What Is a Tariff? Here’s an Overview of the Basics.

On Jun 9, 2023

A tariff, in its simplest definition, is a tax imposed on imported goods — but there’s a lot more to it than just that.

Tariffs are a pivotal part of global trade, shaping the ebb and flow of goods between countries. From encouraging domestic industries to sparking trade wars, tariffs have far-reaching effects that ripple through economies.

Understanding tariffs is crucial in today’s globalized world, whether you’re a small business owner, consumer or policy-maker. Keep reading to learn more about tariffs, breaking down their meaning, history and role in international trade.

What are tariffs?

Tariffs are fees that an importing country charges on foreign goods.

There are two main types of tariffs — specific and ad valorem:

A specific tariff is a fixed fee levied on a physical unit of an imported product.
An ad valorem tariff is a percentage of the value of the imported product.

Tariffs can serve several purposes. They can protect domestic industries from foreign competition by making imported goods more expensive. They also generate revenue for the government.

But it’s important to remember that high tariffs can lead to higher prices for domestic consumers, making everything from cars to groceries more expensive. Understanding tariffs is more crucial than ever in a world increasingly dependent on international trade.

What is the history of tariffs?

Tariffs have been a cornerstone of economic policy for centuries, from the earliest customs duties to modern trade wars.

The World War II period was especially critical for international trade. After witnessing the devastating effects of trade restrictions in the 1930s, countries came together after World War II to establish the General Agreement on Tariffs and Trade (GATT).

This agreement later evolved into the World Trade Organization (WTO), a global body promoting free trade and settling trade disputes.

Throughout history, different countries have imposed tariffs for various reasons.

For instance, high tariffs were a standard part of U.S. economic policy in the 19th and early 20th centuries, designed to protect domestic industries, and in contrast, the post-World War II period shifted towards lower tariffs and more open trade.

Today, tariffs play a significant role in international relations and economic policy.

What is the role of tariffs in international trade?

Tariffs are crucial in shaping the global economy and international trade relations.

Countries impose tariffs on imports for various reasons, such as to protect domestic industries, retaliate against perceived unfair practices or simply as a source of revenue. It’s important to note that the role of tariffs is often closely tied to a country’s trade policy.

Consider the U.S., with a long history of imposing tariffs on imports from countries like China, Canada and Mexico.

Trade agreements, on the other hand, aim to reduce or eliminate tariffs to facilitate free trade. The European Union is a prime example, where member countries have eliminated tariffs on intra-EU trade, promoting the free movement of goods and services.

What are the economic effects of tariffs?

The effects of tariffs can have wide-ranging consequences for an economy.

According to many economists, while tariffs can protect domestic producers by making foreign goods more expensive, they also tend to increase consumer prices. They may provoke retaliatory tariffs from trading partners. Retaliatory tariffs could hurt the U.S. economy, as we heavily export goods to foreign countries.

Higher prices can result from domestic producers increasing their prices up to just below the price of imported goods, taking advantage of the situation. As inflation soars, increasing prices due to tariffs could be a huge concern to the American consumer.

For example, if a $100 product is subject to a 20% ad valorem tariff, domestic producers might raise their prices from $100 to $119. The product is still cheaper than the imported goods, but the price is higher than it would have been without the tariff.

Moreover, tariffs can have a significant impact on specific sectors.

Agricultural products, for instance, are often a focus of tariff policies. Protectionist measures can shield domestic farmers from international competition, but they can also make it harder for those farmers to export their goods if other countries respond with retaliatory tariffs.

What is the relationship between tariffs and trade policies?

A country’s trade policy can significantly influence its tariff rates.

Countries use their trade policies to outline how they interact with other economies, and these policies often reflect a country’s broader economic goals.

While some countries favor a free trade policy with minimal tariffs and trade barriers, others adopt more protectionist policies to…