IGCSE Economics – Globalisation and Trade Restrictions: Raising Tax Revenue
International Trade and Globalisation
Trade Restrictions – Raising Tax Revenue
Governments may restrict trade not only to protect domestic industries but also to generate revenue. This is especially important for countries with a narrow tax base where income and corporate taxes collect only a small proportion of total revenue.
Why Use Trade Taxes?
Broad tax base: Import and export duties are applied to every transaction, capturing revenue from both consumers and producers.
Ease of collection: Customs officials can collect the tax at the border, reducing the need for complex domestic tax administration.
Revenue stability: In economies with volatile domestic production, trade taxes can provide a more predictable stream of income.
Low administrative cost: The marginal cost of collecting a tariff is relatively low compared with other forms of taxation.
Common Trade Taxes Used to Raise Revenue
Tax Type
How It Works
Typical Revenue Use
Specific tariff
A fixed amount charged per unit of imported good (e.g., $2 per kilogram).
General government spending, infrastructure.
Ad‑valorem tariff
A percentage of the value of the imported good (e.g., 10% of the customs value).
Budget deficits, public services.
Export duty
A charge on goods leaving the country, often used on natural resources.
Compensate for depletion of natural assets.
Excise duty on imported goods
Specific taxes on particular products such as alcohol, tobacco, or fuel.
Health programmes, environmental projects.
Calculating Revenue from a Specific Tariff
If a government imposes a specific tariff of \$t\$ dollars per unit on an imported good and the quantity imported in a year is \$Q\$ units, the revenue (\$R\$) generated is:
\$\$
R = t \times Q
\$\$
Calculating Revenue from an Ad‑Valorem Tariff
For an ad‑valorem tariff set at a rate \$r\$ (expressed as a decimal) on imports with a total customs value \$V\$, the revenue is:
\$\$
R = r \times V
\$\$
Illustrative Example
Country X applies a 15% ad‑valorem tariff on imported electronics.
In the fiscal year, the total customs value of imported electronics is \$US\\$200$ million.
Revenue from the tariff is calculated as:
\$\$
R = 0.15 \times 200{,}000{,}000 = US\$30{,}000{,}000
\$\$
This \$US\\$30$ million can be allocated to education, health, or infrastructure projects.
Advantages and Disadvantages of Raising Revenue through Trade Taxes
Advantages
Quick and visible source of income.
Can be adjusted easily to meet fiscal targets.
Reduces reliance on domestic tax collection mechanisms.
Disadvantages
May increase the price of imported goods, affecting consumer welfare.
Can provoke retaliation from trading partners, leading to trade wars.
Risk of encouraging smuggling and under‑declaration of import values.
Suggested diagram: Flow chart showing how a tariff is collected at the border and transferred to the national treasury.