What Is a Tariff?

What is a tariff?

A tariff is a duty levied on imports of goods into a country. The rate—expressed as a percentage of the value of the product—typically depends on two things:

1. The country of origin  
2. The type of product being imported  

Tariffs are usually intended to protect domestic industries by leveling the playing field between domestic and foreign producers by offsetting real or perceived cost advantages, such as lower labor or production costs, differing environmental standards, or foreign government subsidies.

How do tariffs work?

Governments impose tariffs as a tool for trade policy. Other countries often introduce their own tariffs in response.

The US government has recently introduced a broad range of tariff measures that vary in scope and impact depending on the origin of the goods, the industries involved, and specific compliance with provisions or certain US trade agreements. Further, in the US, specific types of tariffs are administered by different federal agencies, each grounded in distinct legal authorities and policy objectives.

Who pays for tariffs?

The “importer of record” pays the tariff when the goods enter the country. From there, the cost often gets passed along the supply chain, ultimately impacting businesses or consumers, depending on market dynamics. For example, even if a product contains components from several countries, its entire value can be subject to tariffs that are incurred by the country where final assembly is done.

How do tariffs impact international trade?

Tariffs alter the pricing dynamics of international trade. For example, they could raise the cost of imported goods, encouraging consumers and businesses to look for domestic alternatives. This may support certain domestic industries, but it can also contribute to higher prices for consumers and businesses, with second-order impacts on the economy and business confidence. Retaliatory actions from other countries may create a more complex environment for exporters and multinational companies to navigate. A collective escalation of trade barriers can also place a strain on the rules and norms of the global trading system.

How is your business impacted by tariffs versus your competitors?

Tariff impacts are not uniform. Tariffs vary in product and geographic scope as well as duration and tariff level. Domestic producers pay no tariffs at all. Companies have different supply chains, cost bases, and degrees of latitude to mitigate and pass through tariff costs. As a result, a given business could be more—or less—exposed than its competitors. This means that leadership needs to evaluate its exposure strategically, rather than just looking at its own business, as all competitors are not always affected equally. Businesses that act early to assess and respond often gain a competitive edge, especially if others are waiting it out, or are relatively disadvantaged.

How can my company prepare for the impact of tariffs?

Elevated use of tariffs is likely to continue for the foreseeable future, accompanied by shifts in trade dynamics among major global economies. Business should act now to understand the developing situation and its impact. Engaging in scenario planning, developing mitigation strategies, and identifying low-risk, high-value actions can help businesses stay ahead in an increasingly uncertain environment—especially as a return to the era of rapid globalization appears unlikely in the near term.