British H.M. Revenue & Customs officers with seized smuggled tobacco, 2014.
A skirmish with smugglers from Finland at the Russian border, 1853. A painting by Vasily Hudiakov.
Smuggling is the illegal transportation of objects, substances, information or people, such as out of a house or buildings, into a prison, or across an international border, in violation of applicable laws or other regulations.
The verb smuggle, from Low Germansmuggeln or Dutchsmokkelen
(="to transport (goods) illegally"), apparently a frequentative
formation of a word meaning "to sneak", most likely entered the English
language during the 1600s–1700s.
History
A book with a concealed space for hiding cigarettes.
Smuggling has a long and controversial history, probably dating back
to the first time at which duties were imposed in any form, or any
attempt was made to prohibit a form of traffic. Smuggling is often associated with efforts by authorities to prevent the importation of certain contraband
items or non-taxed goods; however, there has also been smuggling based
on illegally exporting goods. In England smuggling first became a
recognised problem in the 13th century, following the creation of a
national customs collection system by Edward I in 1275. Medieval smuggling tended to focus on the export of highly taxed export goods — notably wool and hides.
Merchants also, however, sometimes smuggled other goods to circumvent
prohibitions or embargoes on particular trades. Grain, for instance, was
usually prohibited from export, unless prices were low, because of
fears that grain exports would raise the price of food in England and
thus cause food shortages and / or civil unrest. Following the loss of Gascony
to the French in 1453, imports of wine were also sometimes embargoed
during wars to try and deprive the French of the revenues that could be
earned from their main export.
Most studies of historical smuggling have been based on official
sources — such as court records, or the letters of Revenue Officers. A
senior academic of the University of Bristol states that they only
detail the activities of those dumb enough to get caught.
This has led him and others, such as Prof. H. V. Bowen of the
University of Swansea to use commercial records to reconstruct smuggling
businesses.
Jones' study focuses on smuggling in Bristol in the mid-16th century,
arguing that the illicit export of goods like grain and leather
represented a significant part of the city's business, with many members
of the civic elite engaging in it, whether by disguised/hidden
transport or mis-description of goods.
Grain smuggling by members of the civic elite, often working closely
with corrupt customs officers, has also been shown to have been
prevalent in East Anglia during the later 16th century.
In England wool was smuggled to the continent in the 17th century, under the pressure of high excise taxes. In 1724 Daniel Defoe wrote of Lymington, Hampshire, on the south coast of England
"I do not find they have any foreign commerce, except it
be what we call smuggling and roguing; which I may say, is the reigning
commerce of all this part of the English coast, from the mouth of the
Thames to the Land's End in Cornwall."
The high rates of duty levied on tea and also wine and spirits, and other luxury goods coming in from mainland Europe
at this time made the clandestine import of such goods and the evasion
of the duty a highly profitable venture for impoverished fishermen and
seafarers. In certain parts of the country such as the Romney Marsh, East Kent, Cornwall and East Cleveland,
the smuggling industry was for many communities more economically
significant than legal activities such as farming and fishing. The
principal reason for the high duty was the need for the government to
finance a number of extremely expensive wars with France and the United States.
Before the era of drug smuggling and human trafficking, smuggling had acquired a kind of nostalgic romanticism, in the vein of Robert Louis Stevenson's Kidnapped:
"Few places on the British coast did not claim to be the haunts of wreckers or mooncussers.
The thievery was boasted about and romanticized until it seemed a kind
of heroism. It did not have any taint of criminality and the whole of
the south coast had pockets vying with one another over whose smugglers
were the darkest or most daring. The Smugglers Inn was one of the commonest names for a bar on the coast".
In Henley Road, smuggling in colonial times was a reaction to the heavy taxes and regulations imposed by mercantilist trade policies. After American independence in 1783, smuggling developed at the edges of the United States at places like Passamaquoddy Bay, St. Mary's in Georgia, Lake Champlain, and Louisiana. During Thomas Jefferson's embargo of 1807-1809,
these same places became the primary places where goods were smuggled
out of the nation in defiance of the law. Like Britain, a gradual
liberalization of trade laws as part of the free trade movement meant less smuggling. in 1907 President Theodore Roosevelt tried to cut down on smuggling by establishing the Roosevelt Reservation along the United States-Mexico Border.[12][13] Smuggling revived in the 1920s during Prohibition, and drug smuggling became a major problem after 1970. In the 1990s, when economic sanctions were imposed on Serbia,
a large percent of the population lived off smuggling petrol and
consumer goods from neighboring countries. The state unofficially
allowed this to continue or otherwise the entire economy would have
collapsed.
In modern times, as many first-world countries
have struggled to contain a rising influx of immigrants, the smuggling
of people across national borders has become a lucrative extra-legal
activity, as well as the extremely dark side, people-trafficking,
especially of women who may be enslaved typically as prostitutes.
Types of smuggling
Goods
The International Anti-Opium Association, Peking "The War Against Opium"
Road sign at the Canada-US border prohibiting cannabis, Abercorn, Québec (2018)
Much smuggling occurs when enterprising merchants attempt to supply
demand for a good or service that is illegal or heavily taxed. As a
result, illegal drug trafficking, and the smuggling of weapons (illegal arms trade), as well as the historical staples of smuggling, alcohol and tobacco,
are widespread. As the smuggler faces significant risk of civil and
criminal penalties if caught with contraband, smugglers are able to
impose a significant price premium on smuggled goods. The profits
involved in smuggling goods appear to be extensive. The Iron Law of Prohibition dictates that greater enforcement results in more potent alcohol and drugs being smuggled.
Profits also derive from avoiding taxes or levies on imported goods. For example, a smuggler might purchase a large quantity of cigarettes
in a place with low taxes and smuggle them into a place with higher
taxes, where they can be sold at a far higher margin than would
otherwise be possible. It has been reported that smuggling one truckload
of cigarettes within the United States can lead to a profit of US$2 million.
