What is a Tariff?

A tariff is a tax placed on imported goods. Each country has separate regulations, but there are five main types of tariffs: revenue, ad valorem, specific, prohibitive and protective.

A revenue tariff increases government funds. For example, countries that do not grow bananas may create a tax on importing bananas. The government would then make money from businesses that import the fruit.

An ad valorem tariff means that the tax applies to a percentage of the import's value such as a set number of cents on every dollar of value. A specific tariff, on the other hand, means that the tax is not concerned with the estimated value of the imported goods, but rather is based on specific amount of the goods. This type may apply to the number of goods imported or to the weight, volume or other measurement of the goods.

A prohibitive tariff is one that is such as high cost that it keeps the item from being imported. A protective tariff is used to raise the price of imported goods as a protective measure against the competition from foreign markets. A higher tax allows a local company to compete with foreign competition.

Protective tariffs can be advantageous as they can help foster the local economy, but sometimes they can also make the price of the item so expensive that companies must charge more. For example, when gas prices become too high, industries such as the trucking industry may have to charge retailers more for delivering products. The retail industry then has to mark up their items to allow for their increased transportation costs in order to make the same profit they once did. The end result is that consumers pay more for the goods.

When no tariff or other restrictions are placed on imported goods, it is called free trade. Some people consider free trade to allow increased economic growth potential. Others counter that the removal of tariffs to permit free trade only makes the economy have to depend on global markets rather than increase the stability of domestic markets.