History of tariff regulation

Indisputable payment

According to historians, the first application of term “tariff” in the meaning of “indisputable payment” as a strict formed (cash only), time fixed (here and now) and precise sized (neither more, nor less) payment is dated to occur in France during Crusades, or maybe a bit later. The French term “tariff” itself comes from Arabic language, and in Levant it was used to denote a port tax, which was collected from ships, was equal for all of them, and used to support lighthouses and quarantines. Term “tariff”, according to Fernand Brodel ^[1], emerged in France not later than in the 15th century, and meant a payment for services, determined by a collective body of administration, i.e. a payment determined by the Toulouse town-hall for a service of an… executioner!. A tax, collected by Venetian Seigneury for transporting people and cargo by ships belonging to the town can be another example of a “tariff”. Private owners didn’t set up “tariff” for their services. Instead, they used a statutory price – a payment, the amount of which could be discussed in case it didn’t satisfy a customer. As the tax was paid both for actual and imputed income, the statutory price had certain limits, below which the deal could not take place. Finally, the third form of payment known in the history of economics was “salary” (with the emphasis on the last syllable, due to French or, probably, Italian origin) which commonly meant a payment for a certain work time. The amount of such payment depended not only on a good will of an employer and hired worker, but also on the market position, thus, the most expensive gunsmiths from Milan and Nürnberg dictated their prices due to the prestige of their trademark, forcing their customers to choose only goods they could afford.

Upon the development of national governments and origination of colonial policies, it has become vitally necessary for monarchs to establish their own economic structures, first of all, for preservation of the most important “indispensable” state attributes: state system ^[2], international sovereignty and territorial integrity. With an army and fleet as main instruments of foreign policy, which were able to protect economic potential either of private capital as in Europe or state capital as in Russia, the state border has become the main instrument of state regulation. The state border was a territorial limit beyond which one’s priority was set up mostly by military force. But the state border was a priori, an economic one: it was a boundary, where the economic laws of the given country started operating, cemented by the monarch’s authority. It was the state border where an economic instrument named “tariff” was first used. For a long time it was a custom tariff. From it started the practice and technology of tariffing activities in nearly all countries. These activities, as a rule, were performed by people who were close to the king-czar-emperor, i.e. by Court members. With a capital letter.

France

French were the first to start thinking about a unified tariff policy in their state. Their Spanish neighbors, who once possessed huge territories, rapidly lost their advantages due to wrong financial policy (including its tariff constituent). Spanish gold and silver lost their value, were seized by other countries or were simply stolen. France as the closest neighbor of Spain had its reasons to beware of Spanish army (which, by that time, was the best in Europe), and planned to create a state system able to train, keep and equip its own army to match Spanish one. The more so as the claims of France for European leadership became more and more clear by that time.

The first statesman to start working seriously on tariff policy in this direction was Arman Jean du Plessie, more known as cardinal Richelieu. It was his idea of state tax tariffication, i.e. to bring the existing tax system to a predictable state, when the tax was calculated and then publicly announced, giving an opportunity to tax payers to adjust their market activities appropriately. It was Richelieu’s Political Testament to his heirs in the difficult field of state finances: “It is necessary to adapt the weight of the load to the strength of an animal; taxes charged from people should be treated likewise”. In other words, the prosperity of the government requires the prosperity of its civilians. An attempt to collect high taxes from poor citizens will turn against tax-collectors. This reminder will be forgotten in next 100 years and the tariff policy of France will result in a crash of that same authoritarian monarchy, which was so dearly fostered by Richelieu for Louis XIII. But this is a story to be told later.

Not squandering one's talents on trifles like market taxes (they were collected by city magistrates that established city tariffs, and some of them remained the same for decades), Richelieu was engaged in state policy in respect of the most important tariff, customs tariff. In state, whose prosperity mostly depended on trade and relocation of capital—there were no other states at that time—it was customs tariff management that made economic development possible. Main commodity streams, making their way from colonies to parent states and from one country to another, crossed the state border, and by a will of a state power acquired a new value, which directly went to the State treasury. The primary tariff function ‑ replenishment of the state budget regularly, i.e. planned replenishment, allowed the country to make calculations for the future, setting its hopes on its own efforts, and not on the international situation on market position. After Richelieu, this policy was also applied by cardinal Mazarini, though with a bit less success. It is necessary to do justice to France for learning a good lesson: by the end of the 17th century France became the main political player of the continental Europe.

