International trade is one of the foundations of the world economy. Countries that do not have access to certain natural resources or those that are inefficient at producing certain goods can trade with foreign countries to import the resources and goods that they need. Import taxes (tariffs) are financial charges governments impose on goods purchased from other countries.
Function
Like any other tax, import taxes function as a way for governments to raise money to fund their operations and programs. Import taxes amount to sales taxes on the price of goods purchased from abroad. For instance, if a foreign country sells shirts for $10, but the US imposes a 10 percent import tax on shirts, the price of importing shirts from the foreign country will be $11. A government might raise import taxes to increase tax revenue or to discourage importation.
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Effects
The primary impact of import taxes is that they make imports relatively more expensive for domestic consumers. When imports become more expensive, consumers will demand fewer imports and will likely demand more domestic goods. From the perspective of exporters, import taxes are a barrier to trade that can make it difficult to compete with domestic producers. For instance, if exporters in China faced a 20 percent import tax when trading with the US, Chinese goods would have to be significantly cheaper than those offered by US producers to remain competitive.
Potential
Import taxation has the potential to protect domestic industries from international competition. For example, if manufacturers in Brazil produce shirts at a cost of $15, while manufacturers in China produce shirts for $10, the people of Brazil might decide to import all of their shirts from China. This would drive Brazilian shirt factories out of business. If, however, Brazil imposed a 60 percent import tax, shirts from China would cost $16 and consumers would continue to buy $15 Brazilian-made shirts.
Considerations
The trade balance of a nation is the difference between its exports and imports. If a country exports more than it imports, it is called a "net exporter." If it imports more than it exports it is called a "net importer." When a country imposes import taxes the country will tend to shift toward being a net exporter, because demand for imports will fall.