Definition: A tariff is a protectionism tax imposed on imported and exported goods with the aim of generating government revenues and protecting the domestic economies and infant industries from global competition.
What Does Tariff Mean?
What is the definition of tariff? Tariffs are a trade policy tool that seeks to generate additional revenue for governments and domestic producers. Import and export taxes inflate the prices of imported goods, causing a decline in imports and shifting consumers to the consumption of domestic goods.
The price increase in the imported goods encourages domestic producers to increase the output of production, thus realizing higher revenues. On the other hand, the shift of resources to domestic industries restricts free trade, as domestic producers may be efficient than foreign producers. Furthermore, tariffs are viewed as a tool for transferring money to the government through higher consumer prices and higher producer revenues.
Let’s look at an example.
Example
Company A is a producer of wine in Italy and exports 500,000 tons annually to the United States for a cost of $1.10 per ton, which makes a total cost of $550,000. The wine sells for $35 per bottle in the United States.
The United States government imposes a 25% ad valorem tariff on the value of imported wine, which requires Company A to pay a tax of $35 x 25% = $43.75 per bottle. Therefore, the Company has to increase the selling price per bottle in the United States to realize a profit.
Similarly, a specific tax of $25 on the value of imported wine would require Company A to pay $25 per bottle of wine regardless of the selling price per bottle in the United States. To anticipate the tax, Company A would increase the selling price per bottle to realize a profit.
Therefore, with the imposed of tax on imported goods, Company A contributes to the increase of government money. If the Italian wine is expensive for the U.S. consumers, they will shift to domestic wines, thus protecting the domestic producers. Conversely, without a tariff (specific or ad valorem), Company A would realize a profit at the expense of domestic producers and domestic consumers.
Summary Definition
Define Tariffs: Tariff means a tax on goods entering or leaving a country.
