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A tariff is a tax or duty imposed by one nation on the imported goods or services of another nation. Tariffs are a political tool that have been used throughout history to control the amount of imports that flow into a country and to determine which nations will be granted the most favorable trading conditions. High tariffs create protectionism, shielding a domestic industry's products against foreign competition. High tariffs usually reduce the importation of a given product because the high tariff leads to a high price for the customers of that product.

There are two basic types of tariffs imposed by governments on imported goods. First is the ad valorem tax which is a percentage of the value of the item. The second is a specific tariff which is a tax levied based on a set fee per number of items or by weight.

Tariffs are generally imposed for one of four reasons:

  • To protect newly established domestic industries from foreign competition.
  • To protect aging and inefficient domestic industries from foreign competition.
  • To protect domestic producers from "dumping" by foreign companies or governments. Dumping occurs when a foreign company charges a price in the domestic market which is below its own cost or under the cost for which it sells the item in its own domestic market.
  • To raise revenue. Many developing nations use tariffs as a way of raising revenue. For example, a tariff on oil imposed by the government of a company that has no domestic oil reserves may be a way to raise a steady flow of revenue.

Since the early 1990s, the trend has been decreased tariffs on a global scale, as evidenced by the passage of well-known treaties such as the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA), as well as the lowering of trade barriers in the European Economic Community, reducing or even abolishing tariffs. These changes reflect the conviction among some politicians and economists that lower tariffs spur growth and reduce prices generally.

Opponents of tariffs argue that tariffs hurt both (or all) countries involved, those that impose the tariff and those whose products are the target of the tariffs. For the country whose products are the target of tariffs, costs of production and sale prices rise and for most this leads to fewer exports and fewer sales. A decline in business leads to fewer jobs and spreads the slowdown in economic activity.

The argument that tariffs actually harm the country that imposes them is somewhat more complex. Although tariffs may initially be a boon to domestic producers who are faced with reduced competition as a result of the tariffs, the reduced competition then allows prices to rise. The sales of domestic producers should rise, all else being equal. The increased production and higher price lead to domestic increases in employment and consumer spending. The tariffs also increase government revenues that can be used to the benefit of the economy. All of this sounds positive. However, tariff opponents argue that the costs of tariffs can not be ignored. These costs come when the price of the goods on which the tariffs were imposed has increased, the consumer is forced to either buy less of these goods or less/fewer of some other goods. The price increase can be thought of as a reduction in consumer income. Since consumers are purchasing less, domestic producers in other industries are selling less, causing a decline in the economy.

Despite these arguments that tariffs are eventually harmful to all parties in a trade relationship, they have been used by all nations from time to time. Most developing countries use tariff to try and protect their fledgling industries or industries they feel the nation needs domestically in order to remain independent. The United States used tariffs extensively throughout its early years as a nation, and continues to do so today when the political will exists. Even proponent of free trade sometimes determine that tariffs may serve a useful purpose. In 2002, for example, President George W. Bush announced the imposition of steel tariffs for a three year period on imports from the European Union, Japan, China, South Korea and Taiwan. The reaction to these tariffs was swift and threatening. The U.S. ended up withdrawing the tariff in December of 2003 in order to avert the trade war that was brewing in reaction to the steel tariff.

How companies are impacted by tariffs differs from company to company based on a number of factorsproximity of industry sector to the tariff imposed, how directly the company's inputs and outputs are touched by the tariff, whether or not the company is involved in exporting or importing, etc. Businesses that do most of their business within a domestic market may benefit from the imposition of tariffs on competitive products. If, however, the material inputs to the products of a business are the targets of tariffs, then the business may well be harmed by rising prices on its material inputs. In another possible scenario, a business that is involved with exporting may be harmed if it sees the imposition of a tariff on products similar to those it exports, and retaliatory tariffs are imposed by other nations on the products it exports. As these examples show, the impact of tariffs on one business may be very different than those experienced by another business and the impacts differ based on characteristic other than the size of the businesses.

Exporters are usually well aware of the potential harm that may befall them if tariffs are unexpectedly imposed on their products and for that reason they usual include a disclaimer of responsibility for such tariffs that are imposed after a purchase agreement is signed. Such clauses to a purchase agreement usually state something like: "Prices quoted do not include (and Customer agrees to pay) taxes, tariffs, duties, or fees of any kind which may be levied or imposed on either party by federal, state, municipal, or other governmental authorities in connection with the sale or delivery of the product." The key is to protect the business from liability for potential unpredictable and potentially arbitrary government actions.


