What is a Tariff System?

Ken Black

A tariff system is a system by which goods are taxed coming into, or leaving, a country for the purposes of resale. The concept, generally, has both proponents and opponents. Protectionists support the use of tariffs as a way to protect a country's economic system, while free trade advocates see tariffs as needless government interference in the marketplace.

A tariff is typically applied to goods being imported or exported.
A tariff is typically applied to goods being imported or exported.

Tariff systems can employ a variety of types of tariffs. The most common type is the import tariff, or customs tariff, which imposes an additional cost on products imported into the country levying the tariff. Types of import tariffs also vary from ad valorem tariffs, which impose a tax that is a standard percentage of the product's value, to specific tariffs which are pre-determined tax amounts that do not vary as the product's market price may increase of decrease.

Tariffs are sometimes used to correct a trade imbalance between countries.
Tariffs are sometimes used to correct a trade imbalance between countries.

In addition to import tariffs, there are export tariffs which are imposed on products when they leave the country imposing the tax. These types of tariffs are less common, but seen as an important source of revenue. Due to the fact that income taxes, or sales taxes, may not be received for these products, the export tariff is seen as a way of recouping some of that tax revenue loss. Export tariffs may also have the benefit of encouraging a business to find domestic markets.

Typically, a tariff system is implemented for the purpose of protecting the production of a similar good or service within the country. For example, ethanol production in the United States is relatively expensive compared to that of Brazil, simply because of the products used, availability of those products, and costs associated with producing it. Without a significant tariff on imported Brazilian ethanol, the American ethanol industry would likely be decimated, because it would be unable to compete based on price. It's also argued that this type of tariff helps spur innovations in renewable energy.

In addition to using a tariff system to protect a country's production of a product, it is also sometimes, although less frequently, used to impose economic sanctions on other countries. For example, if a product comes from a country that is typically seen by the importing country as having undesirable policies, a tariff may be imposed to hurt that country's economic standing. A more common application of economic sanctions, however, is the outright ban on importing products from that country. The ban on Cuban cigars in the US is an example of this.

While a tariff system is typically used in reference to an individual country's tariff policies, it can also be used to refer to tariff systems among countries. There are a variety of these types of tariff systems in use today, but the most common type is the harmonized tariff system. This system works to ensure that all products are categorized the same way. For example, some countries may see a cotton garment as an agricultural product since it's made from cotton. Others may see it as a textile product. The harmonized system settles the debate.

Cuban cigars are banned from sale in the U.S.
Cuban cigars are banned from sale in the U.S.

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