What is a tariff?

A tariff is best described as a tax imposed on imported goods to increase their price. This mechanism serves several purposes within international trade and economic policy. When a government levies a tariff, it raises the cost of foreign goods, making domestic products relatively more competitive in comparison. This can protect local industries from foreign competition and generate revenue for the government.

Moreover, tariffs can be utilized as a tool in trade negotiations, wherein countries implement tariffs to safeguard specific sectors of their economy or retaliate against perceived unfair trade practices by other nations. The structure of tariffs can vary, including specific tariffs (a fixed fee per unit) or ad valorem tariffs (a percentage of the good's value).

In contrast, the other options present different concepts that do not accurately define a tariff. Subsidies are financial aids to local producers, trade agreements are formal arrangements between countries to regulate trade, and financial penalties typically refer to sanctions or fines rather than a tax structure on imports. Each of these alternatives does not embody the standard economic understanding of what a tariff entails.