How Do Tariffs Work?

If you’ve taken any interest in foreign financial policy and international trade, the term tariff may have come across your radar. Now most people that have studied history may recognize the term because of the Boston Tea Party. The Tea Party occurred because of tariffs, you know, taxes on tea. But, how does the tariff system work today? What does it involve?

There are two definitions for a tariff that are used today. One is actually a list of rates or prices that you see when you go onto a hotel’s website and see the different prices for different kinds of rooms (one queen bed, bunk beds in Chicago, two queen beds, two double beds, whatever), that’s a tariff.  The other, and usually better known, definition involves our traditional perception, which is that of a tax levied on goods that are traveling between places.

How does the latter tariff work? Say that I’m a tea maker in the US, and I can produce a box of tea for 34 cents. I then sell my box of tea for one dollar. There’s a tea maker that is in Venezuela that can make that same box of tea for a quarter. If they were to import their tea into the United States without the tariff, they could sell that box of tea for 90 cents and end up hurting my tea-making business. So, the government may put a ten-cent tariff on each box of tea they import, forcing the importer to sell their tea for about the same price as my tea. That’s what a tariff does. The World Trade Organization (WTO) was created so that tariffs would be fair and to protect both the importers and the exporters of international goods, and that is now their main purpose.