International trade is a driver of the global economy.
Companies based in different countries trade with each other, exchanging goods and services across borders and continents. It facilitates economic growth, enables specialisation and greater competition, which delivers benefits for consumers.
Bearing this in mind, it seems contradictory that governments might look to place barriers to trade in certain sectors. Trade tariffs are a controversial area and are always a key part of any discussion between countries looking to sign trade agreements.
But what are trade tariffs, how do they work and why are they applied?
What is a trade tariff?
A trade tariff, sometimes known as a customs duty, is a tax or fee imposed by a government on goods and services that are imported or exported. It is, in effect, a trade barrier that has been introduced to regulate international trade. They are applied for a variety of reasons including revenue generation for the government, correcting trade imbalances and protecting domestic industries.
Governments may also impose tariffs for strategic reasons, using them as a bargaining chip in negotiations with countries. Trade tariffs may sometimes be applied on a ‘tit for tat’ basis in a trade dispute.
Trade tariffs are controversial, with their role and ability to deliver the desired results hotly debated.
Types of trade tariff
There are a range of tariffs that can be applied to imported and exported goods. The choice of tariff will usually reflect the reasons for the tariff and the intended results of its application.
- Ad Valorem
These tariffs are levied as a percentage of the overall value of the imported goods. For instance, a 10% tariff would mean that 10 per cent of an item’s value would need to be paid as a tariff.
- Specific Tariffs
A specific tariff is levied as a fixed amount per unit rather than being based on the value of the goods. A tariff might be charged at a set amount per kilogram, meaning that two items with different values but of the same weight would be charged the same.
- Compound Tariffs
Compound tariffs combine both ad valorem and specific charges, so the overall amount would reflect both a fixed amount per unit and the item’s value.
Tariff quotas set a maximum quantity of specific goods that can be imported at a lower or zero tariff rate. Any imports above that tariff level will face higher tariff rates. These are used to strike a balance between a desire to protect domestic industries and to provide access to particular goods.
- Preferential Tariffs
Preferential tariffs are applied to goods which originate in a country with which the destination country has a preferential tariff agreement. These are at a reduced level from the usual tariff to help promote trade and economic cooperation.
What is an example of a trade tariff?
Most countries apply trade tariffs to the import of cars and other vehicles. This is to protect domestic car production and to achieve certain carbon emission reduction goals. The UK imposes a specific tariff on imported cars based on their value and carbon dioxide (CO2) emissions. The removal or reduction of vehicle tariffs often plays a key part in any free trade agreement negotiations between a country or group of countries.
Are trade tariffs good or bad?
The role of trade tariffs is hotly debated by economists and policymakers. Trade tariffs can fluctuate over time, often reflecting domestic political priorities. Some countries retain significant trade barriers, particularly where they have a key domestic industry they’re keen to protect.
Others lean more towards tariff-free global trade. Advocates for trade tariffs will argue that they protect key sectors of the economy and guarantee local jobs. They may form a key part of the national budget while being a way to address unfair trade practices such as subsidies for certain industries that make goods from competitor countries non-competitive.
Arguments against trade barriers focus on their potential to enhance trade, drive competition, and encourage economic growth.
Tariff-free trade can help to foster greater choice and prosperity with consumers better able to access the goods and services that they need. They force companies to innovate and specialise while being a catalyst for building strong international trading relationships.
Trade Tariff Reductions at Freeport Liverpool
Freeports provide access to duty suspension, duty exemption on re-exports and flexibility on how duty is calculated.
SSO International Forwarding will play a key role in facilitating greater trade and economic growth at the Liverpool City Region Freeport.
Our comprehensive range of import and export services makes it easy for you to move into new markets and grow your business.
Contact us to find out more.