What is trade tariff & Tariff Barrier and its types | how they work and why it is important with example

Tariffs represent a potent but double-edged sword of international commerce. They can be effectively utilized to shelter fledgling domestic industries from foreign competition, protect local jobs, and generate significant revenue for the government, but they also have significant downsides. Tariffs raise the cost of imported goods and therefore also the cost of goods and services for consumers, domestic manufacturers and businesses who rely on imported components and materials, and they can also generate retaliatory tariffs from other countries, which can escalate into a trade war harming growth prospects across the entire global economy.

What is a Trade Tariff?

A trade tariff is a tax that a government places on items that are imported from foreign countries. You could consider it an “entry fee” for foreign products. Once the tariffs are imposed, this can increase the price of imported goods, which in turn provides locally-made products with some price advantage and helps protect the country’s industries and jobs.

What is a Tariff Barrier?

A tariff barrier is a type of trade barrier that uses tariffs to restrict international trade. It makes imported goods more expensive than domestic ones, encouraging consumers to buy local products.

Trade barriers include both tariff barriers (tax-based) and non-tariff barriers (regulations, quotas, etc.). Tariff barriers are the most direct and transparent form.

Types of Tariff Barriers

Prohibitive Tariff:

A prohibitive tariff is an import duty that is so high it makes the price of purchasing foreign goods infeasible. The purpose of the prohibitively high tariff is not only to discourage imports but to prohibit them from being imported at all, so that the product cannot effectively compete in the domestic market. It may be considered a “No Entry” sign in the form of an exorbitantly high toll.

• For example, 300% on certain foreign textiles.

Ad Valorem Tariff:

An Ad Valorem Tariff is an import tax that is based on the object’s value as a percentage.

• For example, if a country has a 10% ad valorem tariff on smartphones, and a smartphone is imported to the country for $500, the tariff would cost $50. It’s a straightforward “percent tax” based on the selling price of goods.

Compound (Mixed) Tariff:

A Compound (or Mixed) Tariff is a form of tariff that combines two other types of tariffs. It assesses both a fixed amount charged when importing an item and a percentage of that item’s value.

• For example, it is like being charged a flat “service fee” and a flat “sales tax” for an imported item. For instance, a country may charge $100 and 5% of each bicycle’s value imported to a country.

Specific Tariff:

A Specific Tariff is a predetermined charge relating to an imported product based on its quantity or unit, regardless of the products value.

• Think of it as a flat-rate tax. For example, a country might charge a tax of $2 on every single pair of shoes imported, regardless of whether the shoes are cheap flip-flops, or expensive sneakers. The tax is merely on the product, not on its value.

Variable Tariff:

A Variable Tariff is a customs duty that is not set at a fixed amount, but varies based on criteria.

• It works like a surge price for imports. The government increases or decreases the tariff regularly, normally in response to today’s price of the foreign good. The overall goal of a Variable Tariff is to make sure that the cost of the import does not go below a stated floor price, continually protecting domestic farmers or producers from lower price competition from abroad no matter how low world prices are.

Revenue Tariff:

A Revenue Tariff is an import tax with the primary aim of raising revenue for the government as opposed to providing protection to domestic industries.

• Basically, it’s a simple sales tax on goods imported from foreign countries. It’s often assessed at a low rate on items that the country does not produce itself, allowing the goods to still be imported, and the government collects the revenue.

Protective Tariff:

A Protective Tariff is a tax on imports that is intended to protect the businesses of a country from foreign competition.

• The concept is similar to a financial safety net for domestic companies. By increasing the price of imported products, consumers are incentivized to buy domestically due to lower prices, thus aiding in the viability and growth of domestic industries and jobs.

How Do Tariff Barriers Work?

Let’s visualize a straightforward flow of goods from abroad to your neighborhood store. A tariff barrier operates by intervening in this flow at the border:

• An Import Goes Through: A foreign business wants to sell its goods (e.g. cheese) in a different country.
• Tax is Imposed: The cheese arrives at the port only for the government customs agent to stop it and say, “To sell your cheese here, you’ll have to pay a tax (the tariff).” This may be expressed a few different ways: per kg, or a percentage of the value of the cheese—usually 20-30%.
• Cost Becomes Higher: The Cheese Company now has a higher cost. To avoid taking a hit to its profit line, it will raise the wholesale price of the cheese—enough to cover the tariff it paid.
• Price for You Goes Up: The local retailer will now have to pay more money for the cheese, and will then increase the price when it retails the cheese to you, the customer.
• The “Barrier” Effect: The result is that in your supermarket, you see the imported cheese is now much more expensive than cheese produced in your local market.

This creates the “barrier” effect:

• For Consumers: You are more likely to choose the cheaper, locally-produced cheese.
• For Local Producers: The domestic cheese industry is now protected from cheaper foreign competition. Their sales and market share increase.

Why Are Tariff Barriers Important?

• Safeguarding Domestic Industries and Jobs: This is the main goal. Tariffs assist local businesses in competing by raising the price of foreign goods. This can preserve jobs in sectors that would otherwise be destroyed by low-price competition from abroad.
  • Example: Consider that there is a country that can produce shoes for $50 while another country sells them for $30. Domestic shoe factories would be challenged. If shoes imported from the other country bear a $25 tariff, the price of shoes will now be $55, and domestic shoes priced at $50 may be the better option.
• Raising Revenue for Governments: Tariffs provide revenue for governments, particularly in developing nations, which may use the revenue to finance public service goods such as schools, roads, and hospitals.
• Protecting National Security: Countries can impose tariffs to protect industries that are essential to the country’s national security. For example, steel making that is essential for the production of military equipment is considered a national security industry. Likewise, agriculture is paramount for providing food, and a country would not want to be dependent on other countries for food.
• Correcting Unfair Trade: Tariffs can be utilized as punishment for unfair trade practices. For example, a country may “dump” its products in overseas markets at lower prices than the products can be sold for in the host country as a way to drive local competitors from the market.

Real-World Example: U.S.-China Trade War (2018–2020)

Scenario:

• China was exporting cheap steel and electronics to the U.S., undercutting American manufacturers.
• U.S. claimed dumping (selling below cost) and unfair subsidies.

Action:

• U.S. imposed 25% tariff on steel and 10–25% on $300B of Chinese goods.
• China retaliated with tariffs on U.S. soybeans, cars, etc.

Effects:

Impact	Result
Positive (U.S. view)	Protected 12,000+ steel jobs; forced China to negotiate
Negative	U.S. consumers paid $40B+ extra; farmers lost export markets
Global	Supply chains shifted to Vietnam, Mexico

Outcome: Phase One Deal (2020) — China agreed to buy $200B more U.S. goods.

Conclusion

Tariff barriers are powerful tools in trade policy, they protect local economies but can raise prices and spark trade wars. Used wisely, they build industries; used poorly, they hurt consumers.

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