The Role of Customs Tariff: A Historical, Theoretical and Empirical Review

Abstract

Many economists believe that international trade and finance is the place where the discipline of   economics has got its origin. But the debates of international trade are not yet entirely solved and, therefore, some issues are still on the agendas of WTO and other concerned international institutions. The Mercantilists favored exports and disfavored imports. The Classical economists introduced the theories of absolute and comparative advantages as well as labor specialization. They also strongly condemned the intervention of the government in trade and suggested that the market forces can do better if they are left alone. But later on, this assumption of the renowned Classical economists was first challenged by two 20^th century Neoclassical economists, Eli Hecksher and Bertil Ohlin, both from Sweden (Todaro and Smith, 2006). They replaced the complete labor specialization assumption with “factor endowment trade theory”. The Modern economists, who developed the protectionist views, in their turn, challenged both the Classical and the neoclassical economists together. Although most of the economists and schools of thoughts argue for free trade, there are others who support protection, inward-looking strategies and import substitution. Tariff is used by many developing countries all over the world to practice this protectionist view of the Modern economists. Along with its role of protecting domestic infant industries, tariff also has the advantages of generating tax revenue from international trade, controlling the problems of trade deficit and balance of payments, and also attracting investors to the protected sectors. Even from the developed and large countries point of view, the theory of optimum tariff is another argument against free trade. Therefore, the role of tariff is a matter of practical investigations rather than theoretical generalizations.

Keywords: tariff, effective rate of protection, revenue tariff