Tariffs, a tax on imports, have historically been used to support domestic industries and are primarily imposed for two reasons: to protect domestic industries by raising the cost of imported goods, and/or to generate revenue for the government. However, they can often also result in reduced trade, higher prices, and retaliation.
What is a tariff?
Tariffs are taxes on imported goods, paid by the importing business to its government and have been in place in the United States since 1789. They can be used to generate revenue, protect domestic industries, or counter unfair trade practices.
Although there are export tariffs they are generally rare. In the United States for example, export tariffs are not permitted as the Constitution forbids them.
Who uses tariffs?
Developing countries often impose higher tariffs than wealthy countries to protect their industries and generate government revenue. The United States, for example, shifted from high tariffs to income taxes as its primary revenue source in the 1930s.
Almost every country imposes some tariffs. For example, Bermuda has one of the highest weighted tariff at over 23% whereas the United States has one of the lowest rates globally at about 1.5%.
What are the goals of tariffs?
Tariffs are primarily used to protect domestic industries by increasing import costs and encouraging consumers to buy local products.
It’s important to note that certain tariffs are implemented with the specific purpose of countering particular actions taken by foreign countries or companies, while others pertain to national security.
Certain strategic industries, particularly those involving goods with military applications, tariffs may be implemented to safeguard a nation’s self-sufficiency in critical products and reduce dependence on trade.
Other tariffs stem from the concept of economic competitiveness which is often intertwined with the use of tariffs. Some proponents of tariffs see them as a crucial tool for shaping and strengthening a nation’s economy. It has been argued that tariffs can serve as an effective tool for decreasing trade deficit and encouraging the return of manufacturing jobs.
Who pays?
While importers initially pay tariffs to their government, economic research suggests that these costs are largely passed on to consumers. This means that the final burden of tariffs often falls on the individuals who purchase the imported goods.
While tariffs can generate government revenue and protect domestic industries, it’s important to acknowledge their potential downsides for exporters. To maintain market share, exporters may be forced to lower prices, potentially impacting their profitability.
Alternatively, if they choose not to adjust prices, their products may become less competitive due to the relative price increase caused by tariffs, leading to decreased sales.
Both scenarios—price cuts and maintaining prices—can negatively affect profits and potentially harm the exporting country’s economy.
If you need help understanding the impact of tariffs on your business or need assistance reviewing your procedures or classifications, schedule a no-charge consultation with one of our experts today.
Kristine Kelleher is a Trade Compliance Consultant for Export Solutions -- a full-service consulting firm specializing in U.S. import and export regulations.