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When it comes to international trade, there are certain taxes imposed on the import of goods that have to be paid for by domestic importers. A tariff is one such tax levied at trading borders and is a good source of revenue for the government. In the following article, you will learn about what tariffs mean, their purpose and their types.
A tariff, also known as customs duty, is a tax levied on a country's imported goods at the border. The terms 'tariffs', 'custom' and 'duty' can be used interchangeably. It is levied on the domestic importers of a country.
Tariffs mean a way of revenue generation for the government. Additionally, it also serves multiple other national interests, such as promoting domestic and local goods and services by making them more affordable.
It is seen as a protectionist barrier by the government to make the imported products less desirable or competitive in the market compared to the domestic & local alternative goods and services. Additionally, tariffs are also a big source of revenue for the government.
A tariff imposed on imported goods helps to support a developing economy. Here are some objectives of tariffs:
Tariffs work by increasing the prices of imported goods and reducing the competition for the domestic market or industries, especially emerging ones. Tariffs have the purpose of making comparatively cheaper domestic products more attractive to consumers at affordable rates.
It is controversial whether a free market policy would improve the economy more than trade barriers. Many economists agree that tariffs harm the market more than doing any good. They can make the domestic market less productive and innovative by reducing the competition, as the experts would say. Many such scenarios might reflect light on how tariffs are not always beneficial for both the producers and consumers.
There are four principal types of tariffs applicable – specific tariffs, compound tariffs, ad valorem (according to the value), and tariff-rate quota. Here is a brief description of these types:
Now that you have gained some knowledge on what tariff means and its purpose, it will be easier to comprehend how imports and exports work for a country and why tariffs are levied on imported products.
Strategically, tariffs can cause inflation. Tariffs are levied on imported goods & services, which increases their prices. Domestic importers have to pay this, who in return will charge it from the consumers. However, as tariffs are not applicable to all goods and services, they do not have a wide-scale effect that can cause inflation.
A tariff is a tax levied on imported goods and services depending on various factors such as unit, weightage and value of a product. However, a quota limits the number or amount of goods and services that can be imported.