A tariff is a tax levied by a government on goods and services brought in from other nations. Tariffs have several functions, such as generating government revenue, shielding domestic industries from foreign competition, and shaping trade policies. In addition to being a revenue source for the government, tariffs can regulate foreign trade and impose taxes on foreign products to promote or protect domestic industries. Tariffs are among the most commonly used tools of protectionism, alongside import quotas, export quotas, and other non-tariff trade barriers. The term "tariff" comes from the French word tarif, meaning 'set price', which is derived from the Italian tariffa, meaning 'mandated price; schedule of taxes and customs'. Ultimately, this term traces back to the Arabic word taʿrīf, meaning 'notification'.

Specific Tariff: A fixed charge applied to a specific product based on its quantity. For instance, a government might impose a $500 tariff on each imported car.

Ad Valorem Tariff: A tariff calculated as a percentage of the product's value. For example, a 10% tariff on imported wine means that if a bottle costs $20, the tariff would be $2.

Compound Tariffs: A mix of ad valorem and specific tariffs. For example, a product might incur a 5% ad valorem tariff plus $2 per unit.

Tariff-Rate Quotas: These allow a certain amount of goods to be imported at a lower tariff rate, with higher tariffs applied to quantities that exceed the quota. A tariff schedule is a document that outlines the tariff rates for various categories of imported goods. Customs officials use it to classify goods and determine the appropriate tariffs at ports of entry. In the United States, this document is known as the Harmonized Tariff Schedule of the United States (HTSUS).

Protecting domestic industries: Tariffs can increase the cost of imported goods, making domestic products more competitive. This can help safeguard jobs and foster the growth of domestic industries. For example, a tariff on imported textiles could shield domestic textile manufacturers from foreign competition.

Generating revenue: Tariffs provide a source of income for the government, which can be utilized to fund public services. Historically, tariffs have been a significant revenue source for many countries.

Addressing unfair trade practices: Tariffs can counteract dumping (selling goods below cost in a foreign market) or address subsidies given to foreign producers. This can help create a level playing field for domestic businesses.

Safeguarding national security: Tariffs can protect industries deemed essential for national security, such as defense or critical infrastructure. For instance, a tariff on imported steel could ensure a domestic supply of steel for national defense purposes.

Influencing foreign policy: Tariffs can serve as a tool to apply pressure on other nations or achieve foreign policy goals. For example, a country might impose tariffs on another country's goods to encourage compliance with certain policies or international agreements.

Retaliation and negotiation: Tariffs can be used in trade negotiations or as retaliation against unfair trade practices by other nations. For instance, a country might impose tariffs on imports from another nation that has enacted similar measures against its exports.

Tariffs can have various effects on consumers, businesses, and the overall economy:

Higher prices: Tariffs raise the cost of imported goods, which can lead to increased prices for consumers. This can diminish consumer purchasing power and potentially result in inflation. For example, tariffs on imported food products can lead to higher grocery bills for consumers.

Reduced choices: Tariffs can limit the availability of imported goods, thereby reducing consumer options. This can be particularly significant for consumers who prefer imported goods or rely on imports that are not readily available domestically.

Impact on specific goods: Certain sectors of the economy can be particularly affected by tariffs, such as the automotive, energy, and food sectors. For example, gas prices could rise by as much as 50 cents per gallon in the Midwest due to tariffs on Canadian and Mexican oil. Tariffs on electronics could lead to higher prices for smartphones and computers.

Increased costs: Tariffs can elevate the cost of imported inputs for businesses, potentially leading to higher production costs and reduced profitability. This can make it more challenging for businesses to compete, especially those that heavily rely on imported materials or components.

Supply chain disruptions: Tariffs can disrupt supply chains, complicating the process for businesses to obtain necessary goods and services. This can result in delays, shortages, and increased uncertainty, negatively impacting business operations and profitability. Tariffs thus incentivize the development of domestic production to replace imports.

Reduced competitiveness: Tariffs can hinder domestic businesses' ability to compete in international markets, as they may face counter-tariffs from other countries. This can limit export opportunities and adversely affect businesses that depend on international trade.

