What is the political/economical justification for the existence for import duty? Is this purely a form of protectionism? Or are there other reasons as well? (Been thinking about something along the lines of the loss of income taxes from the workers or something like that)
As SE is a Q&A site, let me answer my own question. In classical economics import duty is indeed seen as a form of protecting the internal market and even as form of independence declaration politically, which by neoclassical economists is seen as a distortion of the free market. Below I will quote from wikipedia the justification for the following, but in the end it can be economically understood that there is a gain called the terms of trade gain which is the economic gain from the internalization of some goods in the internal market which has to be bigger than the efficiency loss induced by the import duties (basically the protectionism). This gain, if I understand it correctly, depends on every specific market and there is no universal gain which is true for every single market.
In order to prevent link rot:
The diagram to below shows the costs and benefits of imposing a tariff on a good in the domestic economy, Home.
When incorporating free international trade into the model we use a supply curve denoted as Pw. This curve makes the assumption that the international supply of the good or service is perfectly elastic and that the world can produce at a near infinite q S amount of the good, but had a demand of D. The difference between S and D, SD was filled by importing from abroad. After the imposition of tariff, domestic price rises from Pw to Pt but foreign export prices fall from Pw to Pt* due to the difference in tax incidence on the consumers (at home) and producers (abroad).
At the new price level at Home, Pt, which is higher than the previous Pw, more of the good is produced at Home – it now makes S* of the good. Due to the higher price, only D* of the good is demanded by Home. The difference between S* and D*, StD* is filled by importing from abroad. Thus, imposition of tariffs reduce the quantity of imports from SD to SD.
Domestic producers enjoy a gain in their surplus. Producer surplus, defined as the difference between what the producers were willing to receive by selling a good and the actual price of the good, expands from the region below Pw to the region below Pt. Therefore, the domestic producers gain an amount shown by the area A.
Domestic consumers face a higher price, reducing their welfare. Consumer surplus is the area between the price line and the demand curve. Therefore, the consumer surplus shrinks from the area above Pw to the area above Pt, i.e. it shrinks by the areas A, B, C and D. The government gains from the taxes. It charges an amount PtPt* of tariff for every good imported. Since SD goods are imported, the government gains an area of C and E.
The net loss to the society due to the tariff would be given by the total costs of the tariff minus its benefits to the society. Therefore, the net welfare loss due to the tariff is equal to:
- Consumer Loss – Government revenue – Producer gain
or graphically, this gain is given by the areas shown by:
- (A + B + C + D) – (C + E) – A = B + D – E
that is, tariffs are beneficial to the society if the area given by the rectangle E more than offsets the losses shown by triangles B and D. Rectangle E is called the terms of trade gain whereas the two triangles B and D are also called efficiency loss, as this cost is incurred because tariffs reduce the incentives for the society to consume and produce.
The model above is completely accurate only in the extreme case where no consumer belongs to the producers group and the cost of the product is a fraction of their wages. If instead, the opposite extreme is taken by assuming that all consumers come from the producers' group and that their only purchasing power comes from the wages earned in production and the product costs their whole wage, the graph looks radically different. Without tariffs, only those producers/consumers able to produce the product at the world price will have the money to purchase it at that price.
Is this purely a form of protectionism?
There are three reasons for trade tariffs:
- Protecting and helping out your domestic producers. This can be especially crucial in the case of agriculture as food security is the number one task of any government.
An expectation of quid pro quo from other countries — as long as you tax our exports we are going to mirror the tariffs and tax your imports. This is why organizations such as the WTO exist — they help countries to come to a mutual agreement on how low their import tariffs are going to be.
Efficient revenue can be an important consideration for small countries or where tax collection is inefficient. In many island countries, for example, in the Caribbean, almost all goods are imported, so an import duty is functionally equivalent to a general sales tax with an exception for the tiny amount of locally produced goods, but is more efficient to collect at the dock than in the storefront. This source of revenue for government operations also permits these countries to be tax havens with respect to foreign investment by not having an income tax. (courtesy of @ohwilleke)