A tariff is a tax levied on imports or exports or you can say tariff is a tax imposed on imported goods. The word is derived from the Arabic word taārif, meaning ‘fees to be paid’. It adds to the cost of imported goods and is one of several trade policies that a country can enact. Every country has separate tariff regulations. It helps the government earn extra funds, reduces dependence on foreign markets and protect local businesses. The five main types of tariffs include revenue, ad valorem, specific, prohibitive and protective.
Revenue Tariff :- A revenue tariff is a way that the government will try to increase their funds. A tariff on coffee imports imposed by countries where coffee cannot be grown, for example, raises a steady flow of revenue.
Ad Valorem :- An Ad Valorem denotes a tax, duty, fee or commission that is calculated as a percentage of the good imported. The problem is that as the value of the good rises and falls on the international market it will change the amount of tariff that needs to be paid. This can be problematic because it makes life even more uncertain for importers.
Specific :- A specific tariff is a fixed fee levied that needs to be paid on imports – this money won’t vary in the same way as the Ad Valorem tariff. On the other hand it varies according to the type of good imported. For example, a country could levy a $10 tariff on each pair of shoes imported, but levy a $200 tariff on each gadget imported.
Prohibitive :- A Prohibitive tariff is there to discourage people from importing a certain item. A protective tariff is used to raise the price of imported goods as a protective measure against the competition from foreign markets. A higher tariff allows a local company to compete with foreign competition.
Protective :- A protective tariff is intended to artificially inflate prices of imports and protect domestic industries from foreign competition. It is there to defend industries within a country. If a foreign country is able to product a product at a much cheaper price it will be more attractive to consumers; this means that most will abandon the expensive item that is produced locally. A protective tariff will mean that this imported product will be more expensive and the local industries will find it easier to compete against it.