Talking about French tariff policy, which by the way was actively studied and used in other countries, the most successful in this sphere were Sweden and the Netherlands. It is inevitable to mention here another great French financier, who lived in the 2nd half of the 17th century, and who is considered to be a founder of the theory and practice of financial policy of an authoritarian state in the world history of economics – Jean-Batist Colbert.

Jean-Batist Colbert was the general controller of French finances, an ideologist of state production monopolism and the founder of mercantilism. He was, in other words, a man who instilled into the light-minded French people the iron rule of economic policy: money likes counting. And this counting must be done skillfully to plan expenses based on the exact knowledge of receipts. And to plan receipts based on the knowledge of inevitable expenses. And cut your coat according to your cloth ‑ I don’t know its French equivalent, but that’s the main idea of mercantilism. Colbert did not leave without attention the main tariff aspect – customs tariffs, but he managed to introduce tariff elements into the state taxation policy in the country. I.e. using the earlier mentioned example, the city could continue to establish its own market tariffs but already with regard to the state’s share. I.e. it was forced to increase tariff rate or get from it less than before. It is easy to guess what solution was preferred by the Mayor’s office of the city of Marseilles… Tariffs were established for taxes of citizens and trade corporations with regard to local specifics and development perspectives of a particular territory. Families with many children had their tariff rates decreased, while in some territories of the country and settlers of new colonies were completely exempted from taxes ‑ but for a definite period of time from 3 to 10 years. Finally, it was Colbert who opposed the idea of internal customs in the territory of France, which already hindered the creation of a unified fiscal territory – first of all, due to differences in money nominals (there were about two dozens of money denominations in France and their relative value was totally arbitrary). Colbert did not introduce into the state management the practice, which was later called tariff customs barriers to protect its own markets against competitive imports. He was an active advocate of creating state manufactories.

England

However, France wasn’t the only country which used tariff as a paramount instrument of state policy. Time of transport tariff came in England in Oliver Cromwell’s epoch. Its appearance mainly was dictated by foreign policy. This period of England’s economic history was nominally named “The Epoch of Navigational Acts”. The first one of them (dated 1650) was rather a declaration of political intentions towards the Netherlands, while the second one (1651) was of quite a different nature. Tariff for sea transportations became a very effective instrument “for prosperity and safety of our republic”, was stated in the text of this law. Let’s see, what did that mean.

Since then it was forbidden to import goods from Asia, Africa and America to England, Ireland and English colonies using ships that didn’t belong to England or that didn’t have Englishmen as a main part of the crew. The transportation tariff was approved by personal representatives of Lord Protector either for 1 year, or for a particular cruise, for example, London-Jamaica. Furthermore, it was forbidden to import goods from Europe to England, Ireland and English colonies using non-English ships or ships that didn’t come from a country-manufacturer of imported goods. Moreover, England reserved the right to import, using its own ships, silk materials from Holland and Flanders even if they were manufactured in Italy, and all goods from East Indies and Levant were allowed to be imported without regard to a country-manufacturer. In this case, tariff rates were approved by Lord Protector himself. Finally, fish, fish oil and whalebone were allowed to be imported to England only by English ships, which were also the only ships allowed to transport cargo between English ports. In this case tariff sum varied, but still it was a rigorously fixed value approved by state power. As a result, the Second Navigational Act of Cromwell caused war between England and Holland, but tariff wars are the other story to be told another time. “Navigational Acts” also made a good job for English trade after Restoration.

Another demonstrative method of tariff policy was used by England and Portugal against the third party, namely France, in the early 18th century. We are dealing with so-called “Methuen convention”, which had put the beginning to the epoch of “asiento conventions” and was time and again effectively used as a powerful tool in competitive struggle of colonial metropolises later on. By virtue of that convention, sealed between England and Portugal in 1703, each of these countries was granted an advantage at markets of the other country over competitors from third countries. Portugal was shipping wine to England duty free (metropolises and colonies); meanwhile England was granted the right for free import of wool to Portuguese colonies, the largest of which was Brazil. Naturally, the Portuguese rapidly displaced Spaniards and French out of English market, while Brazilian market was totally monopolized by England in the absence of real challengers. Thus, “tariff zero”, as it was called by the Portuguese, even without any price content, greatly contributed to the development of economy and fortification of international positions of the countries.