Most economists agree that tariffs negatively impact economic growth and welfare, while free trade has a positive effect. Tariffs can distort market prices, reduce efficiency, and lead to a misallocation of resources. Although tariffs may aim to reduce trade deficits, they can also provoke counter-tariffs from other nations, offsetting any potential benefits. Historically, they have been justified as a means to protect emerging industries and facilitate import substitution industrialization (developing a nation by replacing imported goods with domestic production). While tariffs may safeguard some jobs in domestic industries, they can also result in job losses in other sectors, particularly those reliant on imported inputs or exports to countries that impose counter-tariffs. The overall effect of tariffs on employment is complex and influenced by various factors.

Tariffs create deadweight loss, which is a loss of economic efficiency that occurs when the equilibrium for a good or service is not Pareto optimal. This indicates that tariffs lead to a less efficient allocation of resources and a decline in overall economic welfare. Tariffs can affect different groups within society in various ways. While they may benefit some domestic producers by protecting them from foreign competition, they can harm consumers by raising prices and limiting choices. They can also negatively impact businesses that depend on imported inputs or export to countries that impose counter-tariffs.

The decision to impose tariffs is often swayed by political factors, such as lobbying by special interest groups and the use of tariffs as bargaining tools in international negotiations. Although intended to protect specific industries, tariffs can backfire and harm the industries they were meant to protect by increasing input costs and provoking counter-tariffs. Import tariffs can also adversely affect domestic exporters by disrupting their supply chains and raising their input costs.

Tariffs are frequently criticized for their negative economic consequences, including:

Inefficiency: They distort market dynamics and can lead to resource misallocation.

Political influence and lobbying: The decision to impose tariffs can be swayed by political factors, such as lobbying by special interest groups. This can result in tariffs that favor specific industries at the expense of consumers and the broader economy.

Regressive effects: Tariffs disproportionately impact lower-income consumers, who spend a larger share of their income on taxed goods.

Trade wars: A trade war occurs when countries engage in escalating tariffs and other trade barriers against each other. This can lead to a decline in trade, economic harm, and increased tensions between nations.

Governments may utilize other trade policy tools instead of or alongside tariffs, such as:

Subsidies: Financial support to domestic industries to enhance their competitiveness.

Quotas: Limits on the quantity of goods that can be imported.

Non-Tariff Barriers: Regulations, standards, or licensing requirements that restrict imports.

Tariffs have played a significant role in global economic history. For example:

The Smoot-Hawley Tariff Act of 1930 in the United States raised tariffs on thousands of imported goods, worsening the Great Depression by reducing international trade.

The General Agreement on Tariffs and Trade (GATT), established in 1947, aimed to reduce tariffs and other trade barriers globally. It was later succeeded by the World Trade Organization (WTO) in 1995, which continues to oversee international trade.

In recent years, tariffs have become a contentious issue in global trade. For instance:

The U.S.-China trade war (2018–2020) saw both nations imposing tariffs on billions of dollars' worth of goods, affecting global markets.

The European Union employs tariffs as part of its Common External Tariff (CET) system, which applies uniform tariffs on imports from non-member countries.

In early 2025, President Donald Trump imposed tariffs on imports from Canada, Mexico, and China. These tariffs aimed to address issues such as illegal immigration, drug trafficking, and unfair trade practices. However, they also raised concerns about a potential trade war.

Tariffs are a policy tool with a long history and a range of potential impacts. While they can be used to protect domestic industries and generate revenue, they can also lead to higher prices for consumers, disrupt supply chains, and harm the overall economy. The use of tariffs has been a subject of ongoing debate between advocates of free trade and those who support protectionism. Free trade proponents argue that tariffs distort markets, reduce efficiency, and harm consumers. Protectionists contend that tariffs are essential for safeguarding domestic industries, jobs, and national security. The decision to impose tariffs often involves balancing economic and political considerations, highlighting the challenges of navigating the global economy and reconciling competing interests in trade policy.