A tariff is a tax on goods that cross a border. For much of history it was among the easiest taxes for a government to collect: ships arrive at ports, goods are counted, and the tax is paid before anything is sold.
Tariffs have always served two purposes at once. They raise revenue, and they protect domestic producers from foreign competition by making imported goods cost more. In the nineteenth century the United States relied heavily on tariffs for federal revenue, and they were a subject of fierce argument between regions that exported crops and regions that manufactured goods.
The argument for protection
Supporters say a young industry may need shelter while it learns to compete, that some industries matter for national security, and that the threat of tariffs can be a bargaining tool in negotiations. These ideas are old; the case for protecting an "infant industry" has been argued since at least the nineteenth century.
The argument against
Critics, from Adam Smith onwards, argue that tariffs raise prices for consumers and for firms that use imported parts, and that other countries may answer with tariffs of their own. Most economists since have been sceptical of broad tariffs, while allowing that narrow ones can sometimes serve a particular industry or aim.
In the twentieth century governments tried to lower tariffs together. After the Second World War, countries agreed on rules for reducing them, which led to the General Agreement on Tariffs and Trade in 1947 and later to the World Trade Organization in 1995. Tariffs fell substantially, but they did not disappear, and the debate returns whenever economies are under strain.
Key takeaways
- A tariff is a tax on imports; it raises revenue and shelters domestic producers.
- The arguments on each side were already familiar in the nineteenth century.
- Post-war agreements lowered tariffs but did not end the debate.