Unified tariff for the whole territory of the country acted like economic “tie” for that territory. That is, the lord of territory was the one who collected taxes from it. He and only he possessed the right to set up the tax rate. But one could speak about “tariffication” in this sphere only in case the tax remains fixed regardless of changes in market position and inflation. It is most essential for metropolises, i.e. countries carrying out colonial policy, like England and Russia. An example of English tariff policy towards its colonies demonstrates what improper tariff policy can end up with. And a brilliant phrase by Arnold Toynbee should not be forgotten either: ”History isn’t simply what had been. It is what can be. As it had already happened once”.

An intensive French trade in the New World posed a serious threat to economic interests of England. That’s true, sugar from French Martinique had triple shorter route to travel than when imported from England. Huge French territories in the New World (lets not forget, that wide French possessions from Canada up to New Orleans had gone over to USA only during Napoleon Bonaparte’s rule) were real obstacles for territorial expansion of Colonies. Colonies themselves didn’t show much interest in British problems, as they didn’t have their representatives in Parliament and managed their business themselves at a local level. It was only culture and language that consolidated Colonies with the metropolis. But England became aware of possible separatism and began to fortify the integrity of its empire with the blocking tariff to limit the opportunities of French capital in English colonies. So in 1764 the so-called “Sugar Act” was approved in Parliament, which set up an overstated customs tariff for import of goods from “non-English colonies” to the USA. Sugar was the most important among those goods. French interests were affected indirectly, while English colonists were hit very significantly. It was the first time when differences in the interests of colonies and metropolises were touched upon.

The next measure in respect of colonies can be characterized by one of the favorite phrases of Peter the Great: “rather foolish”. The metropolis introduced an additional tariff on stamped paper by passing the “Stamp Act” through Parliament in 1765. Based on this act, all documents drawn up in colonies, including marriage certificates, trade deals, and printed matter had to be made on a special stamped paper. The purpose of such an act was to receive 60 thousand pounds sterling per year to settle considerable state debts. Considering the fact that in 1740 the trade volume between the metropolis and colonies constituted 9.5 million pounds sterling and gross domestic product of colonies was 3,7 million pounds sterling, it is clear that Britain treated its colonies as a “cow”, which could be milked dry. And that was London’s greatest mistake.

The population of colonies was against that act. In the summer of 1765 the boycott of British goods began and in the same year the Intercontinental congress in New York declared British decisions to be illegitimate in colonial territories as there were no American members in Parliament.

However, London took the bit between its teeth. In 1767 the so-called “Pawnshted Act” was approved by Parliament, further limiting opportunities of European countries to trade directly with American colonies. Colonists replied with further boycott of British goods. In 1770, there was an armed conflict in Boston between colonists and representatives of colonial administration, which caused England to change all tax tariffs in colonies, except tea tax. This tax, however, didn’t really mean much to Americans who consumed tea in much less quantities than Englishmen (Americans prefer coffee up to the present time).

But disputes against British economic policy had played a rather significant role in what is called feeling of a single nation. The process could not be stopped. “Boston tea-party” (when English tea cargo was destroyed in Boston) in 1773 initiated a chain reaction, which resulted in Independence War and declaration of the United States of America…

The theoretical foundation of tariffs and taxes was finally concluded by Adam Smith in his bestseller “Studies of the Nature and Cause of the Wealth of Nations” published in 1776. In this work, a tariff was characterized as the main instrument of state regulation of trade, and regulation of economic policy through trade. The model proposed by Smith – the prosperity of industry through trade – had become the most widespread in the West, and it was since then that an idea of priority of free foreign trade without any restrictions for the prosperity of a particular national economy had spread widely. So, the idea of globalization is as old as the World.

Russia

The tariff history of Russia is no less fascinating and instructive.

The first public organization in the Russian Empire ‑ Free Economic Society ‑ was founded 3 years after Catherine II began to reign and 9 years after abrogation of the last internal customs in Russia in 1765. Introduction of protective tariff was one of the first recommendations of the Free Economic Society, meant to protect not so much the internal market but mainly one manufacturer from another (as foreign trade of Russia was rather insignificant). An attempt to break open the internal market of Russia at the expense of powerful corporative Jewish capital (after partition of Poland, the Russian Empire became the owner of territories with the largest Jewish population in Europe) was accomplished by no economical means: introduction of the Jewish pale with its trade tariffs and taxation system.

