International Tariffs: Laws, Rules, And Regulations Explained

International tariffs are a type of trade barrier imposed by countries to increase the price of imported goods and services, thereby influencing trade, raising revenues, or protecting competitive advantages. In the US, Congress has the power to set tariffs, but under specific laws, such as the Trade Expansion Act of 1962, the President can also impose tariffs, particularly in cases involving national security or economic emergencies. Tariffs have been used for centuries, and while their role in international trade has declined in modern times due to the emergence of organisations like the World Trade Organization, they continue to be a favoured policy tool, sparking debate over their impact and effectiveness.

The authority to impose tariffs

In 1962, President Kennedy signed the Trade Expansion Act into law, which allows the President to adjust tariffs based on threats to national security. Under Section 232 of this Act, President Trump imposed tariffs on steel and aluminium imports in 2018. This section allows the President to implement these tariffs without Congressional approval, following an investigation by the Department of Commerce.

Despite this delegation of power to the Executive Branch, Congress has, in recent years, attempted to regain some of its authority over tariffs. There have been bipartisan efforts in Congress to pass legislation that would limit the President's ability to impose tariffs under Section 232, with some members of Congress aiming to require Congressional approval for these tariffs.

In other countries, such as the United Kingdom, HM Revenue & Customs (HMRC) is responsible for collecting tariffs on imports.

Tariffs as a source of government revenue

Tariffs have historically been a primary source of government revenue, but their role has diminished over time. In the US, tariffs have not been a significant source of revenue since the early 1900s, when the federal income tax replaced them as a critical component of tax collection. Today, individual and corporate income taxes, as well as social insurance and retirement payroll taxes, make up the majority of federal revenue. Tariffs currently account for only a small fraction of US government revenue, with President Trump's tariffs on nearly $300 billion of US imports increasing tariff revenue from 1% to 2% of federal tax revenue.

Tariffs are a type of trade barrier, typically in the form of taxes or duties, imposed on imported goods. They are paid by domestic consumers and increase the relative price of imported products compared to domestic ones. While tariffs may benefit certain domestic industries by reducing competition, they are generally considered harmful to economic growth and detrimental to all players in the long run.

Despite their limited contribution to overall revenue, tariffs remain an important tool for governments to protect against unfair trade practices and promote strategic industries. They can also be used as a retaliatory measure when a trading partner is perceived to have broken the rules or acted against foreign policy objectives. However, the use of broad tariffs as a major revenue source is unlikely to be effective in a modern global economy. Such tariffs would negatively impact the macroeconomy, reduce efficiency in domestic production, and likely lead to deep economic distortions that favour the wealthy while harming low- and middle-income households.

The potential drawbacks of relying on tariffs as a major revenue source include increased inflation, reduced efficiency in domestic production, higher unemployment, and greater inequality. Additionally, broad tariffs would place a disproportionate burden on lower-income households, as they spend a larger share of their income on consumption goods that are subject to tariffs. As a result, the use of tariffs as a significant or sole source of revenue is unlikely to be a viable option for governments.

Tariffs as a protectionist measure

Tariffs are a type of trade barrier that countries impose to raise the price of imported products compared to domestic ones. They are a common form of protectionist measure, which aims to advantage local producers and raise revenue for governments.

Protectionism is an economic policy that restricts imports from other countries through methods such as tariffs, quotas, and other regulations. It is often advocated by parties that hold economic nationalist positions, while economically liberal parties generally support free trade.

In the United States, protectionism has been a significant aspect of its trade policy since its inception. Alexander Hamilton, the first Secretary of the Treasury, supported tariffs as a way to protect "infant industries" and promote domestic manufacturing. This policy was particularly prevalent in the 19th century, with the Tariff Act of 1789 being the second bill signed by President George Washington, imposing a 5% tariff on all imports.

The use of tariffs as a protectionist measure continued into the late 19th and early 20th centuries, with the Tariff Act of 1930, also known as the Smoot-Hawley Tariff, which raised tariffs on over 20,000 imported goods. While this act was intended to protect American jobs and farmers, it ultimately led to retaliatory tariffs from other countries and contributed to a significant reduction in American exports and imports during the Great Depression.

While protectionist measures can provide benefits such as growth opportunities for local industries and higher employment rates, there are also disadvantages. These include the stagnation of technological advancements due to a lack of competition, limited choices for consumers, and economic isolation.

Overall, while tariffs can be used as a tool to protect domestic industries and raise government revenue, they can also have negative consequences for international trade and economic growth.

The impact of tariffs

Tariffs are a type of trade barrier imposed by countries to increase the price of imported products relative to domestic ones. They are typically imposed for protectionist or revenue-raising purposes. While tariffs may benefit a few domestic sectors, economists agree that free trade policies in a global market are ideal.

Impact on Consumers

Tariffs are paid by domestic consumers, and they have the effect of raising the relative prices of imported products. Consumers tend to lose out with tariffs as they are left with fewer choices and higher prices.

Impact on Domestic Industries

Tariffs are often created to protect domestic industries and employment. However, studies show that overall, tariffs are detrimental as they impede economic growth and negatively impact all players. Tariffs can also make domestic industries less efficient and innovative by reducing competition.

Impact on Trade

Tariffs can lead to a reduction in trade volume as higher prices reduce demand for imported goods. This can result in a decline in worldwide exports. Tariffs can also lead to retaliatory tariffs by other countries, escalating into a trade war where neither country benefits.

Impact on Government Revenue

Tariffs can increase government revenue as they are a form of tax on imports. However, the revenue-raising role of tariffs has declined over time, particularly in wealthier countries.

Impact on International Relations

Tariffs can be used as an extension of foreign policy to exert political leverage or economic pressure on another country. However, this can create tensions and issues between governments.

The unintended consequences of tariffs

Tariffs are a type of trade barrier imposed by countries to increase the relative price of imported goods and services, aiming to advantage domestic producers and raise revenue. While tariffs can benefit some domestic sectors, they can also have unintended consequences, such as those outlined below:

Industrial Dispersion

The imposition of tariffs on one country can lead to the spread of industrialization to other nearby nations. For example, when the US imposed tariffs on Chinese products in 2018, businesses relocated to Vietnam, resulting in the region's economic growth and a surge in exports to the US.

Inflation

Tariffs raise the cost of imported goods, increasing the overall price level and causing inflation. A 60% tariff on Chinese imports and a 10% tariff on all other imports by the US could lead to a 0.9% spike in inflation, with higher prices for consumers and reduced purchasing power.

Impact on FX Markets

Tariffs can strengthen the domestic currency as they slow global growth more severely than the domestic economy. Other countries may respond by devaluing their currencies to offset the impact of higher tariffs, which can harm domestic exporters as their products become more expensive for foreign buyers.

Supply Chain Disruptions

Tariffs can lead to supply chain disruptions, particularly when the affected country is a major supplier of critical components or raw materials. This can cause production delays or shortages of certain goods, affecting businesses and consumers.

Labor Shortages

Tariffs that target specific industries or countries can lead to labor shortages in those sectors, as higher costs and reduced demand may force companies to lay off workers.

Negative Impact on Economic Growth

While tariffs can provide a short-term boost to government revenues, they can also impede long-term economic growth. Higher tariffs result in lower economic growth, with consumer spending, investment, and business health suffering due to increased uncertainty and higher input costs.

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