People smuggling
With regard to people smuggling, a distinction can be made between people smuggling as a service to those wanting to illegally migrate and the involuntary trafficking of people. An estimated 90% of people who illegally crossed the border between Mexico and the United States are believed to have paid a smuggler to lead them across.
A poster warning the German women and girls about the danger of human traffic in the USA (ca 1900)
Actress and UNICEF AmbassadorLucy Liu spoke out against human trafficking and lauded USAID efforts to increase awareness
Trafficking of human beings, sometimes called human trafficking,
or in the much referred to case of sexual services, sex trafficking,
is not the same as people smuggling. A smuggler will facilitate illegal
entry into a country for a fee, and on arrival at their destination,
the smuggled person is free; the trafficking victim is coerced in some
way. Victims do not agree to be trafficked: they are tricked, lured by
false promises, or forced into it. Traffickers use coercive tactics
including deception, fraud, intimidation, isolation, physical threats and use of force, debt bondage or even force-feeding drugs to control their victims.
While the majority of victims are women,
and sometimes children, other victims include men, women and children
forced or conned into manual or cheap labor. Due to the illegal nature
of trafficking, the exact extent is unknown. A U.S. government report
published in 2003 estimates that 800,000-900,000 people worldwide are
trafficked across borders each year. This figure does not include those who are trafficked internally.
Child trafficking
According to a study by Alternatives to Combat Child Labour Through
Education and Sustainable Services in the Middle East and North Africa
Region (ACCESS-MENA) 30% of school children living in border villages of
Yemen had been smuggled into Saudi Arabia. Child trafficking is commonly referenced as "transporting". Smuggled children were in danger of being sexually abused or even killed. Poverty
is one of the reasons behind child trafficking and some children are
smuggled with their parents' consent via a transporter. As many as 50%
of those smuggled are children. In the Philippines, between 60,000 and
100,000 children are trafficked to work in the sex industry.
Human trafficking and migration
Each year, hundreds of thousands of migrants are moved illegally by highly organized international smuggling and trafficking groups, often in dangerous or inhumane conditions. This phenomenon has been growing in recent years as people of low income countries are aspiring to enter developed countries
in search of jobs. Migrant smuggling and human trafficking are two
separate offences and differ in a few central respects. While
"smuggling" refers to facilitating the illegal entry of a person into a
State, "trafficking" includes an element of exploitation.
The trafficker retains control over the migrant—through force,
fraud or coercion—typically in the sex industry, through forced labour
or through other practices similar to slavery. Trafficking violates the
idea of basic human rights.
The overwhelming majority of those trafficked are women and children.
These victims are commodities in a multibillion-dollar global industry. Criminal organizations
are choosing to traffic human beings because, unlike other commodities,
people can be used repeatedly and because trafficking requires little
in terms of capital investment.
Smuggling is also reaping huge financial dividends to criminal
groups who charge migrants massive fees for their services. Intelligence
reports have noted that drug-traffickers and other criminal
organizations are switching to human cargo to obtain greater profit with
less risk.
It is acknowledged that the smuggling of people is a growing global phenomenon.
It is a transnational crime. Currently, economic instability appears to
be the main reason for illegal migration movement throughout the world.
Nevertheless, many of the willing migrants undertake the hazardous
travel to their destination country with criminal syndicates specialized
in people smuggling. These syndicates arrange everything for the
migrants, but at a high price.
Very often the traveling conditions are inhumane: the migrants
are overcrowded in trucks or boats and fatal accidents occur frequently.
After their arrival in the destination country, their illegal status
puts them at the mercy of their smugglers, which often force the
migrants to work for years in the illegal labor market to pay off the
debts incurred as a result of their transportation.
Wildlife smuggling results from the demand for exotic species and the lucrative nature of the trade. The CITES
(Convention on International Trade in Endangered Species of Wild Fauna
and Flora) regulates the movement of endangered wildlife across
political borders.
Economics of smuggling
Research on smuggling as economic phenomenon is scant. Jagdish Bhagwati
and Bent Hansen first forwarded a theory of smuggling in which they saw
smuggling essentially as an import-substituting economic activity.
Their main consideration, however, was the welfare implications of
smuggling. Against common belief that the private sector is more efficient than the public sector, they showed that smuggling might not enhance social welfare though it may divert resources from government to private sector.
In contrast, Faizul Latif Chowdhury,
in 1999, suggested a production-substituting model of smuggling in
which price disparity due to cost of supply is critically important as
an incentive for smuggling.
This price disparity is caused by domestic consumption taxes and import
duties. Drawing attention to the case of cigarettes, Chowdhury
suggested that, in Bangladesh, smuggling of cigarettes reduced the level of domestic production. Domestic production of cigarettes is subject to value added tax (VAT) and other consumption tax.
Reduction of domestic taxes enables the local producer to supply at a
lower cost and bring down the price disparity that encourages smuggling.
However, Chowdhury suggested that there is a limit beyond which
reducing domestic taxes on production cannot confer a competitive
advantage versus smuggled cigarettes. Therefore, government needs to
upscale its anti-smuggling drive so that seizures (the taking possession
of person or property by legal process) can add to the cost of
smuggling and thus render smuggling uncompetitive. Notably, Chowdhury
modeled the relationship of the smuggler to the local producer as one of
antagonistic duopoly.
Contrarily, in a research by Tat Chee Tsui in 2016, even if
increasing of cigarette duty may encourage smuggling, total cigarette
consumption still declines because price of illicit goods, as
substitutes of taxed cigarettes, also increases because of higher tax
rate.
