What is a tariff?
Natural resources and the ability to produce particular goods and services are limitations for most nations. To meet the wants and desires of their populace, they trade with other nations. Nevertheless, in some situations, commerce between trading partners must be carried out more effectively. Geopolitics, competitiveness, policies, and other issues may aggravate trade partners.
One tool that governments use to deal with business partners they don’t like is tariffs. A tariff is a levy that one nation imposes on the products and services that another nation imports to influence it, increase income, or preserve competitive advantages.
Understanding Tariffs
Tariffs limit imports. Simply put, they raise the cost of products and services acquired from other nations, decreasing their appeal to local buyers.
It’s important to realize that a tariff impacts the exporting nation since customers in the tariff-imposing nation may decide not to purchase imports due to the higher prices. The duty has, however, effectively increased the cost to the customer in another nation if they still decide to purchase the imported product.
Tariffs come in two varieties:
Depending on the kind of goods, a predetermined cost known as a tariff is applied; for example, a $500 tariff applies to cars.
Based on the item’s value, an ad-valorem duty is applied, such as 5% of the value of an import.
The Reasons for Government Tariffs
Governments may apply tariffs for several reasons:
- Increase income
- Defend homegrown industries
- safeguard domestic customers
- safeguard national interests
Increase Income
Governments may increase their income by imposing tariffs. Known as a revenue tariff, this kind of tariff has no intention of limiting imports. For example, President Donald Trump and his administration levied tariffs on several goods in 2018 and 2019 to equalize the trade imbalance. Customs duties received in the 2019 fiscal year were $18 billion.
The duties received in FY 2020 totaled $21 billion.
Defense of Home Industries
Tariffs are a tool that governments may employ to support specific sectors, often to safeguard businesses and jobs. For instance, President Joe Biden suggested in May 2022 imposing a 25% ad valorem duty on steel products from all nations except Canada, Mexico, and the United Kingdom (the latter of which is allowed to trade 500,000 metric tons with the United States).
This proclamation protects American steel manufacturing and production employment in the United States while reopening trade in certain commodities with the United Kingdom.
Defend Local Customers
Tariffs may increase the perceived value of locally produced commodities by raising the cost of those manufactured elsewhere. Certain items, including those painted with lead-based paint, may harm consumers if manufactured in nations with laxer standards. Tariffs may raise the cost of certain goods, so buyers refuse to purchase them.
Defend National Interests
Since they may impose economic pressure on a trade partner’s primary exports, tariffs can also be employed as an extension of foreign policy. For instance, a large portion of the globe reacted to Russia’s invasion of Ukraine by implementing sanctions or boycotting Russian products. President Joe Biden halted regular commerce with Russia in April 2022. On Russian goods that were not subject to the suspension in April, he increased the tax to 35% in June.
Tariffs’ Unintentional Side Effects
Tariffs may result in unforeseen consequences.
Lowering competition may cause domestic businesses to become less inventive and efficient.
Due to the tendency of prices to rise without competition, they may harm domestic consumers.
By favoring specific industries or geographical areas over others, they might cause conflicts. Tariffs intended to support urban manufacturers, for instance, may harm rural customers who do not gain from the policy and will likely pay more for produced products.
Ultimately, a trade war—a futile cycle of retaliation—can result from an effort to exert pressure on a competitor nation via tariffs.
Benefits and Drawbacks of Tariffs
Advantages
- Generate income
- Engage in direct talks.
- Encourage a country’s objectives.
- Establish predictability in a market.
Cons
- Caused problems between the governments
- starts trade conflicts
- Benefits Described
Generate income: As previously said, tariffs allow the government to increase revenue. This may assist the government in cutting deficits and lessening the tax burden that county residents bear.
Open negotiations: Nations may use tariffs to start talks on trade or other matters. Tariffs are a tool that both parties may use to negotiate trade agreements and develop economic policies.
Promote a country’s objectives: One of the most common applications of tariffs is to guarantee that native goods are given precedence within a nation to assist enterprises and the economy.
Stabilize a market and provide pricing predictability: Tariffs may aid in market stabilization.
