A tariff is a tax imposed by a government on imports. A tariff is usually assigned as a percentage of the value of imported goods, but can also be assigned as a fixed amount. A tariff can be used to provide revenues for the government imposing it, but the main point is usually to increase the cost of the imported goods. By doing so, consumers within the receiving country will be more likely to purchase locally-produced goods, which are comparatively less expensive. There are several significant downsides to the use of tariffs, which are:

  • Domestic industries become less efficient, because they have a reduced level of foreign competition.
  • Residents of the country imposing the tariffs are spending more for goods, so their net income declines.
  • Other countries can retaliate against tariffs with their own tariffs, resulting in a trade war.

Despite these issues, governments persist in using tariffs, usually because certain industry sectors complain loudly enough that they are suffering from foreign competition. A government may also impose tariffs in order to protect a growing industry that is considered valuable to the country.