In smuggling, concealment can involve concealing the smuggled goods
on a person's clothing, luggage or inside a body cavity. Some smugglers
hide the whole transportation vehicle or ship used to bring the items
into an area. Avoiding border checks, such as by small ships, private airplanes, through overland smuggling routes, smuggling tunnels and even small submersibles.
This also applies for illegally passing a border oneself, for illegal
immigration or illegal emigration. In many parts of the world,
particularly the Gulf of Mexico, the smuggling vessel of choice is the go-fast boat.
Submitting to border checks
with the goods or people hidden in a vehicle or between (other)
merchandise, or the goods hidden in luggage, in or under clothes, inside
the body, etc. Many smugglers fly on regularly scheduled airlines. A large number of suspected smugglers are caught each year by customs worldwide. Goods and people are also smuggled across seas hidden in containers, and overland hidden in cars, trucks, and trains. A related topic is illegally passing a border oneself as a stowaway. The high level of duty levied on alcohol and tobacco in Britain has led to large-scale smuggling from France to the UK through the Channel Tunnel.
The combination of acknowledged corruption at the border and high import
tariffs led smugglers in the 1970s and ‘80s to fly electronic equipment
such as stereos and televisions in cargo planes from one country to
clandestine landing strips in another, thereby circumventing encounters
at the frontier between countries.
For illegally passing a border oneself, another method is with a false passport (completely fake, or illegally changed, or the passport of a lookalike).
The existence of the Multi-Consignment Contraband (MCC) smuggling
method (smuggling two or more different types of contraband such as
drugs and illegal immigrants or drugs and guns at the same time) was
verified following the completion of a study that found 16 documented
cases of smugglers transporting more than one type of contraband in the
same shipment. MCC shipments were frequently associated with Phase II and Phase III smuggling organizations.
Legal definition
In popular perception smuggling is synonymous with illegal trade. Even social scientists have misconstrued smuggling as illegal trade.
While the two have indeed identical objectives, namely the evasion of
taxes and the importation of contraband items, their demand and cost
functions are altogether different requiring different analytical
framework. As a result, illegal trade through customs stations is differently considered, and smuggling is defined as international trade through ‘unauthorized route’.
A seaport, airport or land port which has not been authorized by the
government for importation and exportation is an ‘unauthorized route’.
The legal definition of these occurs in the Customs Act
of the country. Notably, some definitions define any 'undeclared'
trafficking of currency and precious metal as smuggling. Smuggling is a cognizable offense in which both the smuggled goods and the goods are punishable.
A tariff is a tax on imports or exports between sovereign states.
It is a form of regulation of foreign trade and a policy that taxes
foreign products to encourage or safeguard domestic industry.
Traditionally, states have used them as a source of income. Now, they
are among the most widely used instruments of protectionism, along with import and export quotas.
Tariffs can be fixed (a constant sum per unit of imported goods
or a percentage of the price) or variable (the amount varies according
to the price). Taxing items coming into the country means people are
less likely to buy them as they become more expensive. The intention is
that they buy local products instead – boosting the country's economy.
Tariffs therefore provide an incentive to develop production and replace
imports with domestic products. Tariffs are meant to reduce pressure
from foreign competition and reduce the trade deficit. They have
historically been justified as a means to protect infant industries and to allow import substitution industrialization.
Tariffs may also be used to rectify artificially low prices for certain
imported goods, due to 'dumping', export subsidies or currency
manipulation.
There is near unanimous consensus among economists that tariffs
have a negative effect on economic growth and economic welfare while
free trade and the reduction of trade barriers has a positive effect on economic growth. However, liberalization of trade can cause significant and unequally distributed losses, and the economic dislocation of workers in import-competing sectors.
Etymology
The origin of tariff is the Italian word tariffatranslated as "list of prices, book of rates", which is likely derived from the Arabicta'rif تعريف meaning "notification" or "inventory of fees to be paid".
History
Average tariff rates for selected countries (1913–2007)
Tariff rates in Japan (1870–1960)
Average tariff rates in Spain and Italy (1860–1910)
Average Levels of Duties (1875 and 1913)
Great Britain
At
the beginning of the 19th century, Britain's average tariff on
manufactured goods was roughly 51 percent, the highest of any major
nation in Europe. And even after Britain embraced free trade in most
goods, it continued to tightly regulate trade in strategic capital
goods, such as the machinery for the mass production of textiles.
In 1800, Great Britain with about 10% of the European population,
provided 29% of all pig iron produced in Europe, a proportion that
reached 45% in 1830; industrial production per capita was even more
significant: in 1830 it was 250% higher than in the rest of Europe
compared to 110% in 1800.
Tariffs were reduced in 1833 and the Corn Laws were repealed
in 1846, which amounted to free trade in food. (The Corn Laws were
passed in 1815 to restrict wheat imports and guarantee British farmers'
incomes ). This devastated Britain's old rural economy but began to
mitigate the effects of Great Famine in Ireland.
On 15 June 1903, the Secretary of State for Foreign Affairs, the Marquess of Lansdowne
made a speech in the House of Lords defending fiscal retaliation
against countries with high tariffs and whose governments subsidised
products for sale in Britain (known as 'bounty-fed products', also
called dumping).
The retaliation was to be done by threatening to impose tariffs in
response against that country's goods. His Liberal Unionists had split
from the Liberals, who promoted Free Trade, and the speech was a landmark in the group's slide towards Protectionism.
Landsdowne argued that threatening retaliatory tariffs was similar to
getting respect in a room of armed men by showing a big revolver (his
exact words were "a rather larger revolver than everybody else's"). The
"Big Revolver" became a catchphrase of the day, often used in speeches
and cartoons
United States
Average tariff rates (France, UK, US)
Average tariff rates in US (1821–2016)
US Trade Balance and Trade Policy (1895–2015)
Before the new Constitution took effect in 1788, the Congress could
not levy taxes—it sold land or begged money from the states. The new
national government needed revenue and decided to depend upon a tax on
imports with the Tariff of 1789. The policy of the U.S. before 1860 was low tariffs "for revenue only" (since duties continued to fund the national government). A high tariff was attempted in 1828 but the South denounced it as a "Tariff of Abominations" and it almost caused a rebellion in South Carolina until it was lowered.
