The United States has long been the champion of free trade throughout the world, but recently with shrinking economies of industrialized foreign nations and a growing number of developing countries that are struggling to stabilize their economies, U.S. legislators have been pressured to protect domestic industries from troubles abroad. But protecting business at home typically penalizes consumers since prices typically rise under protectionist regulations. For example, the United States recently slapped a 30 percent import tax on frozen orange juice concentrate; duties on imported glassware, porcelain, and china as high as 38 percent; rubber boots and shoes, 20 percent; luggage, 16 percent; and canned tuna, 12.5 percent. While this may or may not create a competitive environment for domestic producers, it seldom reduces product prices for the consumer.
Tariffs can be classified as either revenue or protective tariffs. Revenue tariffs are designed to raise funds for the importing government. Most early U.S. government revenue came from this source. Protective tariff, which are usually higher than revenue tariffs, are designed to raise the retail price of an imported product to match or exceed that of a similar domestic product. Some
countries use tariffs in a selective manner to discourage certain consumption practices and thereby reduce access to their local markets. For example, the United States has tariff on luxury items like Rolex watches and Russian caviar.
In the past, it was believed that a country should protect its infant industries by using tariffs to keep out foreign- made products. Some foreign goods did enter, but high tariffs made domestic products competitive in price. Recently, it has been argued that tariffs should be raised to protect employment and profits in domestic U.S. industries. For example, the U.S. steel industry has been unsuccessful in lobbying the government to protect domestic steel producers by imposing tariffs on the rising number of imports of low-quality steel into the United States. Weak currencies in Japan, Brazil, South Korea, and Russia have stifled demand for steel in these countries, while the strong dollar in the United States has increased demand for construction materials of all kinds, especially steel. When foreign steel started arriving in the U.S. market at $50 a ton less than domestic steel, the U.S. steel industry cried for protection. But U.S. policy makers have backed away—at least temporarily—as they consider the impact of such tariffs on the current global recession.34
In 1988, the United States passed the Omnibus Trade and Competitiveness Act to remedy what it perceived as unfair international trade conditions. Under the so-called Super 301 provisions of the law, the United States can now single out countries that unfairly impede trade with U.S. domestic businesses. If these countries do not open their markets within 18 months, the law requires retaliation in the form of U.S. tariffs or quotas on the offenders’ imports into this country.
Some nations limit foreign ownership in the business sectors. In the United States, for example, non-U.S. citizens cannot own more than 25 percent of the voting stock in a U.S-based airline; they cannot hold controlling interest in a U.S. television station or network; nor can they fish for mackerel—the only fish in surplus in U.S. waters.35
Tariffs also can be used to gain bargaining clout with other countries, but they risk adversely affecting the fortunes of domestic companies. For example, Australia and New Zealand, two of the world’s largest producers of lamb exports (primarily wool), were outraged when the U.S. International Trade Commission (ITC) placed tariffs up to 40 percent on lamb imports to protect U.S. sheep producers. The ITC ruled that lamb imports were “a substantial cause of threat of serious injury” to the domestic sheep industry. The decision did not make prices any more competitive; instead, it merely reduced the amount of lamb products the United States imports. Even more serious is that the decision undercut the Clinton administration’s efforts to get other countries to open their markets. Although some import relief had been expected, it was never expected to be so severely protectionist.36
In recent years, scores of trading nations have agreed to abolish tariffs on 500 high technology products such as computers, software, calculators, fax machines, and related goods. Elimination of such tariffs means as much as $100 million in annual savings to communication giants like IBM.