A tariff is a tax imposed by a government on goods and services imported from other countries.

Tariffs serve multiple purposes, including generating revenue for the government, protecting domestic industries from foreign competition, and influencing trade policies.

What is a tariff?

Tariff Booth

A tariff is a tax imposed by a government on goods and services imported from other countries. Besides serving as a source of revenue for the government, tariffs can also be a form of regulation of foreign trade and a policy that taxes foreign products to encourage or safeguard domestic industry.

Tariffs are among the most widely used instruments of protectionism, along with import quotas and export quotas, and other non-tariff barriers to trade.

The English word “tariff” derives from the French tarif, meaning ‘set price’, which in turn comes from the Italian tariffa, meaning ‘mandated price; schedule of taxes and customs’. This term ultimately has its roots in the Arabic word taʿrīf, meaning ‘notification’.

What are the types of tariffs?

  1. Specific Tariff: A fixed fee levied on a particular product, based on its quantity. For example, a government might impose a $500 tariff on every imported car.
  2. Ad Valorem Tariff: A tariff based on a percentage of the product’s value. For instance, a 10% tariff on imported wine means that if a bottle costs $20, the tariff would be $2.
  3. Compound Tariffs: A combination of ad valorem and specific tariffs. For instance, a product might incur a 5% ad valorem tariff plus $2 per unit.
  4. Tariff-Rate Quotas: These allow a certain quantity of goods to be imported at a lower tariff rate, with higher tariffs applied to quantities exceeding the quota.

What is a tariff schedule?

A tariff schedule is a document that lists the tariff rates for different categories of imported goods. It is used by customs officials to classify goods and assess the appropriate tariffs at ports of entry.

In the United States, this document is known as the Harmonized Tariff Schedule of the United States (HTSUS).

What are the purposes of tariffs?

  • Protecting domestic industries: Tariffs can make imported goods more expensive, making domestic products more competitive. This can help protect jobs and support the growth of domestic industries. For example, a tariff on imported textiles could protect domestic textile manufacturers from foreign competition.
  • Generating revenue: Tariffs provide a source of income for the government, which can be used to fund public services. Historically, tariffs have been a significant source of government revenue in many countries.
  • Addressing unfair trade practices: Tariffs can be used to counteract dumping (selling goods below cost in a foreign market) or to address subsidies provided to foreign producers. This can help level the playing field for domestic businesses.
  • Safeguarding national security: Tariffs can be used to protect industries that are considered essential for national security, such as defense or critical infrastructure. For example, a tariff on imported steel could be used to ensure a domestic supply of steel for national defense purposes.
  • Influencing foreign policy: Tariffs can be used as a tool to exert pressure on other countries or to achieve foreign policy objectives. For example, a country might impose tariffs on another country’s goods to encourage that country to adopt certain policies or to comply with international agreements.
  • Retaliation and negotiation: Tariffs can be used as tools in trade negotiations or as retaliation against unfair trade practices by other countries. For instance, a country might impose tariffs on imports from another nation that has enacted similar measures against its exports.

What are the effects of tariffs?

Tariffs can have a variety of impacts on consumers, businesses, and the overall economy:

Consumers

  • Higher prices: Tariffs increase the cost of imported goods, which can lead to higher prices for consumers. This can reduce consumer purchasing power and potentially lead to inflation. For example, tariffs on imported food products can lead to higher grocery bills for consumers.
  • Reduced choices: Tariffs can limit the availability of imported goods, reducing consumer choices. This can be particularly significant for consumers who prefer imported goods or who rely on imported goods that are not readily available domestically.
  • Impact on specific goods: Certain sectors of the economy can be hit particularly hard by tariffs, such as the automotive, energy, and food sectors. For example, gas prices could surge as much as 50 cents per gallon in the Midwest due to tariffs on Canadian and Mexican oil. Tariffs on electronics could lead to higher prices for smartphones and computers.

Businesses

  • Increased costs: Tariffs can raise the cost of imported inputs for businesses, potentially leading to higher production costs and reduced profitability. This can make it more difficult for businesses to compete, especially those that rely heavily on imported materials or components.
  • Supply chain disruptions: Tariffs can disrupt supply chains, making it more difficult for businesses to obtain the goods and services they need. This can lead to delays, shortages, and increased uncertainty, which can harm business operations and profitability. Tariffs therefore provide an incentive to develop production and replace imports with domestic products.
  • Reduced competitiveness: Tariffs can make it more difficult for domestic businesses to compete in international markets, as they may face counter-tariffs from other countries. This can reduce export opportunities and harm businesses that rely on international trade.

