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Tarrifs

A tariff is a tax on an import. When someone imports a product that attracts a tariff (such as clothes or cars being imported into Australia), then they must pay this tax before the stock will be released from customs. One of the most controversial issues in the field of world trade is the rate at which tariffs should be levied, which products should attract tariffs, and which countries should be entitled to use tariff protection.

The impact of tariff protection is obvious. Let’s imagine that a particular retailer works with a 100% mark up on cost. They plan to buy an item which cost $50, but there is a 25% tariff on this product. What impact will this have on the price that we pay?


It is clear to see from this example that tariffs will be passed on to consumers in the form of higher prices. With this in mind, you might wonder why an economy would want to charge tariffs at all....

Many people believe that tariffs are used as a revenue raising exercise by the government. While this might be true in some countries, the truth is that tariffs don’t generate a great deal of revenue for the Australian government. In addition, recent budget announcements have reduced this figure. For example, the Free Trade Agreement with Singapore (2003/04) reduced tariff revenue by $30 million, and the removal of the 3% tariff on business inputs (May 11th, 2005) reduced revenue by a further $320 million.

Although numerous arguments have been used over time, the use of tariffs can be reduced to just one argument – tariffs are put in place to ensure that domestic industries are sustainable. And when domestic industries continue to operate, Australians have jobs.

Consider the example above. Imagine that an Australian producer was able to make exactly the same item, but the cost price was $60. Our retailer would need to sell this for $120. Without the tariff, this would result in more people buying the imported product. As a result, domestic jobs would be lost. As a result of this argument, Australia does still charge some tariffs. The general tariff rate is 5%, but we pay 10% on passenger motor vehicles, and 17.5% on clothing. (You should note that the rates are generally 0% (or falling to 0%) for imports from Singapore, Thailand and the USA, because of our special trade agreements with those countries.)

The real question is whether or not the economic arguments which justify the use of tariffs are sound. Although it is true that domestic jobs might be protected, it is also true that consumers will need to pay higher prices. This means that we won’t be able to buy as many goods and services, and so other domestic jobs might be lost. It is also true that tariffs are designed to protect industries which, by world standards, are inefficient. If this is true, then it is hard to see how this will result in job creation into the future. With a growing population, this is something that we do need to consider. In a globalised world, we should also stop to consider the impact of tariffs on people in other countries. If the price of their product is inflated artificially through the taxation system, then they won’t sell as many. This means that jobs will be lost in their country. This is one of the major arguments used by people who oppose globalisation – rich countries use tariffs to protect their industries, while poor countries can not generate enough jobs to ensure the health and wellbeing of their people.

It is worth noting that in 1988 the average tariff rate in Australia was 15%. Since that time, the average tariff rate has fallen to 3.5%, and the unemployment rate is significantly lower today than it has been at any point since the early 1970s.

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