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A tariff policy is a strategy of taxing imported or exported goods and services from one country to another. These taxes often seek to protect domestic industries or punish countries for policies related or unrelated to the economy. Considered by friendlier countries to be a barrier to production and positive interaction, some countries have created exceptions to their tariff policies known as free trade agreements or free trade zones.
The primary focus of a tariff policy is to protect a domestic industry from a comparable foreign import that would otherwise be available at a much cheaper price. For example, if a country is trying to increase its automobile production, allowing in less expensive vehicles of similar quality in would stunt that industrial development. Therefore, a tariff policy may be enacted as a way to give the fledgling domestic industry a chance.
A tariff policy may be directed at a certain product or, to a lesser extent, at certain countries. A country may seek to impose economic sanctions on another country as a punitive measure, for example. The goal is to use economic pressures to encourage reform and change. In some cases, a tariff may be retaliatory to counter a tariff the other country has imposed.
Most tariff policies set up a harmonized tariff schedule, meaning if the products meet certain criteria, they are coded a certain way. This allows importers to fully understand what taxes they face coming into a country, based on the products they are carrying. Further, many countries are on a similar standard regarding how products are classified, which makes looking up the schedule and code for harmonized tariffs simpler.
To help counteract some of the negative effects of tariff policy on some countries, especially those in a close geographic region, free trade agreements may be signed. Two of the most well known are the North American Free Trade Agreement (NAFTA) and the European Union (EU) framework. NAFTA includes the United States, Canada and Mexico. The EU, which includes many countries on the European continent, is more than just a free trade agreement, but it functions in ways very similar to one. These agreements may limit or completely eliminate taxes that would otherwise be imposed by a tariff policy.
A free trade zone is similar to a free trade agreement, and tariff policy is often not enforced inside of such zones. They are different from free trade agreements because they do not cover entire countries, but only specific areas. Usually, these areas are border towns and cities that may depend on each other for trade. Enforcing import tariffs and export tariffs in such areas could be overly burdensome to the local economies.