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I'm a bit confused why customs duties exist. Like, when Brexit happened it was assumed by default by everyone that customs duties would be imposed by all trade happening to/from UK. There was no question that it might be otherwise. On the other hand, people seem to really want "trade deals" which remove these customs duties, and whenever two countries reach an agreement (what are they even arguing about?) to mutually remove these duties, it is always applauded as a good idea and a great step forward.

So... what? Do countries want customs duties? Then why make trade deals to remove them? Do they not want them? Then why impose them in the first place? I'm confused...

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It's mostly a free-rider problem, which means there are mixed motives.

At least according to orthodox economics, free-trade unhindered by customs duties, quotas and measures of equivalent effect benefits all participating economies. The theory behind this is based on economies of scale and comparative advantages.

However, in the real world, governments succumb to protectionist pressures by domestic industries that would not be competitive in a free trade regime. Governments would still like to promote domestic industries' access to foreign markets, but at the same time they want to shield them from competition.

In other words, in parallel with the collective benefits from free trade, there are individual incentives for protectionism. In the short run, the latter tend to override the former, at least from the perspective of a government facing pressure from vested interests and looking to the next election.

Now, if all governments abide by this logic, there will be no free trade regime. Hence the need for international agreements with effective monitoring and enforcement structures.

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  • Hmm... this doesn't seem to be quite it. If this were the case, then: A - why would countries even consider international agreements? B - why are customs duties applied uniformly over ALL merchandise, even ones that the country itself doesn't produce? – Vilx- May 14 at 9:19
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    There is a lack of clarity in my answer, but I don't have time now to fix it. I'll come back to it. In the meantime, the answer to A is that states use trade agreements to credibly commit to free trade. In particular: 1. They "tie their hands" against domestic protectionist pressures. And 2. they commit to meet tariff reductions etc. by their treaty partners with their own, reciprocal reductions instead of exploiting each other's concessions (which would undermine the willingness to make trade concessions in the first place). 2. realizes collective gains despite contrary individual incentives – henning May 14 at 9:56
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    @Vilx: customs duties are frequently NOT uniform across all goods. For example, at various times the USA has taxed Canadian lumber and other processed wood products at higher rates than timber/raw logs. Canada wants the extra value of processing wood products, whereas American sawmills do not have enough domestic supply. They argue that Canadian policies such as forbidding export of raw logs amount to subsidies.Hmmm… I wonder whatthe American policy of forbidding already contracted sales exporting vaccine and components thereof early in this pandemic amounts to protectionism? – Krazy Glew May 14 at 17:15
  • @KrazyGlew - sorry, I wasn't clear enough. Yes, of course the amount often varies by the type of good and/or origin. What I mean is - there is always by default SOME amount of tax on ALL incoming goods, unless an explicit exception is made. It's not the case that countries would only tax those goods where they want to protect local industries and leave the rest alone. They tax everything that comes in until an exception is agreed upon. – Vilx- May 14 at 22:02
  • @Vilx: Again not always true: Sometimes the raw materials have no duties, and I believe there have even been cases where the raw materials were subsidized, in order to encourage domestic industry. Subsidizing or negative tariffs materials might be passed off as trying to help an underdeveloped country. or colony – Krazy Glew May 14 at 22:06
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To aid henning's answer; there are some models that delve into this. Basically various groups within the same country are competing against each other by means of imposing external duties (tariffs of quotas). It's known as the "protection for sale" model. To quote from a review paper on this.

Over the past decades, the Grossman and Helpman (1994) model of “Protection for Sale” (PFS) has become the most influential one in the political economy of trade. The PFS model provides a clear-cut prediction on the relationships between the level of protection and the import penetration ratio: protection is positively related to the import penetration for politically unorganized industries, but negatively related for politically organized ones. This simple relationship is based on an equilibrium model where each politically organized industry proposes campaign contribution bid function that specifies the relationship between campaign contributions and tariffs. Then the government, given these bids from industries, chooses tariffs so as to maximize its objective function, which is a weighted sum of campaign contributions and social welfare.

Several theoretical concerns, however, have been raised about the model. First is the question of whether the model itself is a reasonable depiction of reality. Should lobbies be thought of as “buying protection” in a menu auction as posited by the model? Or is it that contributions buy something else, like access to politicians? Ansolobehere, de Figueriedo, and Snyder (2003), for example, argue forcefully against thinking of contributions as buying policy. [...]

