A tariff is a tax on the regulating authority for the goods or services entering or leaving the country and usually focus on a specific industry or product. It is intended to change the balance of trade between the tariff-imposing country and its international trading partners. For example, when the government imposes import tariff, it adds to the cost of importation of certain goods or services. Additional marginal cost added to the tariff discourages imports, thus affecting trade balance.
There are various reasons the government can set a tariff. The most common examples of arguments to justify the tariffs to protect nascent industries, national defense purposes, supporting domestic employment, the fight against aggressive trade policies and environmental reasons.
Tariffs are commonly used to protect early stages of the domestic industry from international competition. The tariff acts as an incubator that, in theory, should lead to the domestic industry enough time to develop and grow in a competitive position in the international arena.
If a certain segment of the economy provides the most important products with regard to national defense, the government may impose tariffs on international competition, to maintain and secure production in the event of a conflict.
This is typical of the government’s economic policy to focus on creating the environment in which the components have a reliable employment opportunities. If the domestic segment of the industry is struggling to compete with international competitors, the government may use tariffs to reduce import consumption and stimulate consumption of domestic goods in the hope of supporting the growth of associated jobs. (For associated reading, see: not cheap imported goods cost Americans jobs?)
Aggressive Trading Practices
International competitors can use aggressive trade tactics such as flooding the market in an attempt to gain market share and to put domestic producers out of business. Governments can use tariffs to mitigate the impact of foreign legal entities employing what may be considered unfair tactics.
Governments can use tariffs to reduce the consumption of international goods, which do not adhere to certain environmental standards.
(For associated reading, see the Basics of tariffs and trade barriers.)