What Is a Tariff in Trade? A Clear Guide for the Modern Business

According to the International Monetary Fund, Trump’s tariffs threaten to slow global GDP by up to 0.5% in 2025. This makes it more important than ever for businesses to understand how tariffs work and how they impact trade.

In this guide, we’ll explain what tariffs are, how they reshape international trade dynamics, and provide practical strategies to help your business navigate these increasingly common barriers to trade.

Contact clearBorder today for expert guidance on the latest tariff requirements.

What are Tariffs?

Tariffs are taxes that countries impose on imported goods. Tariff rates can vary significantly depending on the product and importing country. Tariffs also come in several forms:

• Ad valorem tariffs (percentage of product value)
• Specific tariffs (fixed amount per unit)
• Mixed tariffs (combining both approaches)
• Compound tariffs (multiple layers of duties)

Bound tariffs represent the maximum rate a WTO member can legally apply, while applied tariffs are the actual rates in effect and are often lower than bound rates.

When governments implement tariffs, it’s the customs authorities who collect these duties at ports of entry. Customs duties serve as the practical mechanism for tariff collection, creating a predictable framework for cross-border trade.

Uncertain about customs requirements? Contact clearBorder for customs compliance consultation.

Why do Governments Impose Tariffs?

Imposing tariffs is about more than just generating revenue, as governments impose tariffs for several strategic reasons. Historically tariffs were a primary source of government income, but today they serve multiple economic and political purposes.

One of the main reasons governments impose tariffs is to protect domestic industries. For example, the UK’s post-Brexit tariff regime places higher duties on certain agricultural products to discourage the consumption of foreign products and protect British farmers from foreign competition. Tariffs also support domestic production by creating price advantages for local manufacturers.

Many countries also impose tariffs on foreign goods for national security reasons. For example, the UK places tariffs on steel imports to maintain strategic industrial capacity. 

Additionally, governments use tariffs to address trade imbalances, imposing higher duties on goods from countries with significant trade surpluses. For example, President Donald Trump’s recent tariffs are meant to address US trade imbalances in the world economy.

The Economic Impact of Tariffs

Impact on Domestic Consumers

Tariffs are meant to address unfair competition, but oftentimes, tariffs tend to increase prices for domestic consumers. For example, when the UK implemented post-Brexit tariffs on certain EU goods, British consumers faced higher costs for imported wine, cheese, and other European products.

Impact on Domestic Industries

By placing tariffs on foreign goods, governments can give domestic industries a competitive advantage, stimulate domestic production, and increase government revenue.

While tariffs are designed to protect domestic industries, these same tariffs can also hamper overall economic growth by increasing production costs. This is because domestic producers are also reliant on components and raw materials from other countries. For example, UK manufacturers using foreign steel or aluminium components saw production costs rise following President Donald Trump’s tariffs, squeezing profit margins and competitiveness.

In addition, by putting up trade barriers to protect domestic industries, domestic producers have less motivation to compete and increase their efficiency.

Global Tariff Governance

The World Trade Organization (WTO) forms the cornerstone of global tariff regulation, establishing rules that govern how its 164 member countries implement trade policies. The WTO provides the legal framework for tariff negotiations, trade deals, and dispute resolution.

WTO member countries must fulfil WTO commitments, including the principle of Most Favoured Nation. Implemented after World War II, this principle ensures that tariff benefits offered to one trading partner are extended to all WTO members. Countries must also commit to “bound tariffs”, which are ceiling tariff rates they cannot exceed without compensating affected trading partners.

Customs unions, like the European Union, also govern tariffs. For example, the EU eliminates tariffs between member states while establishing common tariffs for non-member countries.

Free trade agreements (FTAs) also play an important role in global tariff governance and the world economy. FTAs are preferential tariff arrangements between signatories. For example, the UK-Japan Comprehensive Economic Partnership Agreement eliminates tariffs on 99% of British exports to Japan, creating significant advantages for UK businesses operating in these markets.

Trade Policy as a Political Tool

Beyond economic objectives, tariffs frequently serve as powerful political instruments in international relations. Trade wars, escalating cycles of retaliatory tariffs, demonstrate how quickly tariffs can also become political tools or weapons.

Trump’s tariff policies from 2018 to 2020 provide a compelling case study. By imposing 25% tariffs on steel and 10% on aluminium imports, citing national security concerns, the US triggered immediate retaliatory measures from the EU, Canada, and Mexico. These counter-tariffs strategically targeted politically sensitive US products like bourbon, motorcycles, and agricultural goods.

Tariffs also function as leverage during negotiations. For example, South Korea has agreed to revise its trade agreement with the US to avoid Trump’s more recent tariffs.

For UK businesses, this adds another layer of complexity to international trade, as tariff landscapes can shift rapidly based on diplomatic relations rather than purely economic factors.

Navigating Tariff Measures for Business Success

When tariffs become the norm in the world economy, international traders must develop proactive strategies to navigate trade barriers and mitigate their impact.

First, businesses should conduct thorough tariff assessments to identify potential costs across their supply chains. This allows businesses to make better sourcing decisions and diversify their supply chain to minimise exposure to tariffs.

Understanding precise tariff classifications is also crucial. Even slight differences in product categorisation can result in different duty rates. Traders should regularly review classification codes to ensure customs compliance and optimise tariff positioning.

Free trade agreements can also provide relief from tariffs. For example, UK exporters can utilise the UK-EU Trade and Cooperation Agreement to maintain tariff-free access to European markets, if they meet origin requirements. This free trade agreement can make up for the limited access to the US economy.

Partnering with trade specialists like clearBorder is also essential. Through tailored consultation and training, clearBorder provides expert guidance on tariff classification, supply chain diversification, and customs procedures. By working with trade consultants with extensive experience in global trade, businesses can maintain their operations and grow their business, even during challenging times.

Contact clearBorder today to ensure tariff compliance and reduce trade barrier risks.