How can tariffs impact trade balance?

The correct answer highlights that tariffs can make imports more expensive. When a government imposes tariffs, it adds extra costs to imported goods. This results in higher prices for consumers and businesses that rely on those imports. As imported goods become pricier, consumers may shift their purchasing decisions towards domestically produced items that are relatively cheaper. This shift can lead to an increase in domestic production and consumption, which may improve the trade balance by reducing the trade deficit or potentially creating a trade surplus.

Tariffs do not eliminate imports entirely; rather, they make them less competitive compared to local products, meaning that importing will still occur but potentially at lower volumes. Reducing the cost of domestic goods is not directly a function of tariffs, as tariffs raise the cost of imports, and foreign investments are more influenced by factors such as market potential, labor costs, and regulatory environments rather than tariffs alone.