Why do tariffs exist

The tariffs also increase government revenues that can be used to the benefit of the economy. All of this sounds positive. However, tariff opponents argue that the costs of tariffs can not be ignored.

The price increase can be thought of as a reduction in consumer income. Since consumers are purchasing less, domestic producers in other industries are selling less, causing a decline in the economy. Despite these arguments that tariffs are eventually harmful to all parties in a trade relationship, they have been used by all nations from time to time.

Most developing countries use tariffs to try and protect their fledgling industries or industries they feel the nation needs domestically in order to remain independent. The United States used tariffs extensively throughout its early years as a nation, and continues to do so today when the political will exists. Even proponent of free trade sometimes determine that tariffs may serve a useful purpose. In , for example, President George W. Bush announced the imposition of steel tariffs for a three year period on imports from the European Union, Japan, China, South Korea and Taiwan.

The reaction to these tariffs was swift and threatening. The U. How companies are impacted by tariffs differs from company to company based on a number of factors—proximity of industry sector to the tariff imposed, how directly the company's inputs and outputs are touched by the tariff, whether or not the company is involved in exporting or importing, etc.

Businesses that do most of their business within a domestic market may benefit from the imposition of tariffs on competitive products.

If, however, the material inputs to the products of a business are the targets of tariffs, then the business may well be harmed by rising prices on its material inputs. In another possible scenario, a business that is involved with exporting may be harmed if it sees the imposition of a tariff on products similar to those it exports, and retaliatory tariffs are imposed by other nations on the products it exports.

As these examples show, the impact of tariffs on one business may be very different than those experienced by another business and the impacts differ based on characteristic other than the size of the businesses.

Exporters are usually well aware of the potential harm that may befall them if tariffs are unexpectedly imposed on their products and for that reason they usual include a disclaimer of responsibility for such tariffs that are imposed after a purchase agreement is signed.

Organizations like the WTO attempt to reduce production and consumption distortions created by tariffs. These distortions are the result of domestic producers making goods due to inflated prices, and consumers purchasing fewer goods because prices have increased.

Since the s, many developed countries have reduced tariffs and trade barriers, which has improved global integration and brought about globalization. Multilateral agreements between governments increase the likelihood of tariff reduction, while enforcement of binding agreements reduces uncertainty.

Free trade benefits consumers through increased choice and reduced prices, but because the global economy brings with it uncertainty, many governments impose tariffs and other trade barriers to protect the industry.

There is a delicate balance between the pursuit of efficiencies and the government's need to ensure low unemployment. Pew Research Center. Office of the United States Trade Representative. Agriculture: In Brief. The White House. Customs and Border Protection. Council on Foreign Relations.

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Your Money. Personal Finance. Your Practice. Popular Courses. Economy Economics. Part Of. Global Players. Table of Contents Expand. Who Collects a Tariff? Common Types of Tariffs. Non-Tariff Barriers to Trade. Who Benefits from Tariffs? How Do Tariffs Affect Prices? Tariffs and Modern Trade. The Bottom Line. Key Takeaways Tariffs, or taxes imposed on imports, have been making news lately as the Trump administration initiated multiple tariff rounds on China and elsewhere.

Tariffs are a type of protectionist trade barrier that can come in several forms. While tariffs may benefit a few domestic sectors, economists agree that free trade policies in a global market are ideal.

Tariffs are paid by domestic consumers and not the exporting country, but they have the effect of raising the relative prices of imported products. Article Sources.

There is a myriad of reasons governments initiate tariffs, such as protecting nascent industries, fortifying national defense, nurturing employment domestically, and protecting the environment. Article Sources. Investopedia requires writers to use primary sources to support their work.

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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Economics Current Account Deficit vs. Trade Deficit: What's the Difference? Partner Links. Balanced trade is an economic model under which countries engage in reciprocal trade patterns and do not run significant trade surpluses or deficits. Trade War A trade war arises when one country retaliates against another by raising import tariffs or placing other restrictions on the other country's imports.

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