The most common way to protect one’s economy from import competition is to implement a tariff structure i.e. a tax on imports. In generally, a tariff is any tax or fee collected by a Government of the importing nation. Sometimes the term “tariff” is used in a non-trade context, however, the term is much more commonly used to refer to a tax on imported goods.

Tariffs are worth defining early in an international trade course since changes in tariffs represent the primary way in which countries either liberalize trade or protect their economies. It isn’t the only way, though, since countries also implement subsidies, quotas, and other types of regulations that can affect trade flows between the countries.

When people talk about trade liberalization, they generally mean reducing the tariffs on imported goods, thereby allowing the products to enter at lower cost. Since lowering the cost of trade makes it more profitable, it will make trade freer. A complete elimination of tariffs and other barriers to trade is what economists and others mean, by free trade. In contrast, any increase in tariffs is referred to as protection, or protectionism. Because tariffs raise the cost of importing products from abroad but not from domestic firms, they have the effect of protecting the domestic firms that compete with imported products.

Governments generally impose tariffs to raise revenue and protect domestic industries from foreign competition caused by factors like government subsidies, or lower priced goods and services.