What are Tariffs

A tariff is a tax placed on goods by a government on goods imported from another country, and sometimes on exports. Tariffs are intended to raise the price of foreign goods so that foreign goods are more expensive and consumers are motivated to buy from the country that has the tariff. Tariffs can directly impact international trade, domestic production, and international relations around the world because tariffs change the price of goods that are impacted by their tariffs. Different occasions involve tariffs that vary in type and purpose because of different economic goals of countries, industries that they wish to protect, and relationships they have with foreign countries.

Governments utilize different kinds of tariffs. Ad valorem tariffs are calculated regarding the import item in a percentage. For example, if a person was charged a 10% tariff on a product that is worth $1,000, their tariff would be $100. Ad valorem tariffs are simple and help to provide clarity through negligible changes in the value of many products offered on the market. Thus, on top of being simple to implement, ad valorem tariffs are simple for countries implementing the tariffs because they change with the price of many products in the market. Specific tariffs are fixed charges based on a physical measure like weight or quantity. For example, $5/kg would be a specific tariff on imported sugar. A tariff-rate quota are somewhat like ad valorem tariffs, and somewhat are like specific tariffs. When an imported good has a tariff-rate quota, imports of a good are taxed at a lower tariff rate until the amount exceeds the specific amount of the quota subsequently results to paying tariff rates of that good that are placed on imports.

Last week this blog presented an analysis of tariffs, including their implications for pricing, job security, economic growth, and international trade relations. Governments will apply tariffs for various reasons, however, some of the more common motivations for tariff protectionism include: protecting domestic companies; generating revenue, particularly in developing countries; using tariffs as a tool for retaliation or leverage in the negotiation process; and in the case of national security, to protect particular types of business to assure self-reliance in supply of critical goods including defense, critical energy assets, and food.  

Although tariffs can have positive impacts for domestic businesses and jobs in the short term, economic research shows that the impact of tariffs present significant downsides. One of the more significant downsides is higher consumer prices. Since tariffs impose an increase to the price of foreign products, the pass through effect often means higher costs and diminished purchasing power which leads to increasing cost of living. Tariffs limit competition and can deter companies from innovating and providing better value for consumers. Tariffs can usually lead to retaliatory tariffs which quickly escalate to trade wars for governments. Typically governmental tariff policy leads to retaliation and further complications in international trade relations. 

Real-world examples highlight the challenges and consequences of tariffs. The U.S.–China trade dispute of 2018–2020 is the most comprehensive demonstration by far, as the U.S. imposed tariffs on hundreds of billions of dollars of Chinese goods, and China imposed tariffs on U.S. goods. The results were additional costs to American businesses and consumers and increased costs for Chinese businesses, as well.

The EU’s agricultural tariffs, which are designed to protect EU farmers but make it difficult to conduct business with exporting states, such as the U.S., Brazil, and Australia, are another that typically increases tensions in trade.

Governments have many alternatives to tariffs available to them in standards of support and industry promotion. They can issue subsidies, provide tax discounts, etc., limit foreign standards—which generally happen within free-trade agreements—or, where applicable, legislation can be enacted to ban the predatory pricing conduct of foreign representatives through anti-dumping laws.

In conclusion, tariffs can be powerful policy tools in international trade, however, their use can be complex, and the potential negative economic and political consequences must be considered carefully. A nuanced balance of trade policy that considers the costs of tariffs against the benefits of tariffs is a much better policy option than a continued emphasis upon a tariff policy, as adequate policy attention must be given towards sustainable economic economic growth and maintaining healthy international