Tariffs are a type of tax that affects the cost of imports and exports between countries. According to the United States constitution, tariffs cannot be established between states without Congress’s consent. Tariffs exist because of their ability to generate revenue while simultaneously regulating trade between foreign countries. This type of import and export regulation helps to ensure that domestic companies and goods can compete with the international market.

While there aren’t tariffs for every type of import or export between countries, tariffs tend to be put in place when a certain product or industry is deemed essential and, therefore, needs to be protected within a country. And, of course, tariffs have long been associated with politics and political influence, as well. Historically, tariffs have existed in order to prevent consumers from purchasing imported items when an equivalent is available within their own country. By doing so, countries can dramatically improve their own local economics.

Up until 1913 when the income tax was introduced in the United States, tariffs supported the government by bringing in up to 95% of all funding. Today, tariffs are raised or implemented in ongoing attempts by countries to improve trade relations or, in some cases, to put pressure on specific trading partners.

Tariff Rates in the United States

The tariff rate in the United States used to average around 25% of a product’s cost and, because of this high rate, tariffs brought in the majority of the nation’s federal revenue up until the early 1900’s. With the introduction of America’s income tax in 1913 and payroll taxes in all fifty states in the years following, tariffs became less of an essential source of income. In 1930, tariffs took a serious hit when the country retaliated after the Smoot-Hawley Tariff Act, which raised tariffs by nearly 50%. Because of this act, global trade suffered and, according to some experts, dramatically worsened the effects of the Great Depression.

As the country began to recover from the Great Depression, lower tariffs were established in order to help improve trade relations. This trend lasted for decades until, just recently, higher tariffs were introduced again in 2016, being raised from virtually nothing (duty-free) to 1.6% on all products imported. Three years after this tariff increase, the United States increased tariffs once again, averaging around 7.5% for imports since 2019.

How Are Tariffs Different Than Quotas?

While tariffs are one of the main ways that countries can regulate trade and impact the economy, quotas can have a similar impact. Unlike tariffs, which set import and export fees for certain products, quotas set a limit for how many goods can be imported into a country. These quotas work to restrict foreign trade and ensure domestic producers have an opportunity to compete, but without raising rates on imports when they are allowed into the country.