Overall Economy

  • Economic growth: Most economists agree that tariffs have a negative effect on economic growth and economic welfare, while free trade has a positive effect. Tariffs can distort market prices, reduce efficiency, and lead to a misallocation of resources.
  • Trade deficits: Tariffs may be intended to reduce trade deficits, but they can also lead to counter-tariffs from other countries, which can offset any potential benefits. They have historically been justified as a means to protect infant industries and to allow import substitution industrialization (industrializing a nation by replacing imported goods with domestic production).
  • Job losses: While tariffs may protect some jobs in domestic industries, they can also lead to job losses in other sectors, such as those that rely on imported inputs or export to countries that impose counter-tariffs. The overall impact of tariffs on employment is complex and depends on various factors.
  • Economic inefficiency: Tariffs create deadweight loss, which is a loss of economic efficiency that occurs when the equilibrium for a good or service is not Pareto optimal. This means that tariffs lead to a less efficient allocation of resources and a reduction in overall economic welfare.
  • Distributional effects: Tariffs can have different impacts on different groups within society. While tariffs may benefit some domestic producers by protecting them from foreign competition, they can harm consumers by increasing prices and reducing choices. They can also harm businesses that rely on imported inputs or export to countries that impose counter-tariffs.
  • Political economy: The decision of whether or not to impose tariffs is often influenced by political factors, such as lobbying by special interest groups and the use of tariffs as bargaining chips in international negotiations. Often intended to protect specific industries, tariffs can end up backfiring and harming the industries they were intended to protect through rising input costs and counter-tariffs. Import tariffs can also harm domestic exporters by disrupting their supply chains and raising their input costs.

What are the criticisms of tariffs?

Tariffs are often criticized for their negative economic impacts, including:

  • Inefficiency: They distort market dynamics and can lead to resource misallocation.
  • Political influence and lobbying: The decision to impose tariffs can be influenced by political factors, such as lobbying by special interest groups. This can lead to tariffs that benefit specific industries at the expense of consumers and the broader economy.
  • Regressive effects: Tariffs disproportionately affect lower-income consumers, who spend a larger share of their income on taxed goods.
  • Trade wars: A trade war is a situation in which countries engage in escalating tariffs and other trade barriers against each other. This can lead to a decline in trade, economic harm, and increased tensions between countries.

What alternatives to tariffs?

Governments may use other trade policy tools instead of or in addition to tariffs, such as:

  • Subsidies: Financial support to domestic industries to make them more competitive.
  • Quotas: Limits on the quantity of goods that can be imported.
  • Non-Tariff Barriers: Regulations, standards, or licensing requirements that restrict imports.

Historical Context

Tariffs have played a significant role in global economic history. For example:

  • The Smoot-Hawley Tariff Act of 1930 in the United States raised tariffs on thousands of imported goods, exacerbating the Great Depression by reducing international trade.
  • The General Agreement on Tariffs and Trade (GATT), established in 1947, sought to reduce tariffs and other trade barriers globally. It was later replaced by the World Trade Organization (WTO) in 1995, which continues to regulate international trade.

In recent years, tariffs have been a contentious issue in global trade. For example:

  • The U.S.-China trade war (2018–2020) saw both countries imposing tariffs on billions of dollars worth of goods, impacting global markets.
  • The European Union uses tariffs as part of its Common External Tariff (CET) system, which applies uniform tariffs on imports from non-member countries.

In early 2025, President Donald Trump imposed tariffs on imports from Canada, Mexico, and China. These tariffs were aimed at addressing issues such as illegal immigration, drug trafficking, and unfair trade practices. However, they also sparked concerns about a potential trade war.

Bottom Line

Tariffs are a policy tool with a long history and a variety of potential impacts. While they can be used to protect domestic industries and generate revenue, they can also lead to higher prices for consumers, disrupt supply chains, and harm the overall economy.

The use of tariffs has been a subject of ongoing debate between proponents of free trade and those who advocate for protectionism.

  • Free trade advocates argue that tariffs distort markets, reduce efficiency, and harm consumers.
  • Protectionists argue that tariffs are necessary to protect domestic industries, jobs, and national security.

The decision to impose tariffs often involves balancing economic and political considerations and highlights the challenges of navigating the global economy and balancing competing interests in trade policy.