A tariff is a tax imposed by a governing authority on goods or services entering or leaving the country and is typically focused on a specified industry or product. It is meant to alter the balance of trade between the tariff-imposing country and its international trading partners. For example, when a government imposes an import tariff, it adds to the cost of importing the specified goods or services. The additional marginal cost added by the tariff discourages imports, thus affecting the balance of trade.
There are various reasons a government may choose to impose a tariff. The most common examples of rationale used to justify tariffs are protection for nascent industries, national defense purposes, supporting domestic employment, combating aggressive trade policies and environmental reasons.
Tariffs are commonly used to protect an early-stage domestic industry from international competition. The tariff acts as an incubator that, in theory, should allow the domestic industry ample time to develop and grow into a competitive position on an international landscape.
If a particular segment of the economy provides critical products with respect to national defense, a government may impose tariffs on international competition to support and secure domestic production in the event of a conflict.
It is common for government economic policies to focus on creating an environment where constituents have robust employment opportunities. If a domestic segment or industry is struggling to compete against international competitors, the government may use tariffs to discourage consumption of imports and encourage consumption of domestic goods in hopes of supporting associated job growth. (For related reading, see: Do Cheap Imported Goods Cost Americans Jobs?)
Aggressive Trade Practices
International competitors may employ aggressive trade tactics such as flooding the market in an attempt to gain market share and put domestic producers out of business. Governments may use tariffs to mitigate the effects of foreign entities employing what may be considered unfair tactics.
Governments may use tariffs to diminish consumption of international goods that do not adhere to certain environmental standards.
(For related reading, see: The Basics of Tariffs and Trade Barriers.)