The controversial subject of tariffs has a nuance attached to it which often gets ignored because of its bad rap. Any person dealing with trade has to have a firm understanding of the tariff policies of the country with which he is trading.

But what exactly are they, and if you are in the trading business, what are all things you need to take care of? What are import tariffs? Are they inherently bad; and if so, why were they introduced in the first place? What is the importance of imposing them? What are the criticisms against it? Let’s get to the core of all the questions one by one in this article.

What Are Tariffs?

In simple terms, tariffs are taxes imposed on imports or exports. A tax on imports or exports is dealt with and regulated by the government to raise revenues or to protect competitive advantages to the preferred industries (Usually domestic).

These imposed tariffs allow the government to maintain a balance and leverage the controlled outcomes. But this authority can also be misused and has been done over all these years. Let’s get to the heart of these taxes on foreign goods and try to understand their importance in the trading business.

Reasons to Impose Tariff

Tariffs can be imposed due to a number of reasons. They don't always have to do with rivalry or increasing tensions between the nations. There can be several nationalistic interests involved in imposing them. Let’s have a look at them.

1.    To Protect Domestic Industries

To protect particular domestic industries, governments impose tariffs on the import of those products. Many countries at different points have done that according to their priorities. One such prominent example of 2022 was the 25% ad valorem tariff on steel articles. President Joe Biden in May 2022 proposed this which excluded Mexico, Canada, and the United Kingdom.

This benefited the domestic U.S. steel manufacturing and production industry. Steps like these become essential to take during desperate times in the trajectory of a particular industry in many developing countries as well.

2.    To Raise Revenues

An obvious impact of collecting taxes in any form is the revenue it generates for the country imposing it. During times of crisis, imposing tariffs on popularly imported goods can help the government to raise revenues. It is done in a controlled manner so as to not discourage the traders and raise sudden prices for the buyers.

President Donald Trump imposed such import tariffs in the year 2018 and 2019 on many products to rebalance the trade deficit.

3.    To Protect National Interests

During times of tension between nations or to leverage the economics for the purpose of the country’s own growth, governments impose import tariffs. One such recent example was the tariffs imposed on Russian goods by the U.S.A. due to Russia’s conflicts with Ukraine. The nationwide boycott of Russian goods and to put pressure on the economy of Russia, these import tariffs were imposed.

Similarly, tariffs on Chinese products in India were put in the year 2021. These instances and reasons become a point behind import tariffs by certain governments.

4.    To Protect Domestic Consumers

Some tariffs are imposed by the government on certain goods to discourage consumers from buying them and lessen the sales of those products. The reason for that might span from the harm those products bring to society to the exploitation of privileges the seller might be doing in international trade.

These increased tariffs result in the heightened prices of those products which in turn decrease their overall sales.

5.    To Protect Infant Industries

One such reason to impose import tariffs can be to protect infant industries. The argument is that infant industries are vulnerable to competition, and they need time to be ready to cope with the competitive prices set by the dominating international traders.

That is why, for a certain period of time, the government might impose tariffs on the products from that industry so that these infant industries can develop their own market. Once that is done, the tariffs can be removed or reduced.

Importance of Imposed Tariffs

These tariffs have several advantages and importance for the country and the government imposing them. They range from:

1.    Fairer Competition

Tariffs provide a scope to balance out the competition from the international market and break monopolies. In this way, infant industries or well-established domestic businesses get a chance to boom, culminating in a well-balanced and healthy business environment within the boundaries.

2.    Revenue Generation

These tariffs are a major way to generate revenue in desperate times. The citizen’s tax-paying burden can also be reduced due to these policies. This extra income can help the government plan better and provide greater scope for trade.

3.    Ground for International Negotiations and Agreements

Before putting tariffs on goods, the imposing government gets an opportunity to negotiate with the partner country and evolve their agreements. This can open the space for trade partners from both countries to put forth their conditions and reach a settlement.

4.    Support for Nation’s Goals

To boom a country’s economy, self-sufficiency and a ground for domestic business are eminent. Tariff policies provide those businesses with an opportunity to grow and create a market. This, in turn, helps the country to become self-sufficient and booms the economy. This also creates more jobs in the country due to the increased demands and may help the nation to prosper.

5.    Base for a Predictable Market

With the setting of tax placed on imported goods, the market becomes stable, and the prices become predictable. This helps the government in policy-making and predicting better outcomes for the future. Traders within the boundary benefit largely from this. 

Criticism of Tariff

Imposing tariff seems like an important aspect of trading for a country due to these authoritative measures. But it is also very easy to abuse this authority. History has shown this time and again. That’s where the heart of criticism against this lies. Let’s have a look at them one by one.

1.    Higher Prices for Consumers

The habits of the consumers don’t necessarily change dramatically based on the increased prices. It depends on the spending power of the consumers and the types of goods on which these tariffs are imposed. However the case might be, the consumer will have to face the burden of these import tariff policies.

2.    Basis for a Trade War

As was evident during the Cold War between the U.S. and the U.S.S.R, imposing tariffs on imported products can agitate the partner country to do the same. This can worsen the partner nation’s relationship and can add fuel for rivalry. These increased tensions usually lead to more problems.

Conclusion

It is important to have eloquent policies related to the tariffs so that no government can abuse this prerogative. Sadly, since the inception of this concept, it has been abused in different ways from the times of kingdoms to the modern ages. The tariff has got a bad rap for a reason, even though they might not always have a malicious angle.

So if you are a trader, having a word with the customs office regarding the goods and paying the tariff, if applicable, becomes an obligation. Whatever the reason for that might be, proper planning of costs and maintaining relations with the partners can come a long way. For more information, contact us.

FAQs

 

1. What is a Tariff?

A tariff is a tax imposed on imports or exports.

 

2. Who imposes a tariff?

It is usually the government of a country making decisions based on the political and national scenarios of the country.

 

3. Why are tariffs imposed?

 They can be imposed because of various reasons. That could be to: 

●       Protect domestic industries.

●       Raise revenues.

●       Protect national interests.

●       Protect domestic consumers.

●       Protect infant industries.

 

4. What are the two types of tariffs?

The two types of tariff are import tariff and export tariff. An import tariff is imposed on the goods that are brought by the country, while an export tariff is imposed on the goods that are sold by the country.

 

5. Are tariffs and duties the same?

Although these terms are often used interchangeably, they do have their differences. Tariffs are taxes imposed on imported or exported goods. Duties are the cash equivalent of the tariff percentage. For example, a 10% tariff rate on a product worth $1000 would make the duty on that $100.

Even though both are set by the government, a duty can be set on domestic transactions as well. Tariffs are set on international transactions only.

 

6. Why are tariffs looked negatively upon?

Even though the reason for imposing tariffs might not be that spicy, tariffs are looked at negatively because they could elevate tensions between nations, lead to trade wars, and increase the prices for consumers.