The policy from 1860 to 1933 was usually high protective tariffs
(apart from 1913–21) After 1890, the tariff on wool did affect an
important industry, but otherwise the tariffs were designed to keep
American wages high. The conservative Republican tradition, typified by William McKinley was a high tariff, while the Democrats typically called for a lower tariff to help consumers.
Protectionism was an American tradition: according to Paul
Bairoch, the United States was "the homeland and bastion of modern
protectionism" since the end of the 18th century and until after World
War II.
From 1846 to 1861, during which American tariffs were lowered but this
was followed by a series of recessions and the 1857 panic, which
eventually led to higher demands for tariffs than President James
Buchanan, signed in 1861 (Morrill Tariff).
Between 1816 and the end of the Second World War, the United States had
one of the highest average tariff rates on manufactured imports in the
world. According to economic historian Douglas Irwin, a common myth
about United States trade policy is that low tariffs harmed American
manufacturers in the early 19th century and then that high tariffs made
the United States into a great industrial power in the late 19th
century. A review by the Economist of Irwin's 2017 book Clashing over Commerce: A History of US Trade Policy notes:
Political
dynamics would lead people to see a link between tariffs and the
economic cycle that was not there. A boom would generate enough revenue
for tariffs to fall, and when the bust came pressure would build to
raise them again. By the time that happened, the economy would be
recovering, giving the impression that tariff cuts caused the crash and
the reverse generated the recovery. Mr Irwin also methodically debunks
the idea that protectionism made America a great industrial power, a
notion believed by some to offer lessons for developing countries today.
As its share of global manufacturing powered from 23% in 1870 to 36% in
1913, the admittedly high tariffs of the time came with a cost,
estimated at around 0.5% of GDP in the mid-1870s. In some industries,
they might have sped up development by a few years. But American growth
during its protectionist period was more to do with its abundant
resources and openness to people and ideas.
During the American Civil War (1861-1865), agrarian interests in
the South were opposed to any protection, while manufacturing interests
in the North wanted to maintain it. The war marked the triumph of the
protectionists of the industrial states of the North over the free
traders of the South. Abraham Lincoln was a protectionist like Henry
Clay of the Whig Party, who advocated the "American system" based on
infrastructure development and protectionism. In 1847, he declared:
"Give us a protective tariff, and we will have the greatest nation on
earth". Once elected, Lincoln raised industrial tariffs and after the
war, tariffs remained at or above wartime levels. High tariffs were a
policy designed to encourage rapid industrialisation and protect the
high American wage rates.
The Democrats called for low tariffs help poor consumers, but
they always failed until 1913. The Republican Party, which is heir to
the Whigs, makes protectionism a central theme in its electoral
platforms. According to the party, it is right to favour domestic
producers and tax foreigners and consumers of imported luxury products.
Republicans prioritize the protection function, while the need to
provide revenue to the federal budget is only a secondary objective.
In the early 1860s, Europe and the United States pursued
completely different trade policies. The 1860s were a period of growing
protectionism in the United States, while the European free trade phase
lasted from 1860 to 1892. The tariff average rate on imports of
manufactured goods was in 1875 from 40% to 50% in the United States
against 9% to 12% in continental Europe at the height of free trade.
Milton Friedman
held the opinion that the Smoot–Hawley tariff of 1930 did not cause the
Great Depression, instead he blamed the lack of sufficient action on
the part of the Federal Reserve. Douglas A. Irwin wrote: "most
economists, both liberal and conservative, doubt that Smoot–Hawley
played much of a role in the subsequent contraction".
Tariffs and the Great Depression
Most economists hold the opinion that the US Tariff Act did not greatly worsen the great depression:
Peter Temin,
an economist at the Massachusetts Institute of Technology, explained
that a tariff is an expansionary policy, like a devaluation as it
diverts demand from foreign to home producers. He noted that exports
were 7 percent of GNP in 1929, they fell by 1.5 percent of 1929 GNP in
the next two years and the fall was offset by the increase in domestic
demand from tariff. He concluded that contrary the popular argument,
contractionary effect of the tariff was small.
William Bernstein wrote: "Between 1929 and 1932, real GDP fell 17
percent worldwide, and by 26 percent in the United States, but most
economic historians now believe that only a miniscule part of that huge
loss of both world GDP and the United States’ GDP can be ascribed to the
tariff wars. .. At the time of Smoot-Hawley’s passage, trade volume
accounted for only about 9 percent of world economic output. Had all
international trade been eliminated, and had no domestic use for the
previously exported goods been found, world GDP would have fallen by the
same amount — 9 percent. Between 1930 and 1933, worldwide trade volume
fell off by one-third to one-half. Depending on how the falloff is
measured, this computes to 3 to 5 percent of world GDP, and these losses
were partially made up by more expensive domestic goods. Thus, the
damage done could not possibly have exceeded 1 or 2 percent of world GDP
— nowhere near the 17 percent falloff seen during the Great
Depression... The inescapable conclusion: contrary to public perception,
Smoot-Hawley did not cause, or even significantly deepen, the Great
Depression,"
Nobel laureate Maurice Allais
argued: 'First, most of the trade contraction occurred between January
1930 and July 1932, before most protectionist measures were introduced,
except for the limited measures applied by the United States in the
summer of 1930. It was therefore the collapse of international liquidity
that caused the contraction of trade[8], not customs tariffs'.