Worth noting is the fact that non-tariff barriers are also used quite frequently by nations of all sizes in their attempt to bolster their own economies and protect domestic interests. The Small Business Administration defines non-tariff barriers as "laws or regulations that a country enacts to protect domestic industries against foreign competition. Such non-tariff barriers may include subsidies for domestic goods, import quotas or regulations on import quality."

see also Exporting; Globalization


Allen, Mike. "President To Drop Tariffs On Steel. Bush Seeks to Avoid a Trade War and Its Political Fallout." Washington Post. 1 December 2003.

Ethier, Wilfred J. "The Theory of Trade Policy and Trade Agreements: A Critique." University of Pennsylvania. Department of Economics. Second Edition. 23 March 2005.

Rushford, Greg. "Quit Hiding Behind Tariffs and Embrace Globalization." Seafood Business. August 2005.

Tirschwell, Peter. "An Emerging Trade Barrier." The Journal of Commerce. 15 December 2003.

U.S. Small Business Administration. "Breaking Into the Trade Game: A Small Business Guide." Available from http://www.sba.gov/oit/txt/info/Guide-To-Exporting/trad7.html. Retrieved on 20 May 2006.

                                              Magee, ECDI


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Tariffs are discriminatory taxes collected at the border on imported goods but not levied on similar goods originating domestically. Tariffs are sometimes very large (everywhere in the 1930s and in some developing countries in the early twenty-first century) and sometimes very low (Hong Kong in the early twenty-first century). Tariffs are substantially discriminatory between international trading partners. Regional trade agreements such as the European Union (EU) and the North American Free Trade Agreement (NAFTA) remove tariffs between the members while imposing tariffs on nonmembers. Tariffs also significantly discriminate between goods. Tariff schedules of most countries contain over 10,000 lines with tariffs ranging in some cases from 0 percent to over 100 percent.

Tariffs come in specific and ad valorem forms. Specific tariffs are charges per unit, for example, $1,000 per automobile. Ad valorem tariffs are levied as a percentage of invoice value. A 5 percent tariff levied on a $20,000 automobile yields a $1,000 specific tariff equivalent. The automobile example also illustrates how to calculate the ad valorem equivalent of a specific tariff: divide the specific tariff by the invoice price. Ad valorem tariffs are much easier to use for comparison purposes across goods and countries. Comparison including specific tariffs requires prices to deflate the specific duties, which is often extremely burdensome.

Both specific and ad valorem tariffs are common. Ad valorem tariffs are the only sensible type when there is no natural quantity unit (boxes of parts). But ad valorem tariffs are disadvantageous where corrupt border officials are suspected; underinvoicing will lower the tax paid, with importer and border official splitting the difference. History also matters: The United States has many specific tariffs despite the likely honesty of its customs officials.

Some tariffs vary with the level of trade. The tariff quota is a tariff that steps upward when trade passes a preset amount. Another example is an antidumping duty, which is equal to the difference between last years price differential between the exporting firms cost (or foreign price) and its U.S. sale price.


Tariffs provide revenue to the government that levies them. This benefit is offset by the cost to users of paying the tax. Less obviously tariffs provide a benefit to domestic producers who experience less stringent competition from imports. The balance of these three effects is typically calculated to yield a net loss to the economy. A tariff reduction is typically calculated to reduce net loss by the height of the tariff times the increase in imports induced by the tariff reduction. The marginal net cost of tariffs is thus proportional to the height of the tariff.

A potentially important complication is that import competition may cause periods of unemployment for domestic workers; hence, tariffs provide a benefit by employing more workers. Typical calculations for the U.S. economy show that the costs of employment-increasing tariff hikes per job saved are greater than the wage paid in the jobusually several times the wage.

What explains the use of tariffs in view of their cost to the economy? Politics. The pressure of domestic producers and trade unions that gain from tariffs is largely unopposed. Consumers are unorganized whereas producers who import intermediate goods often refrain from resisting tariffs as they push for tariffs on the import of goods that compete with their output. Two contrary forces push tariffs down. Most importantly, politicians tempted to grant higher tariffs also know that the resulting reduction in general prosperity harms their prospects of retaining power (at the next election or, less certainly, against a coup). More subtly, the interest groups themselves bear a share of the overall cost of tariffs, tending to restrain their demands. Political economy models that view tariffs as objects for sale in political markets with these forces at work have been fitted to data on the pattern of protection, and the model appears to statistically explain the pattern well.

