How Do Tariffs Work?

How Do Tariffs Work?
How Do Tariffs Work? (Image: Public Domain, Wikimedia Commons)

What are Tariffs?

Tariffs are a kind of specialized tax that affect goods imported to, or exported from, a country. Tariffs are mandated by national governments and are a particularly easy form of tax to collect. Tariffs are used by governments for many different reasons, some good and some with insidious intent. Tariffs are also extremely important to international trade and can seriously affect the flow of goods around the globe.

What Types of Tariffs Exist?

There are two major types of tariffs: those based on a percentage of the value of products and those with a set price. Tariffs based on a percentage of the value of goods are called "ad valorem tariffs," and those with a preset value are called "specific tariffs."

Why Do Countries Impose Tariffs on Goods?

Tariffs can be a good way of raising governmental funds. If a business wishes to import or export goods, they'll have to pay the tariffs or else risk legal problems with that government. Likewise, governments can use tariffs to help their domestic businesses compete with foreign competitors by making foreign goods more expensive to purchase. Governments also use what are called "prohibitive tariffs," which are meant to be so costly that they stop a product from being imported or exported altogether.

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