Russia
Russia
adopted more protectionist trade measures in 2013 than any other
country, making it the world leader in protectionism. It alone
introduced 20% of protectionist measures worldwide and one-third of
measures in the G20 countries. Russia's protectionist policies include
tariff measures, import restrictions, sanitary measures, and direct
subsidies to local companies. For example, the state supported several
economic sectors such as agriculture, space, automotive, electronics,
chemistry, and energy.
In recent years, the policy of import substitution due to
tariffs, i.e. the replacement of imported products by domestic products,
has been considered a success because it has enabled Russia to increase
its domestic production and save several billion dollars. Russia has
been able to reduce its imports and launch an emerging and increasingly
successful domestic production in almost all industrial sectors. The
most important results have been achieved in the agriculture and food
processing, automotive, chemical, pharmaceutical, aviation and naval
sectors.
From 2014, customs duties were applied on imported products in
the food sector. Russia has reduced its food imports while domestic
production has increased considerably. The cost of food imports has
dropped from $60 billion in 2014 to $20 billion in 2017 and the country
enjoys record cereal production. Russia has strengthened its position on
the world food market and the country has become food self-sufficient.
In the fisheries, fruit and vegetable sector, domestic production has
increased sharply, imports have declined significantly and the trade
balance (difference between exports and imports) has improved. In the
second quarter of 2017, agricultural exports are expected to exceed
imports, making Russia a net exporter for the first time.
India
From 2017, as part of the promotion of its "Make in India" programme
to stimulate and protect domestic manufacturing industry and to combat
current account deficits, India has introduced tariffs on several
electronic products and "non-essential items". This concerns items
imported from countries such as China and South Korea. For example,
India's national solar energy programme favours domestic producers by
requiring the use of Indian-made solar cells.
Armenia
The
Republic of Armenia, a country located in Western Asia, established its
custom service on January 4, 1992, as directed by the Armenian
President. On January 2, 2015, Armenia was given access to the Eurasian
Customs Union, which is led by the Russian Federation and the EAEU; this
resulted in an increased number of import tariffs. Armenia does not
currently have export taxes; in addition, it does not declare temporary
imports duties and credit on government imports or pursuant to other
international assistance imports.
Customs duty
A customs duty or due is the indirect tax levied on the import or export of goods in international trade. In economic sense, a duty is also a kind of consumption tax. A duty levied on goods being imported is referred to as an import duty. Similarly, a duty levied on exports is called an export duty. A tariff, which is actually a list of commodities along with the leviable rate (amount) of customs duty, is popularly referred to as a customs duty.
Calculation of customs duty
Customs duty is calculated on the determination of the assessable value in case of those items for which the duty is levied ad valorem. This is often the transaction value unless a customs officer determines assessable value in accordance with the Harmonized System. For certain items like petroleum and alcohol, customs duty is realized at a specific rate applied to the volume of the import or export consignments.
Harmonized System of Nomenclature
For the purpose of assessment of customs duty, products are given an identification code that has come to be known as the Harmonized System code. This code was developed by the World Customs Organization based in Brussels. A Harmonized System code may be from four to ten digits. For example, 17.03 is the HS code for molasses from the extraction or refining of sugar. However, within 17.03, the number 17.03.90 stands for "Molasses (Excluding Cane Molasses)".
Introduction of Harmonized System code in 1990s has largely replaced the Standard International Trade Classification
(SITC), though SITC remains in use for statistical purposes. In drawing
up the national tariff, the revenue departments often specifies the
rate of customs duty with reference to the HS code of the product. In
some countries and customs unions, 6-digit HS codes are locally extended
to 8 digits or 10 digits for further tariff discrimination: for example
the European Union uses its 8-digit CN (Combined Nomenclature) and 10-digit TARIC codes.
Customs authority
A customs
authority in each country is responsible for collecting taxes on the
import into or export of goods out of the country. Normally the customs
authority, operating under national law, is authorized to examine cargo
in order to ascertain actual description, specification volume or
quantity, so that the assessable value and the rate of duty may be
correctly determined and applied.
Evasion
Evasion of customs duties takes place mainly in two ways. In one, the
trader under-declares the value so that the assessable value is lower
than actual. In a similar vein, a trader can evade customs duty by
understatement of quantity or volume of the product of trade. A trader
may also evade duty by misrepresenting traded goods, categorizing goods
as items which attract lower customs duties. The evasion of customs duty
may take place with or without the collaboration of customs officials. Evasion of customs duty does not necessarily constitute smuggling.
Duty-free goods
Many countries allow a traveler to bring goods into the country duty-free. These goods may be bought at ports and airports
or sometimes within one country without attracting the usual government
taxes and then brought into another country duty-free. Some countries
impose allowances
which limit the number or value of duty-free items that one person can
bring into the country. These restrictions often apply to tobacco, wine, spirits, cosmetics, gifts and souvenirs. Often foreign diplomats and UN officials are entitled to duty-free goods. Duty-free goods are imported and stocked in what is called a bonded warehouse.
Duty calculation for companies in real life
With
many methods and regulations, businesses at times struggle to manage
the duties. In addition to difficulties in calculations, there are
challenges in analyzing duties; and to opt for duty free options like
using a bonded warehouse.
Companies use Enterprise Resource Planning
(ERP) software to calculate duties automatically to, on the one hand,
avoid error-prone manual work on duty regulations and formulas and, on
the other hand, manage and analyze historically paid duties. Moreover,
ERP software offers an option for customs warehouses to save duty and
VAT payments. In addition, duty deferment and suspension can also be
taken into consideration.
Economic analysis
Effects
of import tariff, which hurts domestic consumers more than domestic
producers are helped. Higher prices and lower quantities reduce consumer surplus by areas A+B+C+D, while expanding producer surplus by A and government revenue by C. Areas B and D are dead-weight losses, surplus lost by consumers and overall.
