What Is A Tariff?

Published On June 9, 2016 | By admin | Finance

A tariff is a tax—or a “duty”—assigned to the importing or exporting of a particular class of goods.  Governments use tariffs to generate revenue on sales conducted through car importing and exporting but also as a means to protect domestic industries from foreign competition.

Why Do We Need Tariffs?

Typically, a consumer might seek to purchase a good from an overseas competitor because they can offer it a lower price; tariffs help to make those goods more expensive so that the consumer will be more likely purchase domestically instead.

At the same time, though, the foreign trade restrictions that tariffs can impose can lead to less than efficient domestic operations.  Without foreign competition, for example, domestic industries may not feel the pressure to provide higher quality products at better prices and, in the worst cases, simply find the cheapest and fastest way to meet consumer demand.

Justifications for Tariffs

Indeed, governments typically use one of only a few justifications for imposing tariffs:

  • As mentioned, one reason is to protect domestic jobs. Tariffs increase the overall retail price of less-expensive foreign goods which ensures that those who make quality, domestic products—that tend to be higher in price—can continue to thrive
  • Tariffs also help to protect new, infant industries. When a country wants to develop a new industry for the production of a particular good (technology, fuel, food products, etc) tariffs are supposed to help make foreign products (in that industry) more expensive so that domestic consumers are more apt to buy locally.
  • Governments can also use tariffs politically when one trade partner does not adhere to trade regulations and guidelines. If an exporting country, for example, violates a trade agreement, the importing nation can impose a tariff to cause that product to fail
  • Finally, tariffs can also protect consumers from a product that a government might deem as harmful; increasing the price can discourage consumers from buying that product.

When all parties involved with trading remain fair and unbiased, tariffs help to maintain a healthy economic structure.  However, there is nothing stopping one country from imposing ridiculous tariffs—sometimes even in retaliation for reasonable tariffs—that can result in a trade war.  This is actually the reason why trade groups like the World Trade Organization have come to be: they help to regulate and facilitate fair trade across the globe.

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