After the Great French Revolution customs tariff acquired another feature: it was the tool used to form anti-Napoleonic coalitions, by means of trade and customs tariffs Napoleon was planning to isolate and render lifeless England. In 1797, Paul I, Napoleon’s ally, established high tariffs for trade with England, and in 1800 made them even higher. This resulted in drastic decrease of ship timber market turnover, causing significant losses for England. The situation was improved only after murdering of Paul I and accession of Alexander I to the throne: in 1801 trade tariffs with England were significantly decreased. Though not for long.

The continental blockade policy put into practice by Napoleon was generally focused on one, yet very effective measure: “to ruin the enemy’s trade making him unable to wage war”. Napoleon’s main enemy was England. Colonial goods and cotton constituting foundation of English export were charged with extremely high customs tariffs (tenfold higher than initial ones). Goods like cacao, coffee, sindon, sugar, cotton, etc. were also taxed. Such policy resulted in 150 million franc income (due to customs confiscations and contraband control) received by Napoleon, but weakened the French economy to a great extent.

Russia was forced to join continental blockade in 1807. Alexander managed to manoeuver with trade taxes for 3 years, but in 1810 strict prohibitive tariffs were adopted. Only in 1815, after Viennese congress which summarized Napoleonic wars, trade tariffs with European countries were significantly decreased.

The first “financial revolution” in Russia, also known as “Kankrin’s reform”, took place in the 1820s-1830s. Egor Frantsevich Kankrin, Minister of Finance of Alexander I and Nikolai I, had restored the state financial system after the war with Napoleon, introduced circulation of silver coins and, finally, approved the protectionist tariff focused on the development of industry within the country. Unfortunately, distillation was the most economically effective business at that time and encouragement of this activity was a kind of a double-edged weapon. Nevertheless, the income from that policy was flowing to the budget allowing to evade deficit a year after Kankrin’s appointment in 1824.

In the 1820s, Russia was trying to master trade and customs tariffs for development of remote territories. The question is: introduction of porto-franco system in Odessa, which allowed to develop that territory to such extent that as early as the end of the 1820s, Odessa had become the fourth among the biggest cities of the Russian Empire after Moscow, Petersburg, and Warsaw. Latter on this experience was used in Vladivostok too.

Before the Crimean war, the entire Russian foreign policy was divided into two major parts: European and American. European trade was carried out with tariffs approved by the Ministry of Finance upon agreement with different interested institutions (or court groupings, directly speaking). American trade was performed by a Russian-American company which became the largest corporation in the world by the time of its heyday in the 1830s. The Russian-American company wasn’t a country, that’s why it didn’t set up any tariffs. It was conducting a very flexible targeted policy depending on demand for the main commodity ‑ fur. However, the absence of a long-term development strategy and keeping of the state from corporate management issues of the company resulted in its crash after 60 years of existence. After that Russian-American trade was frozen for nearly 40 years.

After the Crimean war, the primary objective of tariff policy in Russia was to protect domestic manufacturers, or per se labor market. Very high tariffs were set up for importing of goods that were identical to ones manufactured in Russia, a bit lower tariff rates – for goods that couldn’t compete with goods produced by Russia itself. This policy was doomed: Russia couldn’t compete with Europe.

Thus, customs tariff approved in 1868 was based on other principles: decreased taxes for 152 articles, equal taxes for goods crossing both sea and land borders. The lowest taxes were imposed on imported raw materials, the highest – on finished products. However, this policy also had no anticipated effect and in the mid-70s Russia returned to protectionism. Starting from 1877 all customs taxes were collected in gold currency, increasing their nominal value by 25% at once. Until 1891 all customs taxes were aimed to support Russia’s domestic industry and customs policy was under Alexander III’s personal supervision.

Innovative principles of tariff policy were fixed in the State tariff of 1891 submitted by the Ministry of Finance. This tariff combined and systemized all positive changes of the previous years and was aimed to support certain industry branches, which were short of funding, such as: trade navigation, agriculture and metallurgy. Thus, taxes for imported agricultural machines were decreased to minimum, and in two years Russia became the biggest importer of German croppers and steam threshers.