Shows the consumer surplus, producer surplus, government revenue, and deadweight losses after tariff imposition.
General government revenue, in % of GDP, from import taxes. For this data, the variance of GDP per capita with purchasing power parity (PPP) is explained in 38 % by tax revenue.
Neoclassical economic theorists tend to view tariffs as distortions to the free market.
Typical analyses find that tariffs tend to benefit domestic producers
and government at the expense of consumers, and that the net welfare
effects of a tariff on the importing country are negative. Normative
judgments often follow from these findings, namely that it may be
disadvantageous for a country to artificially shield an industry from
world markets and that it might be better to allow a collapse to take
place. Opposition to all tariff aims to reduce tariffs and to avoid
countries discriminating between differing countries when applying
tariffs. The diagrams at right show the costs and benefits of imposing a
tariff on a good in the domestic economy.
Imposing an import tariff has the following effects, shown in the
first diagram in a hypothetical domestic market for televisions:
Price rises from world price Pw to higher tariff price Pt.
Quantity demanded by domestic consumers falls from C1 to C2, a movement along the demand curve due to higher price.
Domestic suppliers are willing to supply Q2 rather than Q1, a
movement along the supply curve due to the higher price, so the quantity
imported falls from C1-Q1 to C2-Q2.
Consumer surplus
(the area under the demand curve but above price) shrinks by areas
A+B+C+D, as domestic consumers face higher prices and consume lower
quantities.
Producer surplus
(the area above the supply curve but below price) increases by area A,
as domestic producers shielded from international competition can sell
more of their product at a higher price.
Government tax revenue is the import quantity (C2-Q2) times the tariff price (Pw - Pt), shown as area C.
Areas B and D are deadweight losses, surplus formerly captured by consumers that now is lost to all parties.
The overall change in welfare = Change in Consumer Surplus + Change
in Producer Surplus + Change in Government Revenue = (-A-B-C-D) + A + C =
-B-D. The final state after imposition of the tariff is indicated in
the second diagram, with overall welfare reduced by the areas labeled
"societal losses", which correspond to areas B and D in the first
diagram. The losses to domestic consumers are greater than the combined
benefits to domestic producers and government.
That tariffs overall reduce welfare is not a controversial topic
among economists. For example, the University of Chicago surveyed about
40 leading economists in March 2018 asking whether "Imposing new U.S.
tariffs on steel and aluminum will improve Americans'welfare." About
two-thirds strongly disagreed with the statement, while one third
disagreed. None agreed or strongly agreed. Several commented that such
tariffs would help a few Americans at the expense of many.
This is consistent with the explanation provided above, which is that
losses to domestic consumers outweigh gains to domestic producers and
government, by the amount of deadweight losses.
Tariffs are more inefficient than consumption taxes.
A tariff is called an optimal tariff if it is set to maximize the welfare of the country imposing the tariff. It is a tariff derived by the intersection between the trade indifference curve of that country and the offer curve of another country. In this case, the welfare of the other country grows worse simultaneously, thus the policy is a kind of beggar thy neighbor policy. If the offer curve of the other country is a line through the origin point, the original country is in the condition of a small country, so any tariff worsens the welfare of the original country.
It is possible to levy a tariff as a political policy choice, and to consider a theoretical optimum tariff rate.
However, imposing an optimal tariff will often lead to the foreign
country increasing their tariffs as well, leading to a loss of welfare
in both countries. When countries impose tariffs on each other, they
will reach a position off the contract curve, meaning that both countries' welfare could be increased by reducing tariffs.
Political analysis
The tariff has been used as a political tool to establish an independent nation; for example, the United States Tariff Act of 1789,
signed specifically on July 4, was called the "Second Declaration of
Independence" by newspapers because it was intended to be the economic
means to achieve the political goal of a sovereign and independent
United States.
The political impact of tariffs is judged depending on the political perspective; for example the 2002 United States steel tariff
imposed a 30% tariff on a variety of imported steel products for a
period of three years and American steel producers supported the tariff.
Tariffs can emerge as a political issue prior to an election. In the leadup to the 2007 Australian Federal election, the Australian Labor Party announced it would undertake a review of Australian car tariffs if elected. The Liberal Party made a similar commitment, while independent candidate Nick Xenophon announced his intention to introduce tariff-based legislation as "a matter of urgency".
Unpopular tariffs are known to have ignited social unrest, for example the 1905 meat riots in Chile that developed in protest against tariffs applied to the cattle imports from Argentina.
Arguments in favor of tariffs
Protection of infant industry
In the 19th century, Alexander Hamilton and the economist Friedrich List defended the benefits of "educator protectionism" as a necessary means of protecting infant industries.
Protectionism would be necessary in the short term for a country to
start industrialization away from competition from more advanced foreign
industries, under which pressure it could succumb at the first stage of
the process. As a result, they benefit from greater freedom of
manoeuvre and greater certainty regarding their profitability and future
development. The protectionist phase is therefore a learning period
that would allow the least developed countries to acquire general and
technical know-how in the fields of industrial production in order to
become competitive on international markets.
Protection against dumping
States resorting to protectionism invoke unfair competition or dumping practices:
Monetary dumping: a currency undergoes a devaluation
when monetary authorities decide to intervene in the foreign exchange
market to lower the value of the currency against other currencies. This
makes local products more competitive and imported products more
expensive (Marshall Lerner Condition), increasing exports and decreasing
imports, and thus improving the trade balance. Countries with a weak
currency cause trade imbalances: they have large external surpluses
while their competitors have large deficits.
Tax dumping: some tax haven states have lower corporate and personal tax rates.
Social dumping: when a state reduces social contributions or
maintains very low social standards (for example, in China, labour
regulations are less restrictive for employers than elsewhere).
