Tariff

A tariff is a tax that a government charges on goods as they cross its border, almost always on imports and occasionally on exports. It is collected by the customs authority when goods are cleared, and is usually paid by the importer of record, who then decides how much to pass on in prices. Tariffs are among the oldest taxes in the world and are used both to raise revenue and to protect domestic producers.

Tariffs are a form of indirect tax and the best-known tool of protectionism. They are also called customs duties or import duties. Their use between countries is governed by the World Trade Organization, whose members commit to maximum rates and to treating all members equally under most-favored-nation treatment, except within free trade agreements and other permitted exceptions.

A tariff works like an entry fee at a market gate that only outside traders have to pay. A farmer from a nearby village can sell apples freely, while a trader bringing apples from the next county must hand over a fee before setting up a stall. The outside trader either raises prices or earns less, and the local farmer faces less pressure.

Shoppers end up paying part of that fee through higher prices, the gatekeeper collects money, and local growers sell more. Whether the fee is a good idea depends on which of those effects matters most to the people setting it.

• Ad valorem. A percentage of the customs value, such as 10% of the declared price. This is the most common form.
• Specific. A fixed amount per unit, such as a set sum per kilogram or per litre, common for farm goods.
• Compound or mixed. A combination of the two, or whichever is higher.
• Two-tier. A tariff-rate quota charges a low rate up to a set volume and a much higher rate above it.
• Trade-remedy duties. Anti-dumping duties, countervailing duties against foreign subsidies, and safeguard duties against sudden import surges.

Goods are classified under the Harmonized System, a product nomenclature maintained by the World Customs Organization, and each country publishes a tariff schedule against those codes. The duty owed also depends on the customs value and on the good's origin, which is why rules of origin matter so much for traders.

For an ad valorem tariff, the duty is the rate times the customs value:

Here $t$ is the tariff rate as a decimal and $V$ is the customs value. A shipment valued at $50,000 under a 12% tariff owes $0.12 \times 50{,}000 = 6{,}000$ dollars of duty.

Economists also measure how much a tariff structure protects an industry's own value added, known as the effective rate of protection (ERP):

• $t_{f}$ is the tariff on the finished good.
• $t_{i}$ is the tariff on imported inputs.
• $a$ is the share of inputs in the value of the finished good at free-trade prices.

If a finished good carries a 20% tariff, inputs make up half its value and inputs enter duty-free, then $\text{ERP} = 0.20 \div 0.5 = 0.40$, or 40%. Low tariffs on inputs and high tariffs on final goods, called tariff escalation, give far more protection than the headline rate suggests.

A tariff raises the domestic price of the imported good and of competing local products. Who bears the cost depends on price elasticity: if foreign suppliers have few other buyers, they may cut prices and absorb part of it; if not, importers and consumers pay. This is a question of tax incidence. Research on the US tariffs of 2018–2019 found close to full pass-through to US buyers.

Standard economic analysis shows a tariff helps domestic producers and the treasury but costs consumers more than those gains combined, leaving a net efficiency loss. A large importer can sometimes shift part of the cost abroad by improving its terms of trade, but retaliation can wipe that out. Tariffs can also affect the exchange rate and the trade balance, though usually by less than expected, because a stronger currency and lower imported inputs offset part of the effect.

Under the General Agreement on Tariffs and Trade, each WTO member has "bound" maximum tariffs and may apply lower ones. Average tariffs fell steeply after 1947 through successive negotiating rounds. Tariffs remain an important revenue source in many lower-income countries, including Pakistan, where customs duties are supplemented by additional and regulatory duties. The United States raised tariffs widely in 2018–2019 and again in 2025; in February 2026 its Supreme Court ruled that emergency-powers legislation could not be used to impose them, leaving other trade statutes as the basis for US tariffs.

• World Trade Organization: Tariffs
• US International Trade Commission: Harmonized Tariff Schedule