An import tariff is a tax placed by governments on commodities that are shipped into a country from a foreign country. These taxes are often a way to discourage a country's consumers from buying products from another country and to support domestic products and services. Governments generally have the right to determine what products will have a tariff and how much that tax will be. Governments often use two types: ad valorem and specific. The types of tariffs levied helps determine the value of the tax on the particular product.
A specific tariff is a set tax on a product, and this tax is the same on all products of its kind. An ad valorem tariff, on the other hand, is a tax based on a percentage of the value of the product. This tariff can change from time to time as the value of the product increases or decreases. Governments also can impose a two-part tariff, which includes a specific and an ad valorem tariff. A product with a two-part tariff would have a set tax as well as a value-based percentage tax.
An import tariff can have a negative or positive effect on the country imposing the tariff. It typically causes a foreign good to be more expensive because the foreign country selling the good raises the price of its good to offset the tariff it is charged. Therefore, the consumer must pay a higher price to purchase the foreign good, resulting in less purchase power to buy domestic goods. If customers have less purchasing power, domestic producers may not sell as much and have to reduce the workforce to accommodate the decline in business. This can lead to higher unemployment and the economy can quickly reach a recession.
Such tariffs can have a positive effect on the economy as well, however, because they create competition between domestic and foreign producers. Domestic producers typically want to ensure prices are competitive with imported foreign products to gain customers' business. This competition often leads to lower prices for consumers, leaving more purchasing power to buy other products. This can increase sales for businesses and lead to job expansion to help boost the economy.