Environmental dumping: when environmental regulations are less stringent than elsewhere.
Free trade and poverty
Sub-Saharan African countries have a lower income per capita in 2003 than 40 years earlier (Ndulu, World Bank, 2007, p. 33).[47]
Per capita income increased by 37% between 1960 and 1980 and fell by 9%
between 1980 and 2000. Africa's manufacturing sector's share of GDP
decreased from 12% in 1980 to 11% in 2013. In the 1970s, Africa
accounted for more than 3% of world manufacturing output, and now
accounts for 1.5%. Ha-Joon Chang claims that these downturns are the result of free trade policies, and attributes successes in some African countries such as Ethiopia and Rwanda to their abandonment of free trade and adoption of a "developmental state model".
The poor countries that have succeeded in achieving strong and sustainable growth are those that have become mercantilists, not free traders: China, South Korea, Japan, Taiwan.
Thus, whereas in the 1990s, China and India had the same GDP per
capita, China followed a much more mercantilist policy and now has a GDP
per capita three times higher than India's.
Indeed, a significant part of China's rise on the international trade
scene does not come from the supposed benefits of international
competition but from the relocations practiced by companies from
developed countries. Dani Rodrik
points out that it is the countries that have systematically violated
the rules of globalisation that have experienced the strongest growth.
For developed countries that have implemented free trade, the work of E.F. Denison
on growth factors in the United States and Western Europe between 1950
and 1962 shows that the positive effects on growth of trade
liberalization have been negligible in the United States, while in
Western Europe it contributed to a weighted average of only 2% of total
economic growth.
The 'dumping' policies of some countries have also largely
affected developing countries. Studies on the effects of free trade show
that the gains induced by WTO rules for developing countries are very
small.
This has reduced the gain for these countries from an estimated $539
billion in the 2003 LINKAGE model to $22 billion in the 2005 GTAP model.
The 2005 LINKAGE version also reduced gains to 90 billion. As for the "Doha Round", it would have brought in only $4 billion to developing countries (including China...) according to the GTAP model.
However, the models used are actually designed to maximize the positive
effects of trade liberalization. They are characterized by the absence
of taking into account the loss of income caused by the end of tariff
barriers.
Criticism of the theory of comparative advantage
Free trade is based on the theory of comparative advantage.
The classical and neoclassical formulations of comparative advantage
theory differ in the tools they use but share the same basis and logic.
Comparative advantage theory says that market forces lead all factors of
production to their best use in the economy. It indicates that
international free trade would be beneficial for all participating
countries as well as for the world as a whole because they could
increase their overall production and consume more by specializing
according to their comparative advantages. Goods would become cheaper
and available in larger quantities. Moreover, this specialization would
not be the result of chance or political intent, but would be
automatic. However according to some commentators, the theory is based
on assumptions that are neither theoretically nor empirically valid.
International mobility of capital and labour
The
international immobility of labour and capital is essential to the
theory of comparative advantage. Without this, there would be no reason
for international free trade to be regulated by comparative advantages.
Classical and neoclassical economists all assume that labour and capital
do not circulate between nations. At the international level, only the
goods produced can move freely, with capital and labour trapped in
countries. David Ricardo was aware that the international immobility of
labour and capital is an indispensable hypothesis. He devoted half of
his explanation of the theory to it in his book. He even explained that
if labour and capital could move internationally, then comparative
advantages could not determine international trade. Ricardo assumed that
the reasons for the immobility of the capital would be:
the fancied or real insecurity of
capital, when not under the immediate control of its owner, together
with the natural disinclination which every man has to quit the country
of his birth and connexions, and intrust himself with all his habits
fixed, to a strange government and new laws
Neoclassical economists, for their part, argue that the scale of
these movements of workers and capital is negligible. They developed the
theory of price compensation by factor that makes these movements
superfluous.
In practice, however, workers move in large numbers from one country to
another. Today, labour migration is truly a global phenomenon. And, with
the reduction in transport and communication costs, capital has become
increasingly mobile and frequently moves from one country to another.
Moreover, the neoclassical assumption that factors are trapped at the
national level has no theoretical basis and the assumption of factor
price equalisation cannot justify international immobility. Moreover,
there is no evidence that factor prices are equal worldwide. Comparative
advantages cannot therefore determine the structure of international
trade.
If they are internationally mobile and the most productive use of
factors is in another country, then free trade will lead them to
migrate to that country. This will benefit the nation to which they
emigrate, but not necessarily the others.
Externalities
An
externality is the term used when the price of a product does not
reflect its cost or real economic value. The classic negative
externality is environmental degradation, which reduces the value of
natural resources without increasing the price of the product that has
caused them harm. The classic positive externality is technological
encroachment, where one company's invention of a product allows others
to copy or build on it, generating wealth that the original company
cannot capture. If prices are wrong due to positive or negative
externalities, free trade will produce sub-optimal results.
For example, goods from a country with lax pollution standards
will be too cheap. As a result, its trading partners will import too
much. And the exporting country will export too much, concentrating its
economy too much in industries that are not as profitable as they seem,
ignoring the damage caused by pollution.
On the positive externalities, if an industry generates
technological spinoffs for the rest of the economy, then free trade can
let that industry be destroyed by foreign competition because the
economy ignores its hidden value. Some industries generate new
technologies, allow improvements in other industries and stimulate
technological advances throughout the economy; losing these industries
means losing all industries that would have resulted in the future.
Cross-industrial movement of productive resources
Comparative
advantage theory deals with the best use of resources and how to put
the economy to its best use. But this implies that the resources used to
manufacture one product can be used to produce another object. If they
cannot, imports will not push the economy into industries better suited
to its comparative advantage and will only destroy existing industries.
