What are trade tariffs and how can they affect your business?

Over the past few months, we’ve heard a lot in the news about the possibility of trade tariffs, especially in relation to the tariffs imposed by the current US administration.

But what exactly is a trade tariff? What do they do? And how could high trade tariffs affect your ability to export to certain countries and territories?

What is a trade tariff?

A trade tariff is a tax that’s levied on imported goods when they pass through a country’s customs border. This mandatory tax is paid at the border, with the amount you pay determined by global classification codes for specific products and goods.

Paying the tariff increases the cost of exporting goods to this territory. Imposing the tariff discourages foreign enterprises from importing goods into the country and supports domestic businesses in making and selling the same goods locally.

What’s the impact when trade tariffs are imposed?

Imposing trade tariffs can have several significant impacts for foreign entities and businesses that trade internationally:

Reduced export demand: Foreign countries and overseas businesses can experience a sharp drop in their market share as their goods become artificially expensive due to the trade tariffs. This forces businesses to reduce their exports to this country and consider other, more profitable, territories.

Increased costs: Importers bear the direct financial burden at the border, facing higher ‘landed costs’ and administrative complexities. This can significantly reduce the importer’s profit margins and efficiency of their supply chain.

Retaliatory trade cycles: Tariffs often trigger tit-for-tat responses from foreign governments. This creates a cycle of trade barriers that leads to the market becoming more volatile and operational costs becoming less predictable – creating uncertainty for all parties involved.

How could high trade tariffs affect your business?

Economically, trade tariffs increase your cost of goods sold (COGS), by adding a tax cost whenever you export your goods into this particular territory.

With trade tariffs possibly playing a role, it pays to scenario-plan all potential outcomes, so you’re fully prepared for the potential impact.