What are Tariffs? A Definition

What Are Tariffs?

Tariffs are taxes that a country levies on certain classes of imported goods, making them more expensive (all else being equal) for domestic buyers—and thus harder for foreign companies to sell those goods in that country. Tariffs serve as a means of protecting domestic industries, and are often levied, at least in principle, to punish another country for so-called unfair trade practices (more on those later). They’re also a way for the issuing country to raise incremental revenue or to exert leverage on another country or countries during trade negotiations.

Tariffs Explained

A country typically charges tariffs on a particular category of goods to protect domestic industries, especially those considered vital to the national interest, such as semiconductors, agriculture, steel, and renewable energy. A country might also levy tariffs to retaliate for what it deems to be unfair trade practices by companies or institutions in a foreign country. While tariffs often raise the prices that domestic consumers pay, the expectation is that more domestic companies will begin selling the targeted goods—or existing companies will increase their market share—once foreign competitors have been put at a disadvantage. (The flip side is that domestic industries long insulated from foreign competition can become less innovative as a result.) Countries charging tariffs can also use the incremental revenue to pay for government services for which they would otherwise have to borrow funds or raise taxes on citizens.

In 2002, the United States levied tariffs of up to 30% on imported steel because it maintained that competitors from Japan and other countries were unfairly “dumping” the vital commodity on the US market. That is, these nations were allegedly selling steel in the US below the cost of manufacturing it or below the price they sell it for domestically in order to grab market share from—and ultimately weaken —domestic manufacturers. (Those tariffs were lifted in 2003.)

In 2015, the US began levying tariffs on car and truck tires produced in China to offset subsidies it claimed the Chinese government provides to its domestic manufacturers to give them an unfair advantage in the US market. These tariffs have waxed and waned, but have largely remained in place, ranging from 10% to 25% of the tire prices.

While tariffs can be an effective means of dissuading unfair trade practices, they often result in higher domestic prices and can lead to retaliatory tariffs.