tax on imported and, more rarely, exported goods. It is also called a customs duty. Tariffs may be distinguished from other taxes in that their predominant purpose is not financial but economic—not to increase a nation's revenue but to protect domestic industries from foreign competition. For that reason, protective tariffs, as they are often called, are opposed by advocates of free trade. See also protection.
Those customs duties that are still imposed today are usually either one of two types—specific duty, a tax levied on the quantity, whether by weight, size, or number, of the goods; or ad valorem duty, a percentage of the foreign or domestic price. The ad valorem duty is generally considered to be preferable but more difficult to levy, requiring complex procedures to determine the value of goods. Specific duties are best applied for protectionist purposes, since their size varies inversely with the prices of imports. For example, an import taxed at $5 per ton, and costing $100 per ton, may have an effective duty of 5%. However, if its price drops to $80 per ton—a threat to domestic producers—the effective duty may rise to more than 6%. Certain tariffs are also designed to offset dumping.
Tariffs have been used by governments since ancient times, although they were originally sources of revenue rather than instruments of state economic policy. Early customs duties consisted of payments for the use of trade and transportation facilities, including ports, markets, streets, and bridges. By the 17th cent., however, they came to be levied only at the boundary of a country and usually only on imports. At the same time, European powers established special low tariff rates for trade with their possessions; such systems of colonial preference formed the basis of the trading patterns that developed in the 17th and 18th cent. (see mercantilism and Navigation Acts).
Although the free trade movement in the early 19th cent. discouraged the use of tariffs, a new system of trade relations known as imperial preference developed in the late 19th cent. Great Britain and France, in particular, used preferential tariffs to organize the flow of foodstuffs and raw materials from their colonial dependencies and to regulate the export of domestic manufactured products into those areas. Other European nations retaliated by raising their tariffs, and a period of relatively high protective tariffs lasting through the Great Depression followed.
Since World War II the trend has been away from tariffs and in favor of freer trade. Through instruments such as the most-favored-nation clause and the reciprocal trade agreement, two nations may agree to lower their respective tariff barriers. More comprehensive agreements, such as those of the European Union and other customs unions, lower or even eliminate tariffs among groups of nations. Finally, the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), have since the 1950s sponsored a number of initiatives for lowering the customs duties of most major trading nations. The United States has participated in the movement toward freer trade by lowering its customs duties from the high rates of the Hawley-Smoot Tariff Act (1930); by playing an instrumental role in the several GATT tariff initiatives, including the Uruguay round (1986–93), which created the WTO; and by signing (1992) the North American Free Trade Agreement (NAFTA) with Canada and Mexico.