A tariff is a form of taxation imposed on goods crossing the boundary of a country or customs territory, most commonly on imports. Tariffs generate revenue for government and can give domestically produced goods a price advantage over imported competitors. They are instruments of international trade policy, distinct from quantitative restrictions and other non-tariff barriers. The term also denotes a published schedule classifying goods and specifying the duties applicable to them. (wto.org)
Forms and calculation
An ad valorem tariff is calculated as a percentage of a good’s customs value. For example, a 10 percent duty on goods valued at $1,000 produces a $100 customs charge. A specific tariff is a fixed amount per physical unit, such as $2 per kilogram. A compound duty combines percentage and per-unit components. Consequently, a specific tariff’s equivalent percentage burden changes when the price of the imported product changes. (wto.org)
Calculating an ad valorem duty requires customs valuation, not merely identifying a retail price. Under the World Trade Organization’s valuation agreement, the primary basis is transaction value—the price actually paid or payable for goods sold for export to the importing country, subject to specified adjustments and conditions. When this basis is unavailable, alternative valuation methods apply in a prescribed sequence. (wto.org)
Tariff schedules organize goods into product categories, generally using the Harmonized Commodity Description and Coding System, maintained by the World Customs Organization. Classification establishes which tariff line applies; valuation establishes the taxable value. These are separate tasks, and a shared international classification does not imply identical national duty rates. (wcoomd.org)
International rules and preferential treatment
The World Trade Organization distinguishes bound tariffs from applied tariffs. A bound rate is a commitment recorded in a member’s schedule that limits the ordinary customs duty on a product. The applied rate is the rate actually charged and may be lower. Binding therefore provides predictability without necessarily fixing the rate used for every import. (wto.org)
Under most-favoured-nation treatment, a tariff advantage granted to goods from one WTO member generally must extend to like goods from other members, subject to recognized exceptions. Preferential arrangements, including qualifying free-trade areas and customs unions, can permit lower duties among participating economies. A customs union also establishes a common external trade regime. (wto.org)
Ordinary tariffs coexist with special trade-remedy duties. Anti-dumping duties address imports sold below the relevant normal value when the required injury and other conditions are established. Countervailing duties address qualifying subsidies, while safeguard measures may temporarily restrict imports under specified conditions. These instruments have distinct legal requirements rather than being interchangeable names for protection. (wto.org)
Who pays and who bears the cost
An import tariff is normally remitted to customs by the importer, but payment responsibility differs from economic incidence: the ultimate distribution of its cost. Importers may absorb the duty through reduced margins, raise selling prices, or negotiate lower prices from foreign suppliers. The burden can therefore fall on importing firms, purchasers, or foreign producers in different proportions. (imf.org)
Price elasticities, competitive conditions, and the availability of alternative suppliers influence these adjustments. Exchange-rate movements may reinforce or offset changes in local-currency import prices. Incidence is consequently an empirical question, not something determined solely by the tariff’s statutory rate. IMF analysis of the United States’ 2018 tariffs found that their border-price burden was borne almost entirely by American importers, with some costs subsequently passed to consumers and others absorbed in firms’ margins. This finding concerns those measures, not every tariff in every setting. (documents1.worldbank.org)
Economic effects
In the standard supply-and-demand model, a small importing economy cannot influence world prices. A tariff raises the domestic price of the affected good, encourages domestic production, reduces consumption, and lowers imports. Consumer surplus declines, while producer surplus and government revenue increase. Under competitive-market assumptions without other distortions, the consumer loss exceeds those gains, creating deadweight loss from inefficient production and forgone consumption. This is a central result in welfare economics. (documents1.worldbank.org)
A sufficiently large importing economy may lower foreign suppliers’ prices by reducing its demand. This can improve its terms of trade, creating a potential national gain that must be weighed against domestic distortions. Retaliation can erode that gain and leave trading partners worse off. Such possibilities depend on market structure and other countries’ responses; they do not establish a universal benefit from tariffs. (documents1.worldbank.org)
Tariffs on intermediate goods also raise costs for domestic firms using imported inputs, including exporters. In cross-border production networks, protection for one industry may therefore disadvantage another. Tariffs can increase particular prices, but their effect on sustained inflation depends on broader adjustments. Their effect on the trade balance likewise depends on macroeconomic conditions, not simply on reduced imports of targeted products. (imf.org)
Historical development and measurement
The General Agreement on Tariffs and Trade, signed in 1947, provided the framework for successive negotiations reducing tariffs. The WTO began operating on January 1, 1995, incorporating GATT 1994 into a broader institutional structure. Tariff concessions remain product-specific commitments within this system. (wto.org)
Comparisons require consistent statistical definitions. A simple average gives each tariff line equal weight; an import-weighted average emphasizes products actually imported. The latter can understate restrictive protection when high tariffs suppress imports. Comparisons must also distinguish bound, most-favoured-nation applied, and preferential rates, and specify how non-percentage duties are converted into ad valorem equivalents. (wto.org)