What Is a Tariff and Why Do Governments Impose Them?
Have you ever wondered, ”what is a tariff and why do governments impose them”? If so, you’re not alone. I remember being confused about tariffs when I was first learning about economics. But once I understood how they worked, it all made sense. This article tells you what a tariff is, how it works and why the governments impose tariffs.
There are pros and cons to imposing tariffs, but ultimately it’s up to each individual government to decide whether or not they believe the benefits outweigh the costs.
What Is a Tariff?
There are two kinds of tariffs. A “specific” or “fixed” rate is a levy charged per unit of a product, such as $300 for every ton of steel that is imported into the country.
Ad Valorum tariffs are taxes that are calculated based on the value of the good being taxed. For example, a 20% tax on cars.
Both plans work in a very similar fashion.
One of the main purposes of tariffs today is to protect certain domestic industries from foreign competition. Another purpose is to generate revenue for the government.
Understanding a Tariff
A tariff is an increase in the cost of foreign-made products and services. This makes them less attractive to Americans, who may choose to buy domestic alternatives instead.
A point to remember is that the tariffs imposed on the importing countries affect them, not the country imposing the taxes. This is because the consumers in the imported goods’ home country may stop purchasing the product due to an increase in the price.
By choosing the imported product, the domestic consumer is essentially paying the tariff. This raises the cost of the product for the consumer.
Tariffs are a type of trade barrier that is used to restrict imports and protect domestic industries. They are one of the oldest trade policy instruments, with their use dating back to at least the 18th century. Historically, the main objective of a tariff was to raise revenue.
The United States government relied heavily on tariffs for revenue before ratifying the 16th Amendment in 1913 and creating the income tax. Tariffs were an important source of revenue for the government, and they helped to fund many public projects.
Why Governments Impose Tariffs
Governments may use tariffs as a way to bring in money or to protect their country’s businesses, especially if they are new. Tariffs make it more expensive to import goods, so people might start buying local products instead.
Government-imposed taxes can be used to protect certain industries and companies from international competition. They can also be used as tools of diplomacy, such as when a government imposes high taxes on a trading country’s major export.
Unintended Side Effects of Tariffs
The unintended consequences of tariffs can be pretty serious.
The consequences of tariffs can be both intended and unintended. For example, they may make an industry more efficient, but hurt consumers and result in an escalating trade war.
If a nation imports more than it exports, this will result in the loss of valuable, non-renewable natural resources. A country’s wealth in pre-industrial times was believed to be largely based on the value of its finite, non-renewable, and precious commodities such as gold and silver.
The trade of these resources was viewed as a zero-sum game where one country’s success was another country’s failure. If the country was importing more than it was exporting, this would result in a net drain of wealth and a loss of its most precious and scarce materials.
Objectives of tariffs
One of the main objectives of tariffs is to protect domestic industries. By making it more expensive for consumers to purchase imported goods, tariffs can help level the playing field for domestic companies that are competing against foreign businesses.
Tariffs can also be used to raise revenue for a government. When imported goods become more expensive due to tariffs, consumers may be less likely to purchase them, but the government will still collect the tariff fees.
One way to distinguish between revenue-based tariffs and those designed primarily for protectionism is to compare their effects on domestic versus foreign producers, as suggested by Gottfried von Haberler in The Theory of International Trade (1937). Without considering the motives of legislators, Haberler’s suggestion provides a method for differentiating between the two types of tariffs.
The duty imposed on foreign goods is not effective in protecting domestic goods if the foreign goods are not produced domestically, and there are no domestically produced substitutes that experience a shift in demand because of the tariff.
A tariff that is purely protective in nature will incentivize companies to shift their production away from export-oriented industries and into domestic industries that are protected by the tariff, or into other industries that produce substitutes for the taxed goods. This can lead to an overall increase in demand for domestically produced goods.
A purely tax-based tariff will cause resources to shift toward those industries and products that the government taxes, but it will not redirect investment away from those products and towards those that are not.
A country that wishes to protect its home industries and generate revenue from tariffs should select a small number of imported articles of general consumption and subject them to high duties. This will discourage the shift of resources into the production of taxed goods or substitutes, while still providing protection for domestic industry.
A country that wishes to protect its home industries will typically have a long list of protected commodities, with high tariff rates. The country imposes high tariff rates in order to make it more difficult for imported goods to compete with domestically produced goods.
Tariffs are imposed for political reasons and can be put into three categories: transit duties, export duties, and import duties.
So what is a tariff? A tariff is a tax on imported goods or services. The purpose of tariffs is to make foreign products more expensive than domestic ones, thus protecting businesses and jobs in the home country. Tariffs can also be used as a way to retaliate against another country that has placed its own taxes on imports from the first country.