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A tariff is a tax that a governing authority imposes on goods or services entering or leaving the country. Tariffs typically focus on a specified industry or product, and are set in place in a controlled effort to alter the balance of trade between the tariff-imposing country and its international trading partners. For example, when a government imposes an import tariff, it adds to the cost of importing the specified goods or services. This additional marginal cost will theoretically discourage imports, thus affecting the balance of trade.
Governments may opt to impose tariffs for a multitude of reasons, including to protect nascent industries, to fortify national defense programs, to support domestic employment opportunities, to combat aggressive trade policies, and to protect the environment.
Key Takeaways
- A tariff is a specific type of tax that a governing body imposes on goods or services entering or leaving the country.
- In theory, when a government initiates a tariff program, the additional costs saddled upon the affected items discourages imports, which in turn impacts the balance of trade.
- There is a myriad of reasons governments initiate tariffs, such as protecting nascent industries, fortifying national defense, nurturing employment domestically, and protecting the environment.
Infant Industries
Tariffs are commonly used to protect early-stage domestic companies and industries from international competition. The tariff acts as an incubator that theoretically affords the domestic company in question the ample runway time it may need to properly nurture, develop, and grow its business into a competitive entity, on the international landscape. This is essential to startups, because statistically speaking, more than 20% of businesses fail to endure past one year.
National Defense
If a particular segment of the economy provides products that are critical to national defense, a government may impose tariffs on international competition to support and secure domestic production. This can happen both during times of peace and during times of conflict.
Domestic Employment
It is common for government economic policies to focus on fostering environments that provide its constituents with robust employment opportunities. If a domestic segment or industry is struggling to compete against international competitors, the government may use tariffs to discourage consumption of imports and encourage consumption of domestic goods, in hopes of supporting associated job growth, especially in the manufacturing sector.
Aggressive Trade Practices
International competitors may employ aggressive trade tactics such as flooding the market, in an attempt to gain market share and put domestic producers out of business. Governments may use tariffs to mitigate the effects of foreign entities employing unfair tactics.
There are potential downsides to tariffs, namely, they can trigger a spike in the price of domestic goods, which can reduce the buying power of consumers in the nation that imposes the tariffs
Environmental Concerns
Governments may use tariffs to diminish consumption of international goods that do not adhere to certain environmental standards.
What Is an Example of a Tariff?
One example of a tariff is the Chicken Tax. This tariff is a 25% tax levied on light trucks imported into the U.S. It was imposed in 1964 in retaliation against European tariffs on American poultry. The original Chicken Tax affected a range of imports, including potato starch, dextrin, and brandy. In the years that followed, the tariff was removed from most products with the exception of light trucks, which continue to face it today.
What Is Difference Between Tariff and Tax?
The terms “tariff” and “tax” are often used interchangeably. Broadly speaking, a tax is general reference to any compulsory contribution to a government’s revenues. It can be imposed on individuals, for instance through income taxes, or on particular types of transactions, such as sugary drinks taxes. Tariffs are a type of tax applied on products that are being transported between two jurisdictions.
What Is the Average Tariff in the U.S.?
Today, the average import tariff on industrial goods is 2%. Industrial goods includes all non-agricultural products, including cars, metals, clothing, consumer goods, among others.
The Bottom Line
Governments may impose tariffs for a wide range of reasons related to protecting domestic industries, boosting national defense, responding to aggressive trade tactics, and more. Tariffs are usually tailored on a specified industry or product. They aim to manage the specific balance of trade between a country of import and country of export. In theory, when a tariff is imposed on an imported product, it increases the cost of said product and theoretically reduces imports.