A tariff is basically a tax that a government puts on goods that are brought into (imported) or sent out of (exported) a country. The main reason for having tariffs is to make foreign products more expensive so that people are more likely to buy products made locally. Tariffs are a key part of how countries manage trade with one another.
Types of Tariffs
Ad Valorem Tariff : This is a percentage-based tax on the value of a product.
Example : If a car worth ₹10 lakhs is imported and the tariff is 10%, the tax will be ₹1 lakh.
Specific Tariff : A fixed amount is charged per unit, regardless of the product’s value.
Example : ₹500 is charged for each smartphone imported.
Compound Tariff : A mix of both – part percentage, part fixed fee.
Example : 5% of the product’s value plus ₹200 per item.
Why Do Governments Use Tariffs?
- To Protect Local Businesses: Making imports costlier encourages people to buy from domestic producers.
- To Raise Revenue: Especially in developing countries, tariffs are an important source of government income.
- To Reduce Trade Deficits: By discouraging too many imports, countries try to balance their trade.
- To Push Back Politically: Sometimes tariffs are used as a response to unfair trade practices or as a negotiation tactic.
What Are the Impacts of Tariffs?
Positive:
- Helps domestic industries grow by cutting down foreign competition.
- Protects jobs in local manufacturing sectors.
- Promotes self-reliance and local production.
Negative:
- Prices go up for consumers since imports become expensive.
- Can lead to trade wars, which hurt both sides.
- If local businesses get too comfortable without competition, they might become inefficient.
Global Impact – Especially on India
- Effect on Global Trade Mood When the U.S. imposes tariffs, other countries often retaliate. This disrupts supply chains and increases uncertainty in global markets. Investors often pull money out of riskier markets like India and move it to safer places like U.S. government bonds or gold.
Result: Foreign investors pull out (FPI outflows), causing Indian stock markets to weaken.
- Impact on Indian Industries Export-heavy sectors like IT, textiles, and auto parts may suffer due to reduced global demand.
Rising prices of raw materials like steel and electronics (due to tariffs) can hurt profit margins.
Result: Stock prices in affected sectors may fall.
- Currency & Inflation Effects Tariff tensions often strengthen the U.S. dollar and weaken the Indian rupee.
A weaker rupee makes imports more expensive, increasing inflation in India.
To control inflation, the RBI may raise interest rates—bad news for stock markets.
- Effect on Commodities Slower global growth due to trade tensions can reduce demand for oil, metals, etc.
India, as an oil importer, benefits if oil becomes cheaper.
But low global demand also hurts Indian exporters, especially in IT and pharma.
- Investor Confidence Trade tensions make investors nervous.
Volatility increases, trading volumes drop, and stock indices like Sensex and Nifty may decline.
People may also delay or reduce investments in IPOs or new businesses.
