Tariff

AAA

DEFINITION of 'Tariff'

A tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers. A specific tariff is levied as a fixed fee based on the type of item (e.g., $1,000 on any car). An ad-valorem tariff is levied based on the item’s value (e.g., 10% of the car’s value). Tariffs provide additional revenue for governments and domestic producers at the expense of consumers and foreign producers. They are one of several tools available to shape trade policy.

INVESTOPEDIA EXPLAINS 'Tariff'

Governments may impose tariffs to raise revenue or to protect domestic industries from foreign competition, since consumers will generally purchase foreign-produced goods when they are cheaper. While consumers are not legally prohibited from purchasing foreign-produced goods, tariffs make those goods more expensive, which gives consumers an incentive to buy domestically produced goods that seem competitively priced or less expensive by comparison. Tariffs can make domestic industries less efficient, since they aren’t subject to global competition. Tariffs can also lead to trade wars as exporting countries reciprocate with their own tariffs on imported goods. Groups such as the World Trade Organization exist to combat the use of egregious tariffs.

Governments typically use one of the following justifications for implementing tariffs:

  • To protect domestic jobs. If consumers buy less-expensive foreign goods, workers who produce that good domestically might lose their jobs.
  • To protect infant industries. If a country wants to develop its own industry producing a particular good, it will use tariffs to make it more expensive for consumers to purchase the foreign version of that good. The hope is that they will buy the domestic version instead and help that industry grow.
  • To retaliate against a trading partner. If one country doesn’t play by the trade rules both countries previously agreed on, the country that feels jilted might impose tariffs on its partner’s goods as a punishment. The higher price caused by the tariff should cause purchases to fall.
  • To protect consumers. If a government thinks a foreign good might be harmful, it might implement a tariff to discourage consumers from buying it.

VIDEO

RELATED TERMS
  1. Free Trade Area

    A group of countries that invoke little or no price control in ...
  2. Countervailing Duties

    Tariffs levied on imported goods to offset subsidies made to ...
  3. Export

    A function of international trade whereby goods produced in one ...
  4. Import

    A good or service brought into one country from another. Along ...
  5. Quota

    A government-imposed trade restriction that limits the number, ...
  6. Protectionism

    Government actions and policies that restrict or restrain international ...
Related Articles
  1. How Influential Economists Changed Our ...
    Fundamental Analysis

    How Influential Economists Changed Our ...

  2. Adam Smith And
    Entrepreneurship

    Adam Smith And "The Wealth Of Nations" ...

  3. 5 Economic Effects Of Country Liberalization ...
    Economics

    5 Economic Effects Of Country Liberalization ...

  4. The President's Council Of Economic ...
    Economics

    The President's Council Of Economic ...

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center