What Are Tariffs? - Overview

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

Nations have an inherent interest in protecting their own producers from foreign competitors. In this lesson, you'll learn how tariffs accomplish that, as well as some of the economic and political implications of tariffs.

Definition of Tariffs

While international trade is a very complex field of study, it's become important that successful managers understand the fundamentals of how sovereign nations conduct business with one another. Sometimes, nations are both motivated to trade with one another while at other times, one nation may be hesitant to accept imports from trading partners. One tool that can be used to limit imports is a tariff.

A tariff is simply a tax placed on imports. By placing a tax on imports coming into a country, that country's government is increasing the price of foreign goods, thereby making domestic goods more competitive.

Tariffs in International Trade

In the era of globalization, economic issues have become as important to sovereign nations as political and military issues. Supporting and protecting their economy is essential to any nation that wants to ensure a stable citizenry and any political regime that wants to continue to lead their country. With the constant flow of goods and services in and out of countries and the attention worldwide to fair trade practices, it can be difficult to achieve the right balance between protecting the domestic economy without isolating foreign trading partners.

Sometimes trading partners welcome imports, especially when the items being received cannot be made efficiently domestically. For example, England has very few oil reserves but, like the United States, is very petroleum-dependent. To encourage the importing of oil to England, there are no trade barriers for oil there.

Sometimes, however, a country may not want to encourage imports. The United States was once the world's leading steel producer and there are still large companies in the United States that produce steel. But, with more access to natural resources and cheaper labor, China can now produce steel at a much lower cost. Even with the high cost of freight, Chinese companies can sell their steel in the United States at a lower cost than the U.S. producers, and still be profitable.

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