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Tariff rates are the amount of money that must be paid above the cost of an imported or exported good from one country to another. Essentially, tariff rates are a tax on goods designed to limit the impact of foreign trade on a particular nation. These rates fluctuate depending on the country's policies as well as change due to the type of good being imported or exported. Generally, a tariff is imposed on goods either at the point of importation or passed along to the consumer. Many times, the tariff itself is enforced by customs officials and can impact goods of all sizes, from a piece of fruit to an automobile.
According to modern economic and political theory, tariff rates are most commonly associated with the idea of protectionism. Rates are adjusted most readily on import tariffs to prevent a foreign market from overexerting its forces on the domestic market. Due to this fact, these rates are generally adjusted in unison with trade policy and domestic taxation. For example, if the United States adopts a policy to promote its steel industry domestically, it will levy higher tariff rates on imported metals from China. This can create a situation in which China responds with higher tariffs on goods imported from the U.S., resulting in a trade war.
Tariffs are affected by treaties such as the North American Free Trade Agreement (NAFTA). According to this treaty, there are limited tariffs imposed on goods imported from either Canada or Mexico, resulting in a larger influx of materials from this region. As a result, the rates from other countries are adjusted across North America to help prevent too much competition against domestic industry. In addition, the U.S. has the policy of maintaining harmonized tariffs between different nations. It accomplishes this by creating a specific itemized list of different goods and the exact rate of taxation.
One of the major criticisms of tariff rates comes from the argument that it limits free trade. Essentially, if a government promotes a certain industry within its borders over another country's industry, it can result in poor performance domestically. If the foreign company is offering better product or prices, then the domestic company should be forced to compete rather than protect itself with a tariff. Those supporting this argument believe that tariff rates simply prop up companies that should otherwise fail.
In the past, tariff rates were responsible for the largest percentage of revenue to world governments. The U.S. itself drew federal revenue at high rates from the time the first tariffs were imposed in the 1790s until World War I started. At that time, domestic income taxation replaced tariff rates as the highest source of revenue. This was caused most readily by the fact that international trade became very important to the survival of the Allied Powers against the Central Powers in Europe and the Middle East, meaning the U.S. could not charge large tariffs on these warring nations.