Tariffs are the most common type of trade barrier; indeed, one of the objectives of the WTO is to allow member countries to negotiate mutual tariff reductions. A tariff is a tax imposed on the import or export of goods. In general terms, however, a tariff refers to the "import duties" charged at the time of importation of goods. Tariffs have three main functions: to serve as a source of revenue, to protect domestic industries, and to remedy trade distortions (punitive function). Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay The Effect of Tariffs The most basic effect of an import duty is to raise domestic prices in the country imposing the tariff. In “small countries” (defined for us as countries with no influence on international prices), the increase in the domestic price is equivalent to the amount of the customs duty. In “large countries” (those that have an impact on international prices), prices increase a little less than the amount of customs duties because part of the customs duties translates into a reduction in international prices. A price increase induced by customs duties creates a gap. between prices in importing and exporting countries. This in turn leads to an increase in supply (production) in the importing country, while demand (consumption) decreases, which is the essence of the “industrial protection” function of customs duties. Obviously, a customs duty also generates revenue for the government of the importing country (revenue function). Tariffs therefore benefit the government and producers of the importing country in the form of tax revenue at the expense of its consumers in the form of higher prices. Since tariffs result in different benefits and costs for different groups, the net cost to the importing country is "consumer cost minus producer profits minus government revenue." This is equivalent to the sum of the “loss of efficiency” caused by distortions in the price system and the “benefits from improved terms of trade” brought by a reduction in international prices. Thus, for “small countries” which see no improvement in their terms of trade situation because their customs duties have no influence on international prices, the benefits of a customs duty will necessarily be negative. However, for "big countries" who can hope for an improvement in the terms of trade because part of the customs duties will lead to a reduction in international prices, the pros and cons are not so easy to weigh. Economists sometimes refer to "optimal tariffs" low enough that terms of trade improvements exceed costs, thereby maximizing economic welfare. Keep in mind: this is just a sample. Get a personalized article from our expert writers now. Get a Personalized TrialThe degree of protection afforded by a tariff (the effective rate of protection) is not equal to the tariff rate. The first reason is the potential influence of an improvement in the terms of trade. The second reason is that the effective rate of protection differs depending on the stage of the production process to which the duty is applied (duties on spare parts or duties on finished products). it therefore emphasizes that even a relatively low duty rate can function adequately as a means of protecting domestic industry.