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A tariff is a tax that a governing authority imposes on goods or services entering or leaving the country. Tariffs typically focus on a specified industry or product, and are set in place in a controlled effort to alter the balance of trade between the tariff-imposing country and its international trading partners. For example, when a government imposes an import tariff, it adds to the cost of importing the specified goods or services. This additional marginal cost will theoretically discourage imports, thus affecting the balance of trade.
Governments may opt to impose tariffs for a multitude of reasons, including the following goals:
- To protect nascent industries
- To fortify national defense programs
- To support domestic employment opportunities
- To combat aggressive trade policies
- To protect the environment
Key Takeaways
- A tariff is a specific type of tax that a governing body places imposes on goods or services entering or leaving the country.
- In theory, when a government initiates a tariff program, the additional costs saddled upon the affected items discourages imports, which in turn impacts the balance of trade.
- There are a myriad of reason governments initiate tariffs, such as protecting nascent industries, fortifying national defense, nurturing the employment domestically, and protecting the environment.
Infant Industries
Tariffs are commonly used to protect early-stage domestic companies and industries from international competition. The tariff acts as an incubator that theoretically affords the domestic company in question the ample runway time it may need to properly nurture, develop, and grow its business into a competitive entity, on the international landscape. This is essential to startups, because statistically speaking, nine out of 10 businesses fail to endure past one year.
National Defense
If a particular segment of the economy provides products that are critical to national defense, a government may impose tariffs on international competition to support and secure domestic production. This can happen both during times of peace and during times of conflict.
Domestic Employment
It is common for government economic policies to focus on fostering environments that provide its constituents with robust employment opportunities. If a domestic segment or industry is struggling to compete against international competitors, the government may use tariffs to discourage consumption of imports and encourage consumption of domestic goods, in hopes of supporting associated job growth, especially in the manufacturing sector.
Aggressive Trade Practices
International competitors may employ aggressive trade tactics such as flooding the market, in an attempt to gain market share and put domestic producers out of business. Governments may use tariffs to mitigate the effects of foreign entities employing unfair tactics.
Environmental Concerns
Governments may use tariffs to diminish consumption of international goods that do not adhere to certain environmental standards.
[Important: There are potential downsides to tariffs, namely, they can trigger a spike in the price of domestic goods, which can reduce the buying power of consumers in the nation that imposes the tariffs.]