ChainWhat it assumes · how to break it
Start
The government imposes a tariff on imported steel, as the US did in 2018 when it placed a 25% tariff on most steel imports.
1
As a result, importers pay the tariff to the government on every unit still imported, so tax revenue rises.
tariff revenue
tariff revenue
Best link to attack
Assumes: Imports continue at a significant level after the tariff.
Assumes: Imports continue at a significant level after the tariff.
But: The more the tariff cuts imports, the less revenue it raises, and a tariff high enough to stop imports altogether raises none.
2
This means the budget deficit narrows by the amount of tariff revenue collected, other things equal.
budget deficit · fiscal balance
budget deficit · fiscal balance
Assumes: Other tax receipts are unaffected.
But: If steel-using firms and exporters lose sales, their profits and workers' incomes fall, cutting corporation tax and income tax receipts.
3
Consequently, the government needs to borrow less, so debt and debt interest are lower than they would otherwise be.
government borrowing · national debt
government borrowing · national debt
Assumes: The revenue is used to reduce borrowing.
But: Governments may spend the revenue supporting industries hurt by retaliation, as the US did with payments to farmers in 2018 and 2019.
End
Tariff revenue improves the fiscal balance, though by less as imports fall and if other tax receipts drop.
Evaluation chain
- E1However, the revenue depends on imports continuing, which conflicts with the aim of protecting domestic producers.
- E2Because a tariff that succeeds in switching demand to domestic steel cuts the quantity imported, the base on which the tariff is charged shrinks.
- E3As a result, the more price elastic the demand for imports, the less revenue the tariff raises.
- E4So a tariff improves the fiscal balance substantially only when it protects little, and an effective protective tariff does little for the budget deficit.
Another way to attack it: For a developed economy such as the UK, customs duties are a small share of total tax receipts, so the effect on the fiscal balance is small. For some low-income economies tariffs are a much larger share of revenue, because they are easy to collect at ports.
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Questions this answers
- Assess the impact of a tariff on the government's budget position.
- Discuss the arguments for and against tariffs as a source of government revenue.
- Explain why a successful tariff may raise little revenue.
Diagram
Tariff diagram: world supply at Pw shifts up to Pw + tariff. Tariff revenue is the rectangle equal to the tariff multiplied by the quantity still imported (Q3 - Q2).
Reverse and related
Tariff removed → tariff revenue is lost, which matters most for low-income economies that rely on trade taxes.