Import duties – commonly referred to as tariffs – are charges levied on certain goods when they enter an economic territory. The 2008 System of National Accounts (SNA, §7.93) explains that they may be intended as a means of raising government revenues and/or protecting domestic industries by discouraging imports.
This blog explains where tariffs are recorded in the national accounts and how changes in tariffs can impact GDP both in terms of its level (nominal GDP) and its growth rate (change in volume). It is important to distinguish between the direct effect of a change in tariffs, everything remaining equal, and the indirect effects arising due to changes in the behavior of producers and consumers in response to changes in tariffs.
Where are tariffs recorded in national accounts?
Import duties are recorded in the national accounts under ‘Taxes on production and imports’ (D2), in ‘Taxes on products’ (D21) and more specifically as ‘Import duties’ (D2121). Information on import duties is also available in the Government Finance Statistics table Annual government taxes and social contributions receipts. The recording of tariffs is best illustrated in the supply and use tables which are a core component of national accounts (see the schematic table below).
The Supply table shows the origin of products, which are either domestically produced or imported. Tariffs are shown separately from the import values in the supply table as the supply of goods and services by industries and from imports are recorded at basic prices, i.e. the price received by the producer, or, for imports, the value of the good recorded at the border. Taxes less subsidies and trade and transport margins are added to the basic price to arrive at purchaser prices, i.e. the price paid by the buyer of the products (often referred to as the market price) as reflected in the use table.
| Imports and exports in national accounts cannot be directly linked to international trade statistics. National accounts record imports and exports when a change in ownership occurs between residents and non-residents, which need not coincide with the cross-border principle that underlies international trade in merchandise statistics. For more information see here. |
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The Use table shows how products are used by economic activities. Products can be bought and consumed in the production process (called intermediate consumption) or go to final use. The latter comprises household and government final consumption, capital formation (often called investments, defined by a product being used for more than one year in a production process), and exports. In the use table, the import duties will be reflected in the prices of intermediate consumption and final consumption categories of the relevant product categories. This means that tariffs will increase the price actually paid by users for imports, but the value of imports as recorded in the national accounts does not change.
Table 1: Simple schematic of supply-use tables
Supply
| Industries | Industries | Imports | Trade and transport margins | Taxes less subsidies on products | Total | ||
|---|---|---|---|---|---|---|---|
| Agri- culture | Industry | Services | |||||
| Products | Output by product and by industry at basic prices | Imports by product | Trade and transport margins by product | Taxes less subsidies on products by product | Total supply by product at purchaser's prices | ||
| Agri- cultural products | |||||||
| Industrial products | |||||||
| Services | |||||||
| Total | Total output at basic prices by industry | Total imports | Total trade and transport margins | Total taxes less subsidies on products | Total supply at purchaser's prices | ||
Use
| Industries | Industries | Final uses | Total | ||||
|---|---|---|---|---|---|---|---|
| Agri- culture | Industry | Services | Final consumption | Gross capital formation | Exports | ||
| Products | Intermediate consumption by product and by industry at purchaser's prices | Final use by product and category at purchaser's prices | Total use by product at purchaser's prices | ||||
| Agri- cultural products | |||||||
| Industrial products | |||||||
| Services | |||||||
Gross value added | Value added by industry at basic prices and by component (remuneration of employees, other taxes less subsidies on production, gross operating surplus) | Gross value added | |||||
| Total | Total output at basic prices | Total final consumption | Total gross capital formation | Total exports | Total use at purchaser's price | ||
What is the direct impact of tariffs on nominal GDP
There are three approaches used to compile GDP:
- the expenditure approach (see annual and quarterly OECD dataflows);
- the production or output approach (see annual and quarterly dataflows);
- and the income approach (see annual and quarterly dataflows).
Each approach leads to the same value, with Table 1 illustrating how tariffs feed into each approach. The direct impact of changes in tariffs to national accounts aggregates such as GDP, will depend on whether products are being used for final or intermediate consumption.
