Tariffs: Pros, Cons, and Examples

How Taxes to Protect America's Jobs Makes Your Food Cost More

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Tariffs raise the cost of imports. Photo: Silvestre Machado/Getty Images

Definition: Tariffs are custom taxes that governments levy on imported goods. The tax is a percentage of the total cost of the product, including freight and insurance. It raises the price of the import. That gives an advantage to domestic products within that market. Tariffs are a barrier to international trade. They are used to protect a domestic industry. Tariffs are also known as customs or import duties, or import fees.

They are rarely levied on exports.

On average, tariffs are usually around 5 percent. Countries charge different tariff rates depending on the industry they are protecting. They also charge sales taxes, local taxes, and extra customs fees. Governments collect this at the time of customs clearance.

Countries waive tariffs when they have free trade agreements with each other. The United States has trade agreements with more than 20 countries. Businesses should target exports to these countries. That's a good market entry strategy. Customers pay less for U.S. exports because they are tariff-free. (Source: Tariffs and Import Fees)

Pros and Cons

United States policy-makers go back and forth on whether tariffs are good or not. When a domestic industry feels threatened, it asks Congress to tax its foreign competitors' imports. It helps that particular industry, who often create more jobs. That helps workers.

But it also raises import prices. Tariffs always force a trade off between industry and workers versus consumers. 

Another disadvantage of tariffs is that other countries usually retaliate. They raise tariffs on similar products to protect their own domestic industries.  That leads to a downward spiral, as it did during the Great Depression of 1929.

Examples

These examples of U.S. tariffs illustrate best what how tariffs function. They highlight their advantages and disadvantage throughout history.

Harmonized Tariff Schedule. The HTS lists the specific tariffs for every category of imports into the United States (there's 99). It's called the Harmonized schedule because it's based on the international Harmonized System. That describes most of the world's trade goods. The International Trade Commission publishes the Schedule. The U.S. Congress sets the tariffs.

The HTS is a guide. The U.S. Customs and Border Protection (or the customs office in a foreign country) is the final authority. It is the only agency that can provide legal advice. It also helps in determining the classification of your import. Third, it makes a final determination of the tariff itself. For details on the schedule, go to U.S. ITC.

Smoot-Hawley Tariff. In June 1930, the Smoot-Hawley Act raised already-high tariffs on agricultural imports. The purpose was to support U.S. farmers who had been ravaged by the Dust Bowl. The resultant high food prices hurt Americans who were already suffering from the Great Depression. It also compelled other countries to retaliate with their own protectionism.

As a result, world trade dropped 65 percent. (Source: About Logistics, Foreign Trade Zone; About U.S. History, Smoot-Hawley Tariff)

Fordney-McCumber Tariff. Congress imposed this tariff in 1922 on imported products, especially agriculture. It responded to a glut of farm products. During the World War I, European farmers couldn't produce. Other countries replaced their food supply. When the European farmers returned to production, it increased the food supply beyond global demand. As prices dropped, U.S. farmers complained.

Tariff of Abomination. On April 22, 1828, the Federal government levied tariffs on most imports.

It was designed to protect Northeast manufacturers. Instead, it hurt the South. That's because it did two things by raising prices on imports. First, it increased costs for most goods. That hurt the agrarian South the most.

Second, it reduced trade with England, the South's primary buyer of cotton. When British businesses couldn't compete with New England manufacturers, they bought less cotton. As a result, the South's costs rose, but its income fell. That's why Southerners called this tariff an abomination.

Feelings were so intense that it helped spirit Andrew Jackson to the Presidency. He beat John Quincy Adams who had approved the tariff. It also led Vice President John C. Calhoun of South Carolina to anonymously draft the South Carolina Exposition and Protest. It said that states should have the right to nullify any Federal law they didn't like. In fact, the South Carolina legislature nullified the tariff in November 1832. That created a constitutional crisis over states' rights. It backed down in January 1833, but tensions remained perhaps leading to the Civil War. (Source: "Tariff of Abominations," About.com 19th Century History.   "History and Archives," U.S. House of Representatives.) 

Also known as custom tax, custom fee, trade tax, import tax and trade barrier.