Written by True Tamplin, BSc, CEPF®
Updated on June 21, 2021
A tariff is a government-sanctioned tax applied to specific goods imported from another country.
Tariffs may be used to raise revenue, protect domestic industries, or exert political leverage over another country.
Tariffs are levied either as a percentage of the value of the item, called an ad-valorem Tariff, or as a fixed fee, called a Specific Tariff.
Subscribe to the Finance Strategists YouTube Channel ↗
What Is the Purpose of a Tariff?
One reason a government may impose tariffs is to protect domestic industries from foreign competition.
If a domestic computer company sells their products for $1200, but a foreign manufacturer can sell them for only $900, then the government may impose a tariff on foreign computers in order to bring the price more in line with that of domestic manufacturers.
Tariffs have been widely criticized as a flawed economic policy, however.
One of the arguments is that by eliminating foreign competition, it reduces the incentive for innovation by domestic companies.
Tariffs also tend to hurt domestic consumers by driving the price of products up.
Furthermore, since tariffs are often used to exert economic pressure over another country, many feel that tariffs encourage feelings of xenophobia, and sometimes devolve into unproductive trade wars that if left unchecked.