Products used for final consumption or as investment
Suppose an imported product going to household final consumption costs $400 and the new customs duty is $100 (previously $0), then the household final consumption expenditure is now recorded as $500. The direct effect of the change in tariff would therefore raise GDP at current prices (or nominal GDP) by the same amount:
- Expenditure approach – final consumption by households increases by $100;
- Production approach – taxes collected by government increases by the same amount;
- Income approach – same increase for the taxes on imports.
Tariffs will also increase nominal GDP for products going to government final consumption or to capital formation.
Products used for intermediate consumption by producers
In the case of intermediate consumption of products, tariffs will increase the costs of inputs. How this is recorded in the national accounts will vary depending on whether intermediate consumption is by a market producer (e.g. a manufacturing firm) or a non-market producer (e.g. a health service provider).
In the case of a market producer, assuming output remains unchanged, value added will decrease, irrespective which approach is used:
- Production approach – there is no change in nominal GDP as the decrease in value added is offset by a corresponding rise in net taxes on products.
- Expenditure approach – there is no change in nominal GDP as there is no direct change in the final demand of products.
- Income approach – there is a decrease in operating surplus, which is offset by an equal increase in taxes, hence there is no change in nominal GDP.
In the case of non-market producers, the value of their output will rise by the same amount as the tariff increase:
- Production approach – there will be an increase in nominal GDP as value added (i.e. the difference between production and intermediate consumption) will remain the same while taxes less subsidies on products will increase.
- Expenditure approach – there will be an increase in government final consumption due to the increase in output.
- Income approach – the increase in GDP is recorded as an increase in taxes on imports.
For both producers, market or non-market, we see the three approaches arriving at the same result, but via different routes.
Table 2: Tariffs feed into all three GDP approaches
| GDP Approach | Impact of Tariffs |
|---|---|
| Expenditure: C + G + I + (X - M) | GDP is derived as the sum of final consumption expenditure by households (C) and government (G), gross capital formation (I) and exports (X) minus imports (M). Import tariffs will be reflected in the value of final expenditure, but not in imports or exports. |
| Production: VA + T - S | GDP is derived by summing value added (VA) (at basic prices) plus any taxes (T) less subsidies (S) on products. Tariffs may impact both value added and taxes. |
| Income: L + GOS + T' - S' | GDP is derived by summing the income categories (i.e., remuneration of employees (L), gross operating surplus (GOS) and mixed income, and adding any taxes (T') less subsidies (S') on production and imports. Tariffs may impact the gross operating surplus and taxes on production and imports. |
The transactions directly impacted by tariff changes are shown in bold in the first column.
What is the direct impact on real GDP growth?
While tariffs may have a direct upward effect on nominal GDP, changes in tariffs (all else being equal) will not impact real GDP growth, which is measured in volume terms. This is because the entire effect of the tariff increase will be captured in price changes (i.e. the GDP deflator).
For instance, tariffs will be reflected in increased prices of final consumption goods, but the quantity of goods and services consumed and produced remains unchanged, as does GDP growth.
Indirect impact of tariffs
In addition to the direct impact, changes in tariffs will likely have all sorts of indirect effects on the economy and hence on GDP (level and growth rate):
- consumers or companies that directly buy imported products may consume less or switch to domestic substitutes;
- companies may react by raising prices to maintain their profit margin;
- the volume of imports may decline;
- government revenues may increase which may lead to changes in government spending;
- producers and consumers may anticipate tariff changes by increasing their consumption of imported products before the tariff increase is applied.
There will also be various effects on the monetary and financial side of the economy such as changes in exchange rates.
The combined impact of these direct and indirect effects is difficult to predict in advance and is something that lies outside the scope of national accounts compilation, instead being the domain of economic modelling.
Conclusion
Import tariffs are an important component of the national accounts, affecting various indicators in different ways. Notably, they are not reflected in import values, but separately recorded as taxes on production and imports. However, they will be reflected in the prices paid by domestic producers and consumers for the relevant products. Furthermore, tariffs may have a direct impact on GDP in current prices, but will not have an impact on real GDP growth, as the tariffs will be reflected in prices. Of course, this is under the strict assumption that all remains the same.
Given the likely indirect effects of tariffs and the fact that national economies will respond to import tariffs in different ways, it will be important to monitor the situation closely. National accounts data provide an important tool for that purpose.