Radical changes in Russian tariff policy took place by the 1890s, when the approval of double convectional tariff occurred. Until 1890 customs tariff in Russia was rather self-contained: taxes from identical foreign goods were collected equally, regardless of the manufacturer country. Meanwhile, customs struggle among West European countries resulted in double convectional tariff system: bargaining countries made back-to-back tradeoffs for each other concerning goods they were interested to receive or sell. Such agreements were concluded between Germany, Austria-Hungary, Italy, Switzerland and Belgium and took effect in February 1892. Taxes were increased by 30% on average and since July 20, 1893, double customs tariff was established: common for countries favoring us and increased one ‑ for the rest. The first trade convective agreement was signed with France. Its main provision was a declaration of the mutual right for favoring conditions of export, import transit, etc. Besides, both countries agreed not to grant any benefits to manufacturers from other countries, which were not granted to negotiating parties. By virtue of those agreements France decreased kerosene duties by 50%, thus opening French market for Russian petroleum products. Subsequently, similar agreements were concluded with Germany, Austria-Hungary, Bulgaria, Denmark, Portugal, Japan, Serbia, Japan and Tunisia. Not with the USA, England and Turkey.

The first Russian theoretician of tariff policy was Sergei Yulyevich Vitte, mathematician by education, whose career started as a ticket clerk and ended up as chairman of the Council of Ministers of the Russian Empire. It was him who wrote the book entitled Principles of Railway Tariffs in the 1880s, which was published four times during Vitte’s lifetime and was translated into 6 languages. The main idea of the principles is as follows:

• Tariffs ought to regulate interests of a private manufacturer and state treasury with regard to preferences of each, for a long-term period. No less than pay-back period for capital invested.
• Tariffs ought to be evident. No one can conceal them from either competitors or from the state fisc.
• Tariffs ought to provide receipts to the budget, so they couldn’t be changed arbitrarily or in favor of market position.
• Tariffs are unable to solve all problems of protection of own market and attracting funds from outside. They tariffs must be a part of the thought-out and long-term state policy of “favoring its own economy”.
• Tariffs ought to be in correlation with the solvency of the population. It is possible to start with a low tariff, increasing it according to the growth of the nation’s prosperity.
• State tariff ought to have the effect of the law.

S. Vitte had to apply all these principles during Russo-German “customs war caused by 10 kopecks per pood”. During 1893-94 Germany tried to change Russian tariffs for bread trade and totally eliminate tariffs for agricultural machines. Vitte didn’t agree to this and in 1894 a mutually beneficial agreement between Russia and Germany was concluded.

Upon the appearance of free markets (bread, coal and oil markets), state tariffs gradually became the primary instrument of state regulation of economics and the main tool to protect it. Many countries made trade and service ^[3] tariffs a prerogative of special state agencies, as, for example, Germany (special department of Deutsche Bank) or France (tariff committee in the Ministry of Trade). It is necessary to lay emphasis on the fact that nearly all countries who established such agencies sooner or later realized the necessity to form tariffs in cooperation with legislators and manufacturers of goods and services. Tariffs as state laws seem to have appeared for the first time at the beginning of the 1880s in Great Britain.

Tariff history by itself is a story of a state economic management system in its entirety : in respect of private business, state economic policy sector, and in the context of transnational corporations, first of which were the largest trading companies like English East-Indian. Tariff was the most flexible instrument for such activity, allowing  state-of-the-art performance of management, in some cases reaching real refinement. But, at the same time its very nature remained unchanged since Crusades. And the most precise translation of the term “tariff” from Arabic is “something that cannot be disputed”…

[1] See “Material Civilization: Economies and Capitalism”

[2] After the Great French Revolution the term “Constitutional System” started to be applied.

[3] In the Russian Empire tariffs for electric energy varied for different cities, although the amount of payment didn’t depend on consumed energy, but on the duration of a service: weekly or monthly. The payment for consumed energy was first applied in the USSR right before the war, when electrical teapots and irons “consuming” considerable amount of energy appeared. Saving of electrical energy by means of perfecting energy consumption system in the USA was announced shortly after the Great Depression of 1919-32.