Tariff

What Is Tariff?

A tariff is a tax on imported goods, collected by the government of the importing country when the goods cross the border. The party legally responsible for paying a U.S. tariff is the importer of record, the domestic firm or agent bringing the goods in, not the foreign exporter. Tariffs can be set as a percentage of the good's value or as a fixed charge per unit. They serve two broad purposes: raising revenue for the government and protecting domestic producers by making imported goods more expensive relative to home-made substitutes. Tariffs are the oldest and most common instrument of trade policy, and reducing them has been a central goal of international trade agreements.

Why It Matters

Standard economic analysis traces exactly who wins and loses from a tariff. Domestic producers of the taxed good can charge a higher price and sell more, increasing their producer surplus, and the government collects tariff revenue on the imports that still come in. Domestic consumers, however, pay higher prices and buy less, so consumer surplus falls, and much of the economic burden ultimately lands on those domestic buyers. Because the losses to consumers exceed the combined gains to producers and the government, the tariff creates a net loss of total surplus, which in the standard tariff diagram is called deadweight loss. This is why economists generally regard broad tariffs as reducing overall efficiency, even when they benefit specific protected industries.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What is a tariff?
  A tax on imported goods
• What is a "non-tariff barrier" to trade?
  A restriction other than a tax — such as licensing rules, standards, or inspection requirements — that limits imports
• Who is legally responsible for paying a U.S. import tariff when goods arrive at the border?
  The importer of record — the domestic firm or agent bringing the goods in