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. Most Favored Nation Clause

    A level of status given to one country by another and enforced ...
  4. General Order - GO

    A status given to imported goods that are missing the proper ...
  5. Detariffing

    The act of removing the pricing regulations of an industry, set ...
  6. Certificate Of Origin - CO

    A document declaring in which country a commodity or good was ...
RELATED FAQS
  1. What country is the world's largest coal producer?

    Producing nearly 50% of the world's supply, China is the world's largest global coal producer and a large force in global ...
Related Articles
  1. Fundamental Analysis

    How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers laid our financial foundations.
  2. Entrepreneurship

    Adam Smith And "The Wealth Of Nations"

    Adam Smith's 1776 classic may have had the largest global impact on economic thought.
  3. Economics

    5 Economic Effects Of Country Liberalization

    Liberalization provides new opportunities for diversification and profit.
  4. Economics

    The President's Council Of Economic Advisers

    We'll look at the history of the Council, describe its functions and explore some of its most important decisions.
  5. Economics

    The Basics Of Tariffs And Trade Barriers

    Everything you need to know - from the different types of tariffs to their effects on the local economy.
  6. Taxes

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  7. Economics

    Do Cheap Imported Goods Cost Americans Jobs?

    Flooding the market with cheap products can mean job losses and even market collapse - but dumping isn't as threatening as it seems.
  8. Economics

    What Is The World Trade Organization?

    The WTO sets the global rules of trade. But what exactly does it do and why do so many oppose it?
  9. Taxes

    Paying Uncle Sam: From Tobacco To $1 Trillion

    The services we rely on, like education, law and security, were built on taxes.
  10. Investing

    What Has Been Groupon’s Growth Strategy?

    Groupon established a strategy with efforts to become a broader force in the e-commerce world and to expand more strongly into international markets.

You May Also Like

Hot Definitions
  1. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  2. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  4. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  5. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  6. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
Trading Center