is the adoption of what is sometimes called the compensating tariff. This occurs when an increase is granted in the duties levied on manufactured products sufficient to offset any duties which have been levied on the raw materials used by the industry which makes the manufactured products in question. Tariffs of this nature have been particularly applicable in the case of woolens. With every increase in the duty on raw wool, the manufacturers felt they must have a proportionate increase in the duties on manufactured cloth to compensate for their increased costs occasioned by the tariff on raw wool. Such tariffs may also be used to compensate for the use of excise taxes. When an excise tax is placed upon goods produced within a country, a tariff of the same amount is placed upon goods imported into the country.
In most countries a relatively greater amount of attention is being paid to the revenue features of tariffs than to the protective issues. Two reasons can be seen for this. First, the need for increased funds has grown rapidly, and second, the avenues open to central governments for raising funds have been limited.