DEFINITION: A tariff is a tax imposed by one country on the goods and services imported from another country, with the aim of protecting the first country’s industry, of raising revenue, or of influencing the other country’s policies.
Why do countries use tariffs?
Most nations face economic constraints due to their natural resources and their capacity to manufacture goods and services.
For this reason, in the vast majority of cases, a country must resort to international trade to acquire the goods its people want but which cannot be provided domestically.
Even though most nation states find themselves in the same position, international trade is not always conducted harmoniously among the countries of the world.
The factors which may lead to discord among international trading partners include policy differences, competing geopolitical interests, among others.
Tariffs provide one tool that governments may use to cope with trading partners with whom they have disagreements.
ETYMOLOGY: The English noun “tariff” is attested from the late sixteenth century. It derives, via Italian tariffa, from the Arabic ta’rīf, meaning “notification.”
USAGE: The purpose of tariffs is to limit imports.
In essence, tariffs raise the cost of goods and services purchased from foreign nations, thus making them less attractive to domestic consumers.
It is important to note that a tariff may impact both the exporting and the importing nation.
This is obvious in the case of the exporting nation: If consumers in the country imposing the tariff are deterred from buying imported goods due to increased prices, then this, of course, has a direct negative impact on the exporting country.
However, if consumers in the importing country persist in purchasing the imported goods subject to the tariff even at the higher price, then the effect of the tariff will essentially be to increase the cost of living of the country that put the tariff in place.
There are two categories of tariffs:
- A specific tariff is a specified amount imposed on all goods in a certain category, for instance, a $1,000 tariff on automobiles imported from certain countries.
- An ad-valorem tariff is a percentage of the price of an imported commodity, for example, six percent of the declared value of television sets imported from certain countries.
Reasons for Imposing Tariffs
1. To raise revenues: Tariffs may serve as a means of generating government revenue. Such tariffs are referred to as “revenue tariffs” and are not intended to limit imports.
2. To protect domestic industries: Governments may use tariffs to provide an economic advantage to specific industries to safeguard companies and employment opportunities.
3. To protect domestic consumers: Tariffs may be used to render certain imported products prohibitively expensive, not to protect domestic producers, but rather to protect domestic consumers from potentially dangerous products—for example, ones imported from countries with lax safety standards.
4. To protect national interests: Tariffs may also serve as an extension of foreign policy. For example, country A might impose tariffs on Country B’s principal export to exert influence on Country B to change its international behavior.