You are on page 1of 2

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.
The additional tax, or tariff, on imported goods can discourage foreign
countries or businesses from trying to sell products in a foreign country.
The additional taxes make the foreign import either too expensive or not
nearly as competitive as it would be if the tariff didn't exist. This can lead
to fewer choices of goods and a lower quality for consumers. The amount
of chocolate, fruits and vegetables, and automotive parts you have to
choose from are all subject to the effects of tariffs.
Domestic producers benefit by ultimately facing reduced competition in
their home market, which leads to lower supply levels and higher prices
for consumers. As you can see from the graph below, S0 and D0represent
the original supply and demand curves, which intersect at (P0, Q0). St
shows what the supply curve is with the introduction of the tariff. The
market then settles at (Pt, Qt). Less of the good is produced, and
consumers pay higher prices.
When a consumer does purchase a higher-priced imported good with a
tariff imposed on it, the consumer now has less money to spend on other
things. This forces consumers to either buy less of the imported good or
less of some other good, ultimately lowering the purchasing power of
consumers. It is important to remember that although consumers may pay
higher prices because of tariffs and have limited options, the potential
benefit is that domestic sales of goods can increase, ultimately leading to
higher domestic sales and more jobs for companies inside the country.
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

• To protect infant industries. it might implement a tariff to discourage consumers from buying it. • To protect consumers. workers who produce that good domestically might lose their jobs. the country that feels jilted might impose tariffs on its partner’s goods as a punishment. Governments typically use one of the following justifications for implementing tariffs: • To protect domestic jobs. Groups such as the World Trade Organization exist to combat the use of egregious tariffs. The higher price caused by the tariff should cause purchases to fall. . If a government thinks a foreign good might be harmful. If consumers buy less-expensive foreign goods. 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. If one country doesn’t play by the trade rules both countries previously agreed on. • To retaliate against a trading partner.their own tariffs on imported goods. The hope is that they will buy the domestic version instead and help that industry grow.