What is a Tariff? - Overview of the Concept

Last Updated On -19 Aug 2025

Trade, tariffs, and taxation are global phenomena that influence the interdependence of all countries. A tariff refers to a tax that the government levies on imports, as well as, in some cases, exports trade. While some use trade policies to control a country's economic stability, others use them to gain control in politics. Today, international trade is the backbone of a country’s economic development. Understanding tariffs and taxes aids in the proper execution of policies in a country and helps professionals, students, and businesses.

What is a Tariff?

Tariffs are taxes that are levied on goods that are traded internationally. Levied taxes are a way of taxing the government's issues on import trade. A tariff additionally ensures the following:

Revenue Generation: Reducing the economic burden of a government for a country. Government income is streamlined through a certain tax and aids in funding the nation.
Trade Protection: Discouraging the consumption of certain foreign goods additionally reduces foreign trade. Buying goods from international suppliers is discouraged, as these goods are competitively priced.

As an example, consider the country that levies a 20% tax on foreign steel. In this case, steel that is produced in the country of locational production becomes cheaper and boosts the production of the local manufacturers.

Key Types of Tariffs

Tariffs can be classified into different categories according to their functions.

Ad Valorem Tariff

This type of tariff is levied based on a fixed percentage of the value of the imported good. For example, a 10% tariff on electronics would mean that the duty paid rises as the product is priced higher.

Specific Tariff

This is putting a fixed amount of fee on the product that is imported by a certain amount, whether its value is low or high. For instance, USD 50 per ton of imported sugar.

Compound Tariff

This consists of a mixture of both ad valorem and specific tariffs. For instance, 50usd for a ton of wheat and also 5% of its value.

Protective Tariff

These tariffs are meant to protect local manufacturers by making the price of foreign goods higher, so people would prefer to purchase local options.

Revenue Tariff

This is more of a domestic industry tariff, as the intention is to get the money for the government.

What are the Reasons for Tariffs on Imports By the Government?

Excessive reliance on tariffs prevents fair competition and encourages trade disputes, while providing short-term protection to domestic industries. Students and professionals in commerce should analyze the impact of tariffs on global trade.

These are reasons such as economic, political, or strategic for having tariffs:

To encourage local industries to compete with foreign companies.
To encourage local jobs by helping the local companies.
To some degree, to help with the International Trade Deals.
To some degree, to help with the Trade Deficits by reducing the products available for purchase.

Strategic autonomy refers to a country’s use of tariffs to guard sensitive areas like defense, energy, or technology.

Impact of Tariffs on the Economy

Economists often think of tariffs as having both positive and negative effects.

Positive Impacts:

Improves the relative performance of domestic trade and the employment rate.
Promotes the collection of taxes.
Enables infant industries to grow without having to face the blunt force of developed competition.

Negative Impacts:

Increases the cost of goods and services.
May lead to a trade war (as observed with the U.S and China, and more recently, the U.S and India).
Increases economic cost due to the lack of competition among domestic sheltered industries.
Increases cost for firms and disrupts the worldwide supply chain.

Case Study for Tariffs

U.S.-China Trade War (2018-2020): During the trade war, both the U.S. and China placed tariffs on each other’s goods. This resulted in the disruption of supply chains, inflation, and instability in the global economy.
U.S.-India Tariff Tensions (2025): India was recently charged with a trade deficit, resulting in the U.S placing tariffs on textiles, gems, and automobiles. This created a stir of nationalist uprisings in India.

Did you know?

As long as 4,000 years ago, the rulers of the city-states in Mesopotamia charged a tax on certain goods, which shows the ancient use of tariffs.

Frequently Asked Questions (FAQs)

What is the difference between tariffs and quotas?

A quota limits the quantity of goods that can be imported. A tariff is a tax on those goods.

Do tariffs always benefit domestic industries?

No, tariffs are double-edged swords. They might offer some benefit to industries in the short run, but in the long run, they lead to inefficiency, stagnation, lack of innovation, and increased consumer prices.

How do tariffs affect global trade?

As a result of tariffs, trade flows are reduced, and costs are increased. Global supply chains are often disrupted as well. When two major economies impose tariffs on each other, it usually results in trade wars, which affects the whole world’s equilibrium.