TARIFFS

A tariff is a tax charged on imports either on the basis of quantity (for example, "per ton;" these are called specific tariffs) or on the basis of their value (called ad valorem tariffs). Tariffs are the primary means by which governments protect their industries from foreign competition. Tariffs can be levied directly, as goods cross the border, or indirectly, by requiring that a license or permit be purchased before the goods can be shipped. Tariffs generally serve two purposes: to generate tax revenues and to protect a domestic industry from foreign competition. If a government wants to encourage the growth of a newly emerging industry it can also use tariffs to free these "infant" industries from having to compete with established foreign producers on the basis of price. Because tariffs raise barriers to the free flow of international trade, however, in the long run they tend to impede global economic growth. As a temporary way of raising revenues or protecting an industry they can be effective—at least until other countries retaliate by raising their own tariffs.

The first U.S. tariff, of about 8.5 percent, was levied in 1789 on imports like molasses, hemp, steel, and nails in order to raise revenues for the young U.S. government. By the War of 1812 (1812–1814) the average tariff had risen to 25 percent and continued to rise to as high as 33 percent on imported cotton and wool during the 1820s. Under the Tariff of 1828 tariffs were raised to their highest level prior to the American Civil War (1861–1865). Since the Whig and then the Republican Parties represented the industrial Northeast, they favored raising tariffs, while the Democrats, the party of the slaveholding South, opposed them. When the South seceded in 1860, the Republicans seized power and raised tariffs by 10 percent. In 1882 Congress established a permanent Tariff Commission to recommend changes in tariffs and in 1897 the Dingley Tariff imposed the steepest tariffs rates ever (57 percent) on foreign imports.

When the federal government began to collect income taxes in 1913, tariffs began to lose their importance as a source of government revenue and the last great tariff law was the Smoot-Hawley Act of 1930. In 1934 the Reciprocal Trade Act gave the President independent authority to negotiate tariff reductions with foreign countries. In 1947 the United States joined 22 other countries in signing the General Agreement on Tariffs and Trade (replaced in 1995 by the World Trade Organization), which over the years has successfully worked to lower tariff barriers around the world.