Early uses of tariffs
The Oxford English Dictionary defines the word ‘tariff’ as a noun to describe a tax or duty to be paid on a particular class of imports or exports.
It says it originated in the late 16th Century via French from the Italian ‘tariffa’, which describes a list of prices and is itself based on the Arabic word ‘ta’rif’, meaning to notify or define.
Tarifa, a small town on the Southern tip of Spain is sometimes credited as the inspiration for the word as, according to the Chambers Dictionary of Etymology, it was the first port to begin the practice of charging merchants for using its docks.
How barriers to trade have come down
The practice of regulating trade flows spread globally and its high-point in the mid-to-late 19th Century when tariffs were relied upon as a major source of national income, especially in countries that had not yet developed income taxes on domestic populations.
At this point the average tariff was between 40-50%, significantly reducing the free flow of trade between nations. From here average tariffs and their impact on trade fell dramatically over time, with import taxes dropping below 10% and bottoming out around 1920.
Another spike took place during the Great Depression, pushing tariffs up to around 20% at the time of a general collapse in world trade. Trade wars and protectionism became more common around this time of scarcity.
By the 1950s the figure was falling again as countries recovered from the impact of World War II. More recently, the cost of import duties has collapsed to around 5% as developing countries have become increasingly active in world business.
The impact of more players and an increasing willingness of countries to participate in trade with their rivals caused an enormous surge in the value of goods traded around the world in the last 40 years.
In the post-War years throughout the 1950s and 60s it crept up and by 1980 had reached $2 trillion (at 2011 prices for comparison). Then it accelerated quickly, topping $18 trillion just 30 years later in 2010.
This enormous surge in trade (it took the whole of human history to hit $2 trillion in 1980, then just three more decades to add another $16 trillion in annual value), came not just from new international traders from poorer economies but also the dropping of barriers between developed countries.
On top of the fact that trade barriers have steadily fallen since the turn of the 19th Century, the global movement of products and services has been expedited by the falling cost of travel and cargo, as well as most recently the giant leaps in technology that have facilitated trade between distant places.
There is also evidence to suggest that the tariffs that do exist are better conceived, meaning that they serve a more intricate purpose than simply raising public money or penalising foreign imports.
The sparing use of these trade blockers and the greater level of thought that goes into them means the impact on free global trade is at an all-time historical low.
A history of opposition
It’s worth noting that the campaign to reduce trade barriers has been fought for many centuries – almost as long as trade between countries has taken place – with economists arguing that it promotes global economic health and wellbeing.
Most famously, Adam Smith’s The Wealth of Nations, published in 1776, argued that trade between countries promoted specialisation and division of labour – both essential for efficient global development and better living standards.
He claimed persuasively that both were limited by the size of their market – ie a small village is less economically diverse and therefore less likely to advance than a big city – so expanding the market as far as possible beyond national borders is desirable.
In the book, Smith sets out not just the benefits free trade but also the negative ramifications of government intervention that skews the natural flow of trade.
Tackling export subsidies, where governments pay part of the cost of the manufacture of goods for sale to foreign markets, thereby reducing the price and increasing their desirability, he stated:
“The trades, it is to be observed, which are carried on by means of bounties [subsidies], are the only ones which can be carried on between two nations for any considerable time together, in such a manner as that one of them shall always and regularly lose, or sell its goods for less than it really costs to send them to market.
“But if the bounty did not repay to the merchant what he would otherwise lose upon the price of his goods, his own interest would soon oblige him to employ his stock in another way, or to find out a trade in which the price of the goods would replace to him, with the ordinary profit, the capital employment in sending them to market.
“The effect of bounties, like that of all the other expedients of the mercantile system, can only be to force the trade of a country into a channel much less advantageous than that in which it would naturally run of its own accord.”
On import restrictions he was equally dismissive:
“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.
“The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished, no more than that of the above-mentioned artificers; but only left to find out the way in which it can be employed with the greatest advantage.
“It is certainly not employed to the greatest advantage when it is thus directed towards an object which it can buy cheaper than it can make. The value of its annual produce is certainly more or less diminished when it is thus turned away from producing commodities evidently of more value than the commodity which it is directed to produce.”
By illustrating the futility of intervening either to artificially boost the competitiveness of an export on the global market or restrict the inward flow of cheaper or better imports than could be made at home, Smith crystalised the arguments against trade barriers.
These points remain just as persuasive and valid in the 21st Century as they did in the 18th.