The word ‘Tariff’ is Arabic in origin and it basically means ‘that fees need to be paid’. When we use the word ‘tariff’ in economics we are referring to a tax that is placed on imported goods, but it can apply to exported goods as well. There are a number of good reasons why a tariff might be placed on goods, but there are economists who argue against the use of this type of tax — they see it as interfering in the free market.
The Different Types of Tariff
There are a number of different types of tariff including; prohibitive tariff, ad valorem tariffs, a protective tariff, a retaliatory tariff, an environmental tariff, a revenue tariff, and a specific tariff. We will now examine these tariffs in a bit more detail:
- A Prohibitive tariff is there to discourage people from importing a certain item. The logic is that by placing such a high tariff on the product it will make it unattractive to consumers.
- An Ad Valorem tariff is a percentage of the value of the good imported. The problem is that as the value of the good rises and falls on the international market it will change the amount of tariff that needs to be paid. This can be problematic because it makes life even more uncertain for importers.
- A protective tariff is there to defend industries within a country. If a foreign country is able to product a product at a much cheaper price it will be more attractive to consumers; this means that most will abandon the more expensive item that is produced locally. A protective tariff will mean that this imported product will be more expensive and the local industries will find it easier to compete against it.
- A revenue tariff is a way that the government will try to increase their available funds; this money can then be used for whatever means the government likes.
- An environmental tariff is there as part of an attempt by a country to be more eco-friendly.
- A specific tariff sets an amount of money that needs to be paid on imports — this money won’t vary in the same way as the Ad Valorem tariff.
The Advantages and Disadvantages of Tariffs
There are many advantages to tariffs including:
- They help the government earn extra funds
- It reduces dependence on foreign markets
- They protect local businesses
- They can help environmental efforts
- They can be used to encourage consumers to make healthy choices by making unhealthy products prohibitively expensive.
There are also many disadvantages associated with the use of tariffs:
- It can indirectly cause the price of local goods to increase; for example, if the cost of fuel is high then this will impact many industries and they will need to pass on the increased cost of production onto customers.
- It discourages free trade which many economists would claim that this is always a bad idea