To protect domestic industries, governments use tariffs—taxes on imported goods and services—to manipulate trade dynamics. This powerful economic tool serves to protect local businesses against foreign competition. It’s a huge driver of economic opportunity for consumers and our international diplomacy.
That’s because tariffs increase the cost of imported inputs. The result is that consumers ultimately pay a higher price for goods that were previously low-priced before the imposition of the tax. When inflation is high and prices are rising, they exert a powerful effect on consumers. People will either begin to seek out domestic substitutes or buy cheaper imports from countries that don’t have tariffs imposed on them. The effect varies widely between sectors. As an illustration, industries including steel and electronics often run into targeted tariffs that create serious market volatility.
Retaliatory steps by other countries are almost always concurrent with the imposition of tariffs. When one nation imposes tariffs, affected trading partners may respond by imposing their own tariffs, leading to a cycle of trade wars. These conflicts can quickly escalate diplomatic relations, shatter deeply rooted global supply chains, and set in motion economic dominoes that negatively impact the entire economy.
The debate over tariffs continues to be heated among economists. Defenders are quick to claim that tariffs serve as a useful tool for correcting trade imbalances, while critics counter that they have the effect of suppressing economic growth. Heritage’s debate does a great job of showcasing the complexities of tariffs and their multifaceted effects. These impacts vary greatly depending on the sector and which countries are being discussed.
Beyond their immediate economic effects, tariffs are a powerful tool in our international trade negotiations. Countries are used to signing these free trade agreements. Through these agreements they are able to chip away at or even eliminate these tariffs, working towards open markets and building deeper trade relationships. Existing tariffs can still influence global trade dynamics, affecting how goods move across borders and how businesses operate.
Customs authorities are responsible for collecting these tariffs at the point of entry, ensuring that governments receive the intended revenue from imported goods. This process is an important element of protecting the enforcement of trade regulations and oversight of international commerce.