Tariffs are taxes imposed by a government on goods imported from other countries. They are usually paid by the importer to the government of the country where the goods enter
. Tariffs are typically calculated as a percentage of the value of the imported goods (ad valorem), but can also be fixed amounts per unit or based on weight, especially for agricultural products
. How tariffs work:
- When a tariff is imposed, the price of the imported goods rises by the amount of the tariff. For example, a 10% tariff on a $10 product adds $1 to its cost, making it $11
- This higher price tends to reduce the quantity of imports because consumers may buy fewer of the now more expensive foreign goods
- Domestic producers benefit because the tariff makes foreign goods more expensive, allowing local products to compete more effectively and potentially increase their sales
- The government collects revenue from the tariff, which is the tariff amount multiplied by the quantity of imports
- However, tariffs also cause economic inefficiencies known as deadweight losses, where consumers pay more and consume less, and overall economic welfare decreases
Why governments use tariffs:
- To generate revenue for the government budget
- To protect domestic industries from foreign competition by making imported goods more expensive, encouraging consumers to buy domestic products
- To counteract unfair trade practices such as dumping (selling goods below cost) or subsidies by foreign governments
- As a diplomatic or political tool to influence the behavior of other countries, sometimes as part of sanctions or trade negotiations
- To reduce trade deficits by discouraging imports and promoting domestic production
Who pays tariffs:
- The importer initially pays the tariff to the government at the border
- Importers may pass some or all of the tariff cost onto consumers through higher prices
- Exporters from the tariff-imposing country’s trading partners may also be affected indirectly, as their products become less competitive in the tariff-imposing country
Summary: Tariffs increase the cost of imported goods, protect domestic industries, generate government revenue, and can be used as tools in trade policy. However, they often lead to higher prices for consumers and economic inefficiencies, and can provoke retaliatory tariffs from other countries
