What is a Duty?
In the tax and import/export world, a duty (or customs duty) is money collected under a tariff.
How Does a Duty Work?
A duty is a federal tax on imports or exports. For example, Americans who travel abroad can bring back a certain number of dollars' worth of items without paying a duty. If the traveler brings back more than the allowed dollar amount worth of items, he or she must pay the tax (which varies according to the type of item, the type of travel, and other factors).
One of the best known tariff agreements is the controversial North American Free Trade Agreement, which went into effect on January 1, 1994. NAFTA required the elimination of duties on half of U.S. goods shipped to Mexico and the gradual phaseout of other tariffs among the U.S., Canada and Mexico over a 14-year period.
The World Trade Organization, which was created in 1995 and replaced the General Agreement on Tariffs and Trade, is an international body that acts as a trade-dispute settlement organization and offers a forum to discuss new and existing trade rules and tariffs.
Why Does a Duty Matter?
Duties are used by governments to generate revenue or to protect domestic industries from competition. Duties can make it more expensive for Americans to purchase foreign goods, causing a decline in imports, a decline in the supply of the good, and a resulting increase in the price of the good. The price increase usually motivates domestic producers to increase their output of the product. Some economists argue that the resulting higher consumer prices, higher producer revenues and profits, and higher government revenues make duties a way to effectively transfer money from U.S. consumers to the U.S. Treasury. Some economists also argue that duties interfere with free market ideals by diverting resources to industries in which the U.S. is a less efficient, high-cost producer.