What exactly is the meaning and definition of a tariff?

Tariffs are levies on imports, exports, and transit to a third country. They're meant to raise state cash, preserve domestic business, or advance politics, but they can backfire.

What exactly is the meaning and definition of a tariff?
Can you explain what a tariff is and why it exists? Image by Jarosław Bialik from Pixabay

Tariffs are taxes that a country puts on goods that it wants to import or export so that they can cross its border. It can be used for goods coming into a country from another country or leaving a country for a third country. The first is the most common and controversial. It tries to raise money, protect domestic industries, or put pressure on other countries, but it doesn't always work and can have bad results.

Tariffs on International Trade

Tariffs come from the mercantilism of the 1600s, 1700s, and 1800s in Europe. During the rise of absolutism, when the government stepped into the economy a lot, they were used a lot. The idea of free trade came with the economic liberalism of the 19th and 20th centuries. Without tariffs, international trade grew, which made free trade possible. With the First World War, protectionism came back and stayed until the end of World War II. After that, free trade came back, but protectionists on the left and right later fought against neoliberalism.

Tariffs are a part of international trade that has been around for a long time. They can be ad valorem, specific, mixed, or compound. Ad valorem tariffs are fixed percentages that are based on how much something is worth. For example, if the tariff on imported cars is 5% and each car is worth $1,000, the importer must pay the government $50 for each car they bring in. A specific tariff is a set amount of money that must be paid for each unit of goods that are brought in or sent out.

Using this example as a guide, the government might want $1,000 for every ten cars that are brought into the country. Lastly, a mixed tariff is a combination of both specific and ad valorem tariffs, while a compound tariff has parts of both. In this case, cars with an ad valorem tariff of more than 5% must pay, for example, $100 per car.

There are also two kinds of tariffs: quota and seasonal. Quota tariffs are based on the amount or value of goods that are exported or brought in. With the examples above, the specific tariff on cars could be applied to imports of less than 1,000 cars. A seasonal tariff, on the other hand, changes depending on the time of year. For example, a certain tax on cars would only be in effect for the first half of the year.

What is the purpose of tariffs?

Tariffs are used for three main reasons: to make money for the government, to protect domestic industries, and for political reasons. The same reason is behind all taxes: to bring in money. Second, raising the price of imported goods can make people less likely to buy them.

The goal is to cut back on imports so that more people will buy things made in the country. For more controversial political reasons, tariffs could be put on imports from countries or companies that have used unfair trade practices or tried to hurt the country's leadership.

Tariffs, on the other hand, can have bad effects. First, trying to protect the domestic industry can raise prices for consumers by making the country less competitive. Since imports have gone down, there is less competition, so domestic companies don't have to lower their prices to attract customers because they have no other choice. Tariffs can also make domestic companies less productive and less likely to come up with new ideas. This makes them less likely to improve or invest to stay competitive with foreign products.

Lastly, reciprocity makes tariffs less useful from a political point of view. This means that the country that makes the goods that have this kind of tax put on them also puts it on the goods that the country exports. So, tariffs don't help achieve political goals. Instead, they can start a cycle of economic retaliation or "trade wars" like the one between the U.S. and China.

Source: EOM