A tariff is a tax imposed by governments on imported goods and services
On Wednesday, US President Donald Trump introduced sweeping tariffs targeting key economic partners, escalating global trade tensions. The new tariffs include a 34% tax on China, a 20% levy on the European Union, and a 26% “discounted reciprocal tariff” on India. The affected industries range from automobiles and dairy to steel and electronics.
Trump’s trade battles are not new. During his first term, he aggressively targeted China with tariffs, leading to retaliatory measures on US exports. His tariff threats also played a key role in renegotiating the US-Mexico-Canada Agreement (USMCA) in 2020.
What are tariffs?
A tariff is a tax that a government places on imported goods and services. When products cross borders, the importing business must pay this tax to its home country’s government. Tariffs are typically calculated as a percentage of an item’s value, known as an ad valorem tariff.
Why are tariffs imposed?
Governments use tariffs for several reasons:
- Protect domestic industries: By making imports more expensive, tariffs encourage consumers to buy locally-made products, shielding domestic businesses from foreign competition.
- Generate government revenue: In some countries, tariffs provide a major source of income, especially where other taxation options are limited.
- Address trade imbalances: Tariffs can reduce trade deficits by discouraging imports and promoting exports.
Types of tariffs
- Ad valorem tariffs: Charged as a percentage of the product’s value.
- Specific tariffs: Charged as a fixed amount per unit, regardless of its value.
- Compound tariffs: A combination of ad valorem and specific tariffs on the same product.
Who pays for tariffs?
Although importers are responsible for paying tariffs, the cost is usually passed down to consumers.
- Businesses may absorb some costs, reducing their profits.
- Consumers often pay higher prices for goods.
- In some cases, exporters lower their prices to stay competitive.
- Companies may relocate production to avoid tariffs.
- Importers can request exemptions if no alternative suppliers exist.
How does the US collect and enforce tariffs?
The US Customs and Border Protection (CBP) enforces tariffs at 330 ports of entry, including borders, seaports, and airports. While the Treasury Department sets regulations, CBP manages collection, audits, and penalties.
How it works:
- Imported goods receive numeric codes under the International Harmonized System, determining the tariff rate.
- Businesses pay tariffs when clearing customs, with funds going to the Treasury’s General Fund.
- Incorrect declarations—whether intentional or accidental—can lead to penalties.
Special cases:
- Re-imported US goods: If a product made in the US is not altered abroad, it returns duty-free.
- Manufactured goods: If US gold is sent to India for jewelry making, the final product is taxed upon re-entry, including the gold’s value.
Trump has now imposed a 26% reciprocal tariff on Indian goods.
What are reciprocal tariffs?
A reciprocal tariff is when a country matches the import tax that another nation imposes on its goods.
For example, if Country A charges a 10% tariff on imports from Country B, then Country B can respond by charging the same 10% tariff on goods from Country A. The goal is to ensure fair trade between nations.
However, some countries adjust tariffs based on trade deficits rather than simply matching rates. The US, for instance, has considered higher tariffs on nations with large trade surpluses, aiming to correct what it sees as unfair trade practices.