Tariff policies tax goods and services to protect domestic industries or punish countries. Free trade agreements and zones can counter negative effects. Harmonized tariffs are used, and sanctions may be imposed.
A tariff policy is a strategy of taxing goods and services imported or exported from one country to another. These taxes often seek to protect national industries or punish countries for policies related or unrelated to the economy. Seen by friendlier countries as a barrier to production and positive interaction, some countries have created exceptions to their tariff policies known as free trade agreements or free trade zones.
The main objective of a tariff policy is to protect a domestic industry from a comparable foreign import which would otherwise be available at a much cheaper price. For example, if a country is trying to increase its automobile production by allowing cheaper vehicles of similar quality, it would stall industrial development. Therefore, a tariff policy can be implemented as a way to give the nascent domestic industry a chance.
A tariff policy can be directed at a particular product or, to a lesser extent, at certain countries. A country may seek to impose economic sanctions on another country as a punitive measure, for example. The goal is to use economic pressures to encourage reform and change. In some cases, a tariff may be retaliatory for countering a tariff imposed by the other country.
Most tariff policies establish a harmonized tariff, which means that if products meet certain criteria, they are coded in a certain way. This allows importers to fully understand what taxes they face upon entering a country, based on the products they are carrying. Also, many countries follow a similar standard when it comes to product classification, which makes it easier to find the program and code for harmonized tariffs.
Free trade agreements can be signed to help counter some of the negative effects of tariff policy on some countries, especially those in a neighboring geographic region. Two of the best known are the North American Free Trade Agreement (NAFTA) and the European Union (EU) framework. NAFTA includes the United States, Canada and Mexico. The EU, which includes many countries on the European continent, is more than just a free trade agreement, but functions in ways very similar to one. These agreements can limit or completely eliminate taxes that would otherwise be imposed by a tariff policy.
A free trade zone is similar to a free trade agreement and tariff policy is often not enforced within such zones. They are different from free trade agreements because they do not cover entire countries, only specific areas. Typically, these areas are border towns and cities that may depend on each other for trade. Import and export duties in such areas could be excessively burdensome for local economies.
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