For example, when workers cannot move from one industry to
another—usually because they do not have the right skills or do not live
in the right place—changes in the economy's comparative advantage will
not shift them to a more appropriate industry, but rather to
unemployment or precarious and unproductive jobs.
Static vs. dynamic gains via international trade
Comparative
advantage theory allows for a "static" and not a "dynamic" analysis of
the economy. That is, it examines the facts at a single point in time
and determines the best response to those facts at that point in time,
given our productivity in various industries. But when it comes to
long-term growth, it says nothing about how the facts can change
tomorrow and how they can be changed in someone's favour. It does not
indicate how best to transform factors of production into more
productive factors in the future.
According to theory, the only advantage of international trade is
that goods become cheaper and available in larger quantities. Improving
the static efficiency of existing resources would therefore be the only
advantage of international trade. And the neoclassical formulation
assumes that the factors of production are given only exogenously.
Exogenous changes can come from population growth, industrial policies,
the rate of capital accumulation (propensity for security) and
technological inventions, among others. Dynamic developments endogenous
to trade such as economic growth are not integrated into Ricardo's
theory. And this is not affected by what is called "dynamic comparative
advantage". In these models, comparative advantages develop and change
over time, but this change is not the result of trade itself, but of a
change in exogenous factors.
However, the world, and in particular the industrialized
countries, are characterized by dynamic gains endogenous to trade, such
as technological growth that has led to an increase in the standard of
living and wealth of the industrialized world. In addition, dynamic
gains are more important than static gains.
Balanced trade and adjustment mechanisms
A
crucial assumption in both the classical and neoclassical formulation
of comparative advantage theory is that trade is balanced, which means
that the value of imports is equal to the value of each country's
exports. The volume of trade may change, but international trade will
always be balanced at least after a certain adjustment period. The
balance of trade is essential for theory because the resulting
adjustment mechanism is responsible for transforming the comparative
advantages of production costs into absolute price advantages. And this
is necessary because it is the absolute price differences that determine
the international flow of goods. Since consumers buy a good from the
one who sells it cheapest, comparative advantages in terms of production
costs must be transformed into absolute price advantages. In the case
of floating exchange rates, it is the exchange rate adjustment mechanism
that is responsible for this transformation of comparative advantages
into absolute price advantages. In the case of fixed exchange rates,
neoclassical theory suggests that trade is balanced by changes in wage
rates.
So if trade were not balanced in itself and if there were no
adjustment mechanism, there would be no reason to achieve a comparative
advantage. However, trade imbalances are the norm and balanced trade is
in practice only an exception. In addition, financial crises such as the
Asian crisis of the 1990s show that balance of payments imbalances are
rarely benign and do not self-regulate. There is no adjustment mechanism
in practice. Comparative advantages do not turn into price differences
and therefore cannot explain international trade flows.
Thus, theory can very easily recommend a trade policy that gives
us the highest possible standard of living in the short term but none in
the long term. This is what happens when a nation runs a trade deficit,
which necessarily means that it goes into debt with foreigners or sells
its existing assets to them. Thus, the nation applies a frenzy of
consumption in the short term followed by a long-term decline.
International trade as bartering
The
assumption that trade will always be balanced is a corollary of the
fact that trade is understood as barter. The definition of international
trade as barter trade is the basis for the assumption of balanced
trade. Ricardo insists that international trade takes place as if it
were purely a barter trade, a presumption that is maintained by
subsequent classical and neoclassical economists. The quantity of money
theory, which Ricardo uses, assumes that money is neutral and neglects
the velocity of a currency. Money has only one function in
international trade, namely as a means of exchange to facilitate trade.
In practice, however, the velocity of circulation is not
constant and the quantity of money is not neutral for the real economy. A
capitalist world is not characterized by a barter economy but by a
market economy. The main difference in the context of international
trade is that sales and purchases no longer necessarily have to
coincide. The seller is not necessarily obliged to buy immediately.
Thus, money is not only a means of exchange. It is above all a means of
payment and is also used to store value, settle debts and transfer
wealth. Thus, unlike the barter hypothesis of the comparative advantage
theory, money is not a commodity like any other. Rather, it is of
practical importance to specifically own money rather than any
commodity. And money as a store of value in a world of uncertainty has a
significant influence on the motives and decisions of wealth holders
and producers.
Using labour and capital to their full potential
Ricardo
and later classical economists assume that labour tends towards full
employment and that capital is always fully used in a liberalized
economy, because no capital owner will leave its capital unused but will
always seek to make a profit from it. That there is no limit to the use
of capital is a consequence of Jean-Baptiste Say's law, which presumes
that production is limited only by resources and is also adopted by
neoclassical economists.
From a theoretical point of view, comparative advantage theory
must assume that labour or capital is used to its full potential and
that resources limit production. There are two reasons for this: the
realization of gains through international trade and the adjustment
mechanism. In addition, this assumption is necessary for the concept of
opportunity costs. If unemployment (or underutilized resources) exists,
there are no opportunity costs, because the production of one good can
be increased without reducing the production of another good. Since
comparative advantages are determined by opportunity costs in the
neoclassical formulation, these cannot be calculated and this
formulation would lose its logical basis.
If a country's resources were not fully utilized, production and
consumption could be increased at the national level without
participating in international trade. The whole raison d'être of
international trade would disappear, as would the possible gains. In
this case, a State could even earn more by refraining from participating
in international trade and stimulating domestic production, as this
would allow it to employ more labour and capital and increase national
income. Moreover, any adjustment mechanism underlying the theory no
longer works if unemployment exists.
In practice, however, the world is characterised by unemployment.
Unemployment and underemployment of capital and labour are not a
short-term phenomenon, but it is common and widespread. Unemployment and
untapped resources are more the rule than the exception.
.png)
.gif)
.png)
.png)
.png)
.png)
_and_Trade_Policies.png)