Advantages Described
Exacerbating tensions between states: Tariffs are a standard tool many countries use to penalize or deter behavior they find objectionable. Regrettably, doing so may exacerbate tensions and cause more issues between the two nations.
Start trade wars: When a nation has tariffs placed on it, it usually responds by starting a trade war in which neither nation gains an advantage.
Tariff History
Europe Before Modern
In premodern Europe, a country’s wealth was traditionally made up of immovable, tangible resources like gold, silver, land, and other natural resources. Trade was seen as a zero-sum game with an apparent net gain or loss of wealth. A nation’s wealth would be depleted if it imported more goods than it exported, mainly gold. Instead of dealing with one another, nations sought to acquire colonies with whom they could establish exclusive commercial connections. Cross-border commerce was regarded with distrust.
The mercantilist regime made extensive use of tariffs and even outright trade prohibitions. Since its colonies were often forbidden from exporting their raw resources abroad, the colonizing nation, which saw itself as in competition with other colonists, would import raw materials from them. The colonizing nation would use the resources to make manufactured goods to sell to the colonies. Strict tariffs and other restrictions were implemented to ensure colonies only bought products from their nations.
Novel Theories of Economics
Among the first to doubt the logic of this arrangement was the Scottish economist Adam Smith. In 1776, when Britain’s American colonies proclaimed independence due to oppressive trade laws and excessive taxes, Adam Smith wrote his Wealth of Nations.
Authors like David Ricardo, who popularized the idea of comparative advantage, expanded upon Smith’s theories. According to this argument, each nation should focus its resources on the activity at which it is most proficient if it is better at generating a specific good. At the same time, another is better at creating a different one. Instead of building trade obstacles that compel the nations to reallocate resources to areas where they excel, they should engage in trade. This theory holds that tariffs impede economic progress, even when they may be used to the advantage of specific, limited industries.
The popularity of these two strategies has fluctuated: limited trade based on a zero-sum game and unrestricted trade based on the concept of comparative advantage.
The late 1800s and early 1900s
During the late 19th and early 20th centuries, relatively free trade flourished due to the widespread belief that international trade had rendered large-scale battles between states unnecessary and costly. That notion was disproven during World War I, and until the conclusion of the Second World War, nationalist trade policies—including high tariffs—dominated.
Following that, free trade saw a 50-year comeback, culminating in the World Trade Organization (WTO) being established in 1995 as a global platform for dispute resolution and establishing norms.
Free trade agreements also spread, such as those with the European Union (EU) and the North American Free Trade Agreement (NAFTA), which is now known as the United States-Mexico-Canada Agreement (USMCA).
But when doubts about this model—sometimes referred to as neoliberalism by detractors who connect it to liberal ideas from the 19th century in support of free trade—grew in the 2010s, Britain decided to vote to exit the European Union in 2016. On a campaign that included a demand for tariffs on imports from China and Mexico, Donald Trump won the U.S. presidential election the same year and put it into effect as soon as he entered office.
Both political extremes oppose tariff-free multilateral trade agreements, claiming they undermine national sovereignty and promote a race to the bottom regarding worker rights, salaries, and standards for quality and products. Defenders of these agreements, however, argue that tariffs harm consumers, stifle innovation, and spark trade wars.
What Does a Tariff Mean in Simple Terms?
A tariff is an additional cost a country that imports a product imposes on it.
A Tariff Example: What Is It?
The British tea tax on the American colonies, which sparked the Boston Tea Party, is among the most well-known tariff instances in the United States.
How do tariffs operate?
A tariff is an extra import fee, diverting customers’ intent and funds from the nation selling the item.
Bottom-line tariffs have been around for millennia in one form or another. Trading partners use them to advance national objectives and interests, safeguard domestic businesses and consumers, and politically influence a partner.
Despite what is sometimes seen in the media, tariffs are sometimes good. They may serve as a way to reopen trade talks, provide all parties with an opportunity to air grievances, and even aid in market stabilization.
Conclusion
- Governments impose tariffs to gain political clout over other nations, safeguard home industries, and increase income.
- Tariffs can have unintended consequences, such as increased consumer pricing.
- Tariffs have a long and controversial history, and there is ongoing discussion over whether they are a good or harmful policy.
