A
tariff
, at the most basic level, is a tax charged on goods or services as they move from one country to another. You may also see them referred to as a “customs duty,” as the term is often used interchangeably with “
tariff
.”
Tariffs
are typically charged by the country importing the goods. They serve two purposes: economically, they generate revenue for the
importing
country and protect home-based industries producing those same goods. Some
tariffs
, called protective
tariffs
, charge a higher tax on
imported
goods so the domestically produced versions of the same goods can be sold at a more competitive price.
In contrast to protective
tariffs
, revenue
tariffs
exist primarily to raise money on goods that are not produced
domestically
, allowing the government to invest in other resources. For example, nonprotective
tariffs
include
import
taxes on oil produced elsewhere, or products that are only produced in other countries.
Tariffs in the World Economy
Tariffs have grown and evolved as modern world trade has advanced. Starting in the mid-20th century, large-scale international trade has grown exponentially. One of the earliest attempts to regulate world trade was the General Agreement on Tariffs and Trades (GATT) in 1948, which sought to open negotiations, set international standards, and reduce tariffs to encourage trade.
However, the GATT was not a permanent world-trade solution, leading to the largest international trade negotiation in history: the Uruguay Round. As a result of the Uruguay Round (which lasted from 1986–1994), the World Trade Organization (WTO) was created to supervise and manage international trade and tariffs. For the first time, it was not just goods that were subject to international trade rules and tariffs—services and intellectual property (like designs and technology) were included as well.
Benefits of Tariffs
Tariffs
mainly benefit the
importing
countries, as they are the ones setting the policy and receiving the money. The primary benefit is that
tariffs
produce revenue on goods and services brought into the country.
Tariffs
can also serve as an opening point for negotiations between two countries. The GATT, WTO, and other trade agreements use regulation of
tariffs
as a way to bring nations together to determine economic policy.
Tariffs
can also support a nation’s political goals, and help the country stabilize or regulate its own industries. A government can set taxes on
domestic
products that are in line with international
tariffs
to level the playing field.
Tariffs
can make a market predictable. A prime example of this is the agricultural trade, which is subject to quotas,
import
limitations, and
tariffs
.
Drawbacks of Tariffs
Tariffs
can antagonize existing issues between governments, leading to consequences that are political as well as economic. A famous example of
tariffs
changing the global political scene is the American Revolutionary War. One of the main issues driving a wedge between Britain and its American colonists was the high
tariffs
placed on goods shipped to the
colonists
. The Townshend Acts (passed in Parliament) established high
tariffs
on the colonies, who had no say in the measures. “No taxation without representation” became a rallying cry for the
colonists
, and helped fuel the resentment that led to the American Revolutionary War.
The politics involved in
tariffs
can also trigger escalating trade conflicts between countries in modern times as well. In 2018, the United States implemented protective
tariffs
on steel and other
imported
goods from around the world. Other nations, particularly in the European Union and China, found this problematic, saying they would add new
tariffs
on U.S. products like motorcycles, orange juice, and bourbon as a result. At the time, European Union Trade Commissioner Cecilia Malmstrom called it a “dangerous game” on the world stage.
For better or worse,
tariffs
help shape world
markets
and relationships on a daily basis. Government trade negotiations may seem pretty distant from most of our everyday lives, but we buy products affected by
tariffs
every day: food, clothes, cars, electronics, and more. The prices of these products may be protected by
import
tariffs
if the product is also produced
domestically
, or the price may be increased by
tariffs
if it comes from another country. Even if we cannot see the
tariff
negotiations going on behind everything we use, know that they exist and they are constantly guiding our consumption from behind the scenes.
FAQs
Hamilton proposed an increase in tariff rates on just over twenty individual commodities, reductions in tariff rates on five raw materials, and government bounties (subsidies) to five separate industries. These specific recommendations involved rather modest changes in existing tariffs.
