What is a Protective Tariff?

Published by Thomas Herold in Economics, Laws & Regulations, Trading

'Protective Tariff' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A protective tariff is a choice by a national government to create a financial barrier or tax on the imports of one or more nation’s imports into the country. In many cases, such tariffs are not intended to raise additional national revenue as much as they are to artificially increase the prices of said imports. This helps to protect the sales and production of domestic goods and services so that they will continue to be manufactured and sold successfully in the host nation. Some critics argue that these types of tariffs are a real threat to free trade. Others argue that they provide two important benefits.

The first benefit is to trap domestic spending within the national economy rather than bleed it out to a foreign competing company and country. The second benefit lies in stopping cheap imports from crushing local business and industry. The import of oranges is a classic example of such a protective tariff. Not every place is able to grow citrus. South American countries are ideally situated and acclimated to grow huge amounts of citrus fruits to export.

While a nation may produce its own oranges but might instead simply import them from South American countries at a cheaper price than growing them internally, they could decide to apply a protective tariff to the price of foreign oranges and other citrus produce. Such a tariff is guaranteed to raise the price of the potentially imported oranges in order to level the playing field for domestic citrus producers. The tariff will make sure that these foreign oranges are similar to or more expensive than the prices of the locally grown variants.

Such a protective tariff proves to be a true tax on goods which a country chooses to import. These taxes make the prices of the foreign imports higher than the prices for typically more expensive goods and services. A piece or cloth might cost $5 in the United States and similarly $5 in Great Britain. If the American government wanted to encourage domestically-produced cloth over British manufactured cloth, they would need to set up a tariff on British cloth so that the cost was higher than locally produced cloth. They might add a $1 per piece tariff to the British cloth with a 20 percent rate. The ultimate goal of such a protective tariff is to protect the native industry from its foreign competition.

The very first American to suggest utilizing these protective tariffs to encourage American industrializing proved to be founding father and Treasury Secretary Alexander Hamilton. He wrote the important “Report on Manufacturers” to further this agenda. Hamilton believed that imposing a tariff on textile imports would help American industrial efforts to build up manufacturing facilities in order to one day compete effectively with the dominant in the world British companies.

Following the War of 1812, inexpensive British products began to flood the American markets. This undercut and even threatened to destroy the young industries in the U.S. Congress complied with Hamilton’s wishes and established tariffs in 1816 so that they could deter British goods from dominating in the country. They followed this up with another tariff in 1824. The much debated Tariff of Abominations of 1828 culminated these early efforts. It was President John Quincy Adams who approved the final Tariff of Abominations following the majority vote approval of the House of Representatives.

The goal of this 1828 tariff actually lay in protecting both Western and Northern agricultural products from foreign competitors. The setting of this kicked off a national debate regarding how constitutional it was to slap tariffs on foreign imports unless the goal was to raise revenues from duties. Included in the case in question were molasses, iron, flax, distilled spirits, and various other completed goods.

Critics of these policies claim that tariffs are unethical. They argue that the expenses involved with shipping would be the only equitable cost to add on to a final good’s price. Applying such protective tariffs threatens fair and free trade they correctly claim.

Free Download (No Signup Required) - The 100 Most Important Financial Terms You Should Know!
This practical financial dictionary helps you understand and comprehend the 100 most important financial terms.

The term 'Protective Tariff' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.