The discriminatory aspect of tariffs (differing across trading partners and across goods) typically adds to the cost of tariffs. Discrimination across trading partners results in costly trade diversion. The purchase of goods shifts from the lowest cost source (increasing net loss in proportion to the tariff if the source is not a partner) to the favored partner (with marginal net benefit equal to the zero tariff ). Discrimination across goods imposes a more subtle cost on the economy with a similar structure. Think about increasing the dispersion of tariffs while preserving the average tariff. The increase in tariffs on already high-tariff goods reduces trade where it is most costly whereas the reduction in tariffs on low-tariff goods increases trade where it is least costly.

Discrimination across trading partners and across goods is substantial and has increased with the overall liberalization of trade since the mid-1900s. Regional trade agreements have proliferated even as multilateral negotiations have reduced overall tariffs. Wide tariff reductions have exempted certain product categories, such as agriculture and apparel, in rich countries.


Tariffs tend to reduce prices of exports from foreign economies. This spillover implies that part of the cost of tariffs is borne by foreigners. Since national governments will thus be tempted to overuse tariffs, nations agree to restrict their tariffs in international negotiations and enforce their agreements through international institutions such as the World Trade Organization (WTO). The dispute settlement process of the WTO generates frequent headlines and gives a false impression that international relations are becoming more acrimonious. As with family therapy, if the parties are arguing, it is better than if they are not talking. Imperfections in particular negotiation rounds or institutions should not obscure their very positive role in preventing much worse outcomes, such as the tariff wars of the 1930s.

Two basic principles of the WTO and its predecessor institutions are nondiscrimination between partners and reciprocity. Reciprocity means that the parties alter their tariffs to balance the exchange of market access provided. For example, a round of tariff negotiations might increase U.S. imports by one trillion dollars while reciprocally increasing access to foreign markets by one trillion dollars. Importantly, the WTO permits the United States to withdraw market access of, say, one billion dollars, by raising its tariffs in a particular product while reciprocally authorizing the foreign countries to withdraw one billion dollars of market access by raising foreign tariffs.

Regional trade agreements are the great exception to nondiscrimination. The principles of the WTO permit it on the reasoning that a move toward free trade between the members is better than the move away from liberal trade due to trade diversion. Opinions among trade economists diverge over whether regional agreements are a building block or a stumbling block to multilateral liberalization.

SEE ALSO Barriers to Trade; Liberalization, Trade; Quotas, Trade


Anderson, James E., and Eric van Wincoop. 2004. Trade Costs. Journal of Economic Literature 42: 691751.

Anderson, James E., and J. Peter Neary. 1992. Trade Reform with Quotas, Partial Rent Retention and Tariffs. Econometrica 60 (1): 5776.

Bagwell, Kyle, and Robert W. Staiger. 2002. The Economics of the World Trading System. Cambridge, MA: MIT Press.

Krugman, Paul, and Maurice Obstfeld. 2006. International Economics: Theory and Policy, 7th ed. Boston: Addison-Wesley.

James E. Anderson


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Free Trade v. Protection. During Jeffersons Embargo and the War of 1812 Americans began to develop, out of necessity, the type of manufacturing that Alexander Hamilton had prized. When the war ended and cheap British manufactured goods flooded American markets, eastern manufacturers cried for protective tariffs that would raise the prices of foreign goods. On the other hand, Southerners and Westerners had less financial interest in manufacturing, and as consumers opposed high tariffs which translated to higher prices. Tariff policy, as much as banking and internal improvements, was central to political debates and caused a split in the Democratic Party.

1816. The first postwar Congress prepared and passed the first obviously protective tariff in United States history. Pushed through the House by Henry Clay and John C. Calhoun, the Tariff of 1816 increased rates by approximately 25 percent. In contrast to later tariff struggles, southerners and northeasterners actually opposed

this first tariff, while the Middle States and the old Northwest supported it. This alliance would change as New Englands manufacturing interests expanded. Many items were covered under this tariff, including cotton cloth.

1824. Protectionists argued that in spite of the 1816 tariff, the British had dumped cheap goods in the United States and contributed to the Panic of 1819. They pushed through a higher tariff that favored the Middle Atlantic states and New England. Duties increased on woolens, cotton, iron, and finished products. Westerners secured a much higher duty on hemp and raw wool. Sugar, molasses, coffee, and salt were also on the protected list.