Are tariffs good or bad for the economy? ›
Indeed, the evidence shows that large-scale tariffs result in significant declines in domestic output and productivity, higher unemployment, more inequality and real exchange rate appreciation implying a loss of international competitiveness, while having only small effects on the trade balance.
What does "tariffs" mean? ›
Tariff. Tariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers.
What is the main argument against tariffs? ›
Tariffs can have unintended side effects. They can make domestic industries less efficient and innovative by reducing competition. They can hurt domestic consumers, since a lack of competition tends to push up prices. They can generate tensions by favoring certain industries, or geographic regions, over others.
Why did Hamilton favor tariffs? ›
Through high tariffs designed to protect American industry from foreign competition, government bounties and subsidies, and internal improvements and transportation, Hamilton hoped to break Britain's manufacturing hold on the United States.
What is the main argument for using tariffs? ›
Tariffs are a form of tax applied on imports from other countries. Economists say the costs are largely passed on to consumers. Countries have used them to protect domestic industries, such as agriculture and renewable energy, as well as to retaliate against other states' unfair trade practices.
What country has the highest tariffs? ›
Currently, the countries with the highest tariff rates in the world (in weighted mean across all goods) are the island nations of Palau (34.6 percent), Solomon Islands (30.3 percent), and Bermuda (27.6 percent).
Who gets the money from tariffs? ›
Tariffs are paid to the customs authority of the country imposing the tariff. It is important to recognize that the taxes owed on imports are paid by domestic consumers and not imposed directly on the foreign country's exports.
How would high tariffs hurt America? ›
Historical evidence shows tariffs raise prices and reduce available quantities of goods and services for US businesses and consumers, which results in lower income, reduced employment, and lower economic output. Tariffs could reduce US output through a few channels.
Why does Trump want tariffs? ›
During the presidency of Donald Trump, a series of tariffs were imposed on China as part of his "America First" economic policy to reduce the United States trade deficit by shifting American trade policy from multilateral free trade agreements to bilateral trade deals.
Economists at Nomura “estimated that higher tariffs would increase inflation by 0.75 percentage points in 2025.”
What are the top three US exports? ›
Yearly Trade
The most recent exports are led by Refined Petroleum ($138B), Crude Petroleum ($118B), Petroleum Gas ($116B), Cars ($57.5B), and Integrated Circuits ($49.8B).
Who hated tariffs? ›
Southerners resented tariffs because they raised the cost of imported foreign goods and invited retaliatory tariffs that lowered foreign demand for their agricultural exports.
Is anyone made worse off as a result of tariffs on imports? ›
There is another big drawback of such tariffs: while they may give some relief to industries and workers that directly compete with the affected imports, they will be broadly contractionary, reducing output, investment, and employment in the whole economy.
What would happen if there were no tariffs? ›
If we abolished import tariffs, imported goods would be less expensive for manufacturers and workers (who are also consumers) and exported goods that used imported components would be more competitive. All else being equal, we'd import more and export more.
How did federalists view tariffs? ›
The Federalist debt platform focused around import tariffs and taxation of shipping tonnage to gain revenue while protecting industries in the US to make the new nation self-sufficient. Additionally, the US government paid all state debts in order to give legitimacy to the national government.
Did Alexander Hamilton believe in free trade? ›
Free trade, he complained, stood “contrary to the uniform practice and sense of the most enlightened nations.” Rather, commerce must be subject to “the encouragements or restraints of government.” The “power of regulating trade ought to have been a principal object of the Confederation,” he continued, laying out the ...
Which president supported high tariffs? ›
In his 1928 campaign for the presidency, Republican candidate Herbert Hoover promised to increase tariffs on agricultural goods, but after he took office lobbyists from other economic sectors encouraged him to support a broader increase.
Who opposed tariffs? ›
Vice President John C. Calhoun of South Carolina strongly opposed the tariff, anonymously authoring a pamphlet in December 1828 titled the South Carolina Exposition and Protest, in which he urged nullification of the tariff within South Carolina.
