A tariff, or import tax, is a duty imposed by a national government, customs territory, or supranational union on imports of goods and is paid by the importer. Exceptionally, an export tax may be levied on exports of goods or raw materials and is paid by the exporter. Besides being a source of revenue, import duties can also be a form of regulation of foreign trade and policy that burden foreign products to encourage or safeguard domestic industry. Protective tariffs are among the most widely used instruments of protectionism, along with import quotas and export quotas and other non-tariff barriers to trade.
Tariffs can be fixed (a constant sum per unit of imported goods or a percentage of the price) or variable (the amount varies according to the price). Tariffs on imports are designed to raise the price of imported goods to discourage consumption. The intention is for citizens to buy local products instead, which, according to supporters, would stimulate their country's economy. Tariffs therefore provide an incentive to develop production and replace imports with domestic products. Tariffs are meant to reduce pressure from foreign competition and, according to supporters, would help reduce the trade deficit. They have historically been justified as a means to protect infant industries and to allow import substitution industrialisation (industrializing a nation by replacing imported goods with domestic production). Tariffs may also be used to rectify artificially low prices for certain imported goods, due to dumping, export subsidies or currency manipulation. The effect is to raise the price of the goods in the destination country.
There is near unanimous consensus among economists that tariffs are self-defeating and have a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers has a positive effect on economic growth. American economist Milton Friedman said of tariffs: "We call a tariff a protective measure. It does protect . . . It protects the consumer against low prices." Although trade liberalisation can sometimes result in unequally distributed losses and gains, and can, in the short run, cause economic dislocation of workers in import-competing sectors, the advantages of free trade are lowering costs of goods for both producers and consumers. The economic burden of tariffs falls on the importer, the exporter, and the consumer. Often intended to protect specific industries, tariffs can end up backfiring and harming the industries they were intended to protect through rising input costs and retaliatory tariffs. Import tariffs can also harm domestic exporters by disrupting their supply chains and raising their input costs.
The word tariff ultimately derives from the Arabic taʿrīf, meaning "proclamation" or "information" (from ʿarafa, "to make known"). The Arabic word entered the languages of Europe in the sense "list of prices or duties" in the 16th century, via trade with the Levant. It appears earliest in Italian.
In the city state of Athens, the port of Piraeus enforced a system of levies to raise taxes for the Athenian government. Grain was a key commodity that was imported through the port, and Piraeus was one of the main ports in the east Mediterranean. A levy of two percent was placed on goods arriving in the market through the docks of Piraeus. The Athenian government also placed restrictions on the lending of money and transport of grain to only be allowed through the port of Piraeus.
In the 14th century, Edward III took interventionist measures, such as banning the import of woollen cloth in an attempt to develop local manufacturing. Beginning in 1489, Henry VII took actions such as increasing export duties on raw wool. The Tudor monarchs, especially Henry VIII and Elizabeth I, used protectionism, subsidies, distribution of monopoly rights, government-sponsored industrial espionage and other means of government intervention to protect the wool industry.
A protectionist turning point in British economic policy came in 1721, when policies to promote manufacturing industries were introduced by Robert Walpole. These included, for example, increased tariffs on imported foreign manufactured goods, export subsidies, reduced tariffs on imported raw materials used for manufactured goods and the abolition of export duties on most manufactured goods. Britain was thus among the first countries to pursue a strategy of large-scale infant-industry development. Outlining his policy, Walpole declared that "it is very obvious, that nothing would more contribute to the obtaining so publick [sic] a Good, than to make the Exportation of our own Manufactures, and the Importation of the Commodities used in the manufacturing of them, as easy and unconditional as possible".
British protectionist policies continued over the next century, with Britain remained a highly protectionist country until the mid-19th century. By 1820, the UK's average tariff rate on manufactured imports was 45–55%. In 1815 the Corn Laws were enforced: tariffs and other trade restrictions on imported food and corn. The laws were designed to keep corn prices high to favour domestic farmers, and represented British mercantilism. The Corn Laws enhanced the profits and political power associated with land ownership. The laws raised food prices and the costs of living for the British public, and hampered the growth of other British economic sectors, such as manufacturing, by reducing the disposable income of the British public.
In 1846 the Corn Laws were repealed, so tariffs were significantly reduced. Economic historians see the repeal of the Corn Laws as a decisive shift towards free trade in Britain. According to a 2021 study, the repeal of the Corn Laws benefitted the bottom 90% of income earners in the United Kingdom economically, while causing income losses for the top 10% of income earners.
In the UK customs duties on many manufactured goods were also abolished. The Navigation Acts were abolished in 1849 when free traders won the public debate in the UK. But while free trade progressed in the UK, protectionism continued on the Continent. The UK unilaterally pursued free trade, even as most other large industrial powers retained protectionist policies. For example, the USA emerged from the Civil War even more explicitly protectionist than before, Germany under Bismarck rejected free trade, and the rest of Europe followed suit. Countries such as the Netherlands, Denmark, Portugal and Switzerland, and arguably Sweden and Belgium, had fully moved towards free trade prior to 1860.
On June 15, 1903, the Secretary of State for Foreign Affairs, Henry Petty-Fitzmaurice, 5th Marquess of Lansdowne, made a speech in the House of Lords in which he defended fiscal retaliation against countries that applied high tariffs and whose governments subsidised products sold in Britain (known as "premium products", later called "dumping"). The retaliation was to take the form of threats to impose duties in response to goods from that country. Liberal unionists had split from the liberals, who advocated free trade, and this speech marked a turning point in the group's slide toward protectionism. Lansdowne argued that the threat of retaliatory tariffs was similar to gaining respect in a room of gunmen by pointing a big gun (his exact words were "a gun a little bigger than everyone else's"). The "Big Revolver" became a slogan of the time, often used in speeches and cartoons.
In response to the Great Depression, Britain temporarily abandoned free trade in 1932. The country reintroduced large-scale tariffs.
According to Douglas Irwin, tariffs have historically served three main purposes: generating revenue for the federal government, restricting imports to protect domestic producers, and securing reciprocity through trade agreements that reduce barriers. The history of U.S. trade policy can be divided into three distinct eras, each characterized by the predominance of one goal. From 1790 to 1860, revenue considerations dominated, as import duties accounted for approximately 90% of federal government receipts. From 1861 to 1933, the growing reliance on domestic taxation shifted the focus of tariffs toward protecting domestic industries. From 1934 to 2016, the primary objective of trade policy became the negotiation of trade agreements with other countries. The three eras of U.S. tariff history were separated by two major shocks—the Civil War and the Great Depression—that realigned political power and shifted trade policy objectives.