Abominations. Protectionists were aided by a plot hatched by Jacksonians to discredit President John Quincy Adams by raising rates so high that even hightariff advocates would reject them. Thus, the Jacksonians could take credit for favoring tariffs, even as they cried to sabotage the bill. The plan backfired when the bill passed on 11 May 1828, and Adams signed in. The Tariff of 1828 raised duties on hemp, iron, raw wool, molasses, distilled spirits, and flax, while lowering the rate for woolens. It was an extremely high tariff, the product of duplicity and disliked to varying degrees by everyone. But Northern manufacturers and Western farmers found more to like than did Southern planters, who had to pay far higher prices on the manufactured goods they needed. Southerners prepared to defend their section against the Tariff of 1828, which they referred to as the Tariff of Abominations.

Nullification. Calhoun and South Carolina led the charge against the tariff and sought to defend southern rights. Calhoun, who had previously been a nationalist, feared that an expansive central government would someday threaten slavery. He formulated a concept of the Union in which the Constitution was a contract between the states and federal government, not between the people and the federal government. Calhoun argued that states could nullify or void federal laws that they believed were unconstitutional. South Carolina called a nullification convention and nullified the 1828 tariff, as well as a tariff passed in 1832 that reduced rates on many items but still protected northeastern manufacturing. Andrew Jackson, though opposed to government intervention in favor of special interests, wanted an assertive government to defend the peoples liberty. Nullification threatened federal power, and so Jackson reacted vigorously. He secured a Force Bill from Congress authorizing the federal army to enforce federal law in South Carolina, even as Clay worked out the details of a compromise tariff.

Compromise . On the same day Jackson signed the Force Bill, he signed a new tariff bill. The 1833 tariff gradually reduced rates over the next decade. By 1842, for example, the rate on cotton was to be cut in half. Most rates were to be reduced to the 1816 levels. At the same time, manufacturers had ten years to prepare for increased competition. South Carolina repealed its nullification and accepted the new tariff, though it did nullify the Force Bill. Jackson wisely ignored this final defiance.

1846. The 1833 tariff was followed by a tariff in 1842 that maintained the status quo and gave some protection to northern industry. But by the mid 1840s American manufacturing had developed to the point that many Democrats, except those from industrial states, doubted the benefits of protection. In 1846 the Walker Tariff (named after its sponsor, Mississippian Robert Walker, James Polks treasury secretary) significantly reduced rates to an average of 26 percent.


William W. Freehling, Prelude to Civil War: The Nullification Controversy in South Carolina, 18161836 (New York: Harper & Row, 1966);

Peter Temin, The Jacksonian Economy (New York: Norton, 1969).


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A tariff is a tax charged on imports either on the basis of quantity (for example, "per ton;" these are called specific tariffs) or on the basis of their value (called ad valorem tariffs). Tariffs are the primary means by which governments protect their industries from foreign competition. Tariffs can be levied directly, as goods cross the border, or indirectly, by requiring that a license or permit be purchased before the goods can be shipped. Tariffs generally serve two purposes: to generate tax revenues and to protect a domestic industry from foreign competition. If a government wants to encourage the growth of a newly emerging industry it can also use tariffs to free these "infant" industries from having to compete with established foreign producers on the basis of price. Because tariffs raise barriers to the free flow of international trade, however, in the long run they tend to impede global economic growth. As a temporary way of raising revenues or protecting an industry they can be effectiveat least until other countries retaliate by raising their own tariffs.

The first U.S. tariff, of about 8.5 percent, was levied in 1789 on imports like molasses, hemp, steel, and nails in order to raise revenues for the young U.S. government. By the War of 1812 (18121814) the average tariff had risen to 25 percent and continued to rise to as high as 33 percent on imported cotton and wool during the 1820s. Under the Tariff of 1828 tariffs were raised to their highest level prior to the American Civil War (18611865). Since the Whig and then the Republican Parties represented the industrial Northeast, they favored raising tariffs, while the Democrats, the party of the slaveholding South, opposed them. When the South seceded in 1860, the Republicans seized power and raised tariffs by 10 percent. In 1882 Congress established a permanent Tariff Commission to recommend changes in tariffs and in 1897 the Dingley Tariff imposed the steepest tariffs rates ever (57 percent) on foreign imports.

When the federal government began to collect income taxes in 1913, tariffs began to lose their importance as a source of government revenue and the last great tariff law was the Smoot-Hawley Act of 1930. In 1934 the Reciprocal Trade Act gave the President independent authority to negotiate tariff reductions with foreign countries. In 1947 the United States joined 22 other countries in signing the General Agreement on Tariffs and Trade (replaced in 1995 by the World Trade Organization), which over the years has successfully worked to lower tariff barriers around the world.

See also: Dingley Tariff, General Agreement on Tariffs and Trade, Smoot-Hawley Tariff