[And a couple of more technical points which I'll omit here.]

Despite these concerns, the PFS model has had much empirical support. A number of studies have estimated the protection equation derived by the model and found that the parameter estimates follow the pattern predicted by the model (e.g., Goldberg & Maggi, 1999; Gawande & Bandyopadhyay, 2000; Mitra, Thomakos, & Ulubasoglu, 2002; Eicher & Osang, 2002; McCalman, 2004). Recently, researchers have extended the original PFS model by incorporating firm size (Bombardini, 2004), foreign and domestic lobbies (Gawande & Krishna, 2004), lobbying of both upstream and down stream producers (Gawande & Krishna, 2005), and labor unions and labor immobility (Matschke & Sherlund, 2006). While the original model accounts for tariffs, its quota version was also constructed and estimated (Facchini, Van Biesbroeck, & Willman, 2006). These extensions, in effect, graft some complications onto the original PFS model and provide evidence that additional factors are also essential. It should be stressed that as the extensions typically leave its basic predictions unchanged, they seem to provide more evidence in favor of the original PFS framework.

So it might not be a complete model, but it has a fair amount of empirical support. The reason why customs duties seems to be "haphazardly" applied by governments, i.e. to some things but not others is basically explained by this PFS model to a fair extent.

As henning mentioned free riding... that's also an issue, but not in the most obvious fashion, but rather within groups:

Olson hypothesized that a latent group's ability to organize and contribute toward providing a public good might be jeopardized by free riding. The politics of trade protection feature the collective action problem, since protection benefits all firms in the industry including those who contributed nothing to attaining it. This paper examines the extent of free riding in lobbying over tariffs in the context of the Grossman and Helpman (1994) protection-for-sale model in which industry lobbies seek to bend government policy in their favor. Previous investigations of the model have produced the puzzling result that governments are largely welfare-maximizing and care little about campaign contributions, in contrast to numerous examples of welfare-reducing policies that have in fact been bought cheaply by special interests. We think the result arises because the model assumes away free riding by firms which hinders industry's ability to organize politically. We introduce free riding into the Grossman–Helpman model, allowing industries to be partially organized. Using a new data set on US trade barriers, we test the model using estimation methods new to this literature. The estimates support the model's predictions and reveal that the extent of free riding by manufacturing firms can help resolve the puzzling result. [...]

A key assumption behind the Grossman–Helpman prediction [...] is that industries failing to achieve cooperation in lobbying offer no contributions to the policymaker, ruling out the possibility that individual owners of sector-specific capital may have a strong private incentive to lobby the government. GH implicitly assumed that the fixed costs of lobbying were greater than the net gain to any individual offering of a private contribution schedule to the policymaker. In the data sets used by Goldberg and Maggi (1999) and Gawande and Bandyopadhyay (2000), however, every four-digit Standard Industrial Classification (SIC) industry has some positive contributions. It thus seems unrealistic to assume that some industries are unorganized and offer no contributions. In practice, capital owners are organized into firms that lobby the government through political action committees. It is likely that corporations, particularly large ones, have incentives to lobby the government over trade policy even if the industry as a whole is unable to overcome the free rider problem and organize a cooperative lobby.

Our solution to this problem is to distinguish between cooperative lobbying, in which the industry lobby acts to maximize total industry profits, and noncooperative lobbying, in which each firm acts to maximize its own profits. [...] [Intra-group] free riding explains why we might observe a low level of trade barriers even when it is cheap to lobby the government.

More recent papers (2016) have added the separation of power as a feature to the [PFS] model. Basically, the government is no longer treated as a whole, but rather the executive is seen as taking a gamble in free-trade agreement negotiations by hoping that there won't be enough of a blocking minority (fueled by lobbying) in the legislature, which then needs to ratify the agreement.

I for one still find these models rather lackluster in view of the direct lessons that protection [from free trade] can be "bought" straight at the ballot box by some groups. In a context where there already exists political polarization for other reasons, relatively small groups can act as arbiters at the ballot box (in "battleground states" and similar constituency organization that makes the votes of most others less relevant/powerful) and achieve their group goals. Alas I could not find much in the way of political economy models that have tried to incorporate such post-2016 lessons...

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