Tax professionals: Tariffs 101
Frequently asked questions about tariffs, insight from trade professionals on the current U.S. tariff landscape, and more.
Tariffs, a critical part of international trade, have helped shape economies and have been the cause of many disputes over the years. We’ll dive into the details of what tariffs are, their purpose, and who pays for them. We’ll also discuss the current tariff landscape in the U.S., including recent trade tensions, and how to communicate the impacts of tariffs to clients and stakeholders.
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What is a tariff?
A tariff is a tax paid by the importer imposed by a government on goods and services imported from other countries. Tariffs can be used to protect domestic industries against foreign competition, raise revenue for governments, or address trade imbalances. Tariffs, especially during the early stages industrialization, were a shield to protect emerging domestic industries and allow them to mature, compete on a worldwide scale. Tariffs achieved this by reducing a country’s dependence on imported goods, and by helping to maintain its self-sufficiency. Tariffs are also a tool to protect national security, especially those that are vital to a country’s infrastructure and defense. Recently, tariffs have been used by the Trump administration
in the U.S. both as a return to protectionary strategy, and as a threat to other governments to try to drive other policies, even policy that is not always related to trade and commerce. What is an ad valorem tariff?Anad valorem is a common type of tariff which is calculated as a percent of the value imported goods. Ad valorem is different from a specific tariff which is a fixed amount for each unit of the product. This type of tariff can affect the price of goods more significantly as the value of the goods increases. What is the difference between a tariff and an embargo? A tariff and an embargo are both trade restrictions. However, they work differently and have different effects. An embargo is an outright or partial ban of trade with a particular country or specific goods. It is a more severe trade restriction than a tariff.
Duty or tariff?
The term “duty” refers to any tax, fee, or charge imposed on imports or exports of goods. Tariffs are one type of duty, but other taxes and fees can also be included, including excise taxes
and
customs taxes as well as
value added taxes (VATs)
for imported goods. Tariffs can be used to increase the cost of imported goods and make them less competitive with domestically produced goods. Tariffs can be used to protect domestic industries and jobs by increasing the cost of imported goods. This measure is intended to encourage consumers and businesses to buy domestically produced steel, thereby supporting local jobs and industries. Additional uses of tariffs include: Revenue generation: Tariffs generate revenue for the government, which can be used for various public services and infrastructure projects.Job protection: By making imported goods more expensive, tariffs can help preserve jobs in domestic industries that might otherwise be outcompeted by cheaper foreign products.
National security:
Tariffs can be used to protect industries that are crucial for national security, such as defense.Encouraging domestic production:
Higher costs for imported goods can incentivize consumers and businesses to buy domestically produced products, potentially boosting local economies.
- What are retaliatory tariffs?Retaliatory tariffs are taxes imposed by one country in response to tariffs or other trade restrictions imposed by another country. Tariffs are often used to punish countries for unfair trade practices, or to force them to change their policies. In 2018, the U.S. imposed tariffs on Chinese goods for the first time, prompting China to respond with its own tariffs, affecting industries ranging from agriculture to technology. Recent announcements by the Trump administration have imposed aggressive and broad taxes on major U.S. trading partner countries like Canada and Mexico and industries that are heavily globalized, such as automotive and high tech. Tariffs are paid by the importers. The financial burden doesn’t end there. Tariffs often cause importers to pass on higher costs to consumers. Imported goods can become more expensive to the average consumer if their prices rise.
- Tariffs can also affect producers. Small and medium-sized businesses may choose to absorb the costs rather than burdening consumers. This can erode their margins. Tariffs on raw materials, for example, can have a significant effect on manufacturers. Tariffs can increase the cost of raw materials like steel, aluminum or chemicals, which in turn increases production costs. This can erode their competitiveness, both domestically and internationally.
- To counter these challenges, businesses can pursue tariff exemptions or reductions through official channels. This multifaceted process may involve lobbying, filing for specific exemptions, or engaging in trade negotiations.
- What are the current U.S. tariffs?The
U.S. The tariff landscape
reflects the United States strategic economic interests as well as its relationships with the global trade community. Since 2018, the U.S. implemented significant tariffs on imports from China under Section 301 of Trade Act of 1974 and on steel and aluminium under Section 232 of Trade Expansion Act of 1961. This strategy has increased significantly in scope and intensity since the beginning of the second Trump administration.
About 94% of U.S. merchandise imports
by value are industrial (non-agricultural) goods. The U.S. maintains an average trade-weighted import tariff rate of 2 percent on industrial goods.
The future tariffsThe U.S. tariff landscape is rapidly changing under Trump’s second administration. In a recent
Thomson Reuters & SupplyChainBrain Webinar,
Marianne rowden CEO and Director of E-Merchants Trade Council said: “Tariffs will not only be a trade issue any more; they are the instrument that the president will use to exert leverage over other nations for a variety of issues.”
Following up on her comment,
Andre This is not a unilateral situation. It adds an additional level of complexity. How to communicate the impact of Tariffs to Clients Tax Professionals play a vital role in helping clients understand the impact that tariffs have on their business and financial planning. Here are some ways to effectively communicate the importance of tariffs with clients, internal stakeholders and corporate leadership.
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1. Explain the direct financial impactIncreased costs: Highlight how tariffs can increase the cost of imported goods, which can directly affect the client’s bottom line. Price adjustments
: Discuss how these increased costs might be passed on to consumers, potentially affecting sales and market competitiveness. 2. Discuss the indirect economic effects
Supply chain disruptions
: Explain how tariffs can disrupt supply chains, leading to delays and increased operational costs. 3. Highlight fiscal policy and government revenueFiscal Impact
: Explain how government spending and tax policies can be affected by tariffs, which could have an indirect impact on their business.–4. Provide practical adviceTax planning and risk management
: Offer
tax planning strategies to mitigate the financial impact of tariffs, such as optimizing inventory management and exploring tax credits or deductions.
5. Stay informed and communicate regularly
- Keep clients updated: Keep clients informed about changes in tariff policies and their potential impacts.
- By clearly communicating the financial, operational, and strategic implications of tariffs, tax professionals can help their clients make informed decisions and navigate the changing realities of international trade. For more information, read our blog collection on tariffs.
