What Are Tariffs? What Businesses Need to Know

Tariffs are a hot topic these days, in business and politics. Some business leaders welcome the idea of tariffs, saying these measures will help them compete against imports from countries. Others fear that tariffs will raise the cost of the finished goods, components, and raw materials they import.

This article will help explain the ins and outs of tariffs, how they work in practice, and what companies and countries stand to gain and lose from them.

What Are Tariffs?

Tariffs are a type of tax that a country levies on certain classes of imported goods, making them more expensive (all else being equal) for domestic buyers—and thus harder for foreign companies to sell those goods in that country. Tariffs can serve myriad uses, such as protecting domestic companies and industries, punishing another country for unfair trade practices, raising revenue, and exerting negotiating leverage.

Key Takeaways

• Tariffs are an import duty levied on raw materials, finished goods, or services imported from outside a country’s borders.
• Countries implement tariffs for a number of reasons, both economic and political.
• Tariffs can protect domestic industries from foreign competition and, potentially, unfair trade practices.
• Tariffs can also lead to inflation, retaliatory measures from trading partners, and potentially economic decline as companies may lose access to lucrative global markets.
• Tariffs are typically calculated as a percentage of the value of the imported goods.
• Trade regulations are complex, and many companies struggle to comply with them.
• Global trade management is a discipline that can help companies navigate the complexities of international trade, often with the help of sophisticated software.

Tariffs Explained

A country typically charges tariffs on a particular category of goods to protect domestic industries, especially those considered vital to the national interest. A country might also levy tariffs to retaliate against what it deems to be unfair trade practices by foreign governments that subsidize their domestic industries and companies.

While tariffs can raise the prices that domestic consumers must pay, the expectation is that more domestic companies will increase their market share—once foreign competitors have been put at a disadvantage. Some domestic industries long insulated from foreign competition can become less innovative as a result. Countries charging tariffs can also use the incremental revenue to pay for government services for which they would otherwise have to borrow funds or raise taxes on citizens.

While tariffs can be an effective means of combating unfair trade practices, they often result in higher domestic prices and can lead to retaliatory tariffs.

Why Are Tariffs Important? Why Are They Used?

Tariffs are important because of the impact they have on international trade, domestic and foreign companies, consumers, and the economy. Countries use tariffs for various reasons, typically to:

• Protect domestic industries. Industries such as manufacturing are often global, and companies typically build their plants wherever labor is cheapest. One reason a country might implement tariffs is to make domestically manufactured goods relatively cheaper and incentivize companies worldwide to set up manufacturing operations, and create manufacturing jobs, in that country.
• Bolster national security. Certain industries, such as defense, high technology, and agriculture, can be considered critical to a country’s national security, and tariffs are sometimes used to protect those industries.
• Reduce foreign competition. When the cost of imported goods goes up due to tariffs, domestic producers gain a price advantage, making it more likely that consumers will buy their goods over the imported version.
• Use as a negotiation tool. Tariffs can be used to extract economic or political concessions from a trading partner. For example, countries can use the threat of tariffs to achieve positive results with border security measures and intellectual property protection.
• Protect infant industries. Governments often want to give an advantage to important emerging industries, especially if the host country is in a race with other nations.
• Reduce trade deficit. A trade deficit is when a country imports more products from another country than it exports to that country. Countries can use tariffs to discourage domestic consumers and companies from buying imported products and raw materials, thus reducing the value of imports relative to exports.
• Raise revenues. The money collected from tariffs goes directly into government coffers, making it an easy way to raise money to pay down debt or invest in domestic programs without increasing income or other taxes.

How Do Tariffs Work?

Tariffs are usually implemented by regulation in the issuing country. Once the regulation is implemented, government agencies communicate the new requirements to all agencies responsible for border crossings, revenue, and enforcement.

Tariffs are typically charged at the point of entry into the host country—for example, at airports, road and train crossings, and ports. Companies importing the goods usually must pay the tariff, which can prompt them to raise the prices of the goods.

What Are the Effects of Tariffs?

Although tariffs may offer short-term benefits, they also come with long-term tradeoffs that can negatively affect domestic businesses and consumers, as well as a country’s economic efficiency, innovation, and relations with other countries. Potential negative consequences of tariffs include:

• Inflation. Tariffs on imports, especially raw materials such as lumber and oil, drive up the price of manufacturing domestic goods. The manufacturers then pass those costs along, in the form of higher prices, to the consumers who buy those finished goods.
• Entrenched protectionism for domestic industries. Countries that have historically subsidized certain sectors can face stiff public resistance if they try to pull back on their protectionist policies. For example, both India and the EU saw strikes and protests in 2024 response to proposed changes in agricultural policy.
• Retaliation from other countries. When a country imposes tariffs on its trading partners, those partners typically impose tariffs of their own in retaliation. This cycle of trade restrictions can escalate, leading to long-standing trade wars and geopolitical tensions.
• Economic slowdown and recession. Trade wars also tend to have a negative impact on economic growth as prices rise, consumer purchasing power declines, trading partners retaliate, and injured companies lay off workers. An analysis by Moody's Analytics estimated that, in 2019, 300,000 American jobs were either lost or not created due to the US trade war with China, with the biggest impacts in the manufacturing, warehousing, distribution, and retail sectors.
• Inefficiency and shortages. Domestic producers that benefit from tariff protection may have less incentive to improve their efficiency, which can lead to reduced output and higher prices. For example, India is considering reducing its tariffs on solar energy components because it can’t source enough components domestically and must rely on imports to make up for the shortfall.
• Reduction in product quality. Companies protected from foreign competitors by high import tariffs can lose their innovative edge.
• Global supply chain disruptions. Companies that rely on imports of goods and materials subjected to tariffs must reconfigure their supply chains to depend less on suppliers of those goods. It can be difficult to find new suppliers, leading to disruptions and shortages of certain items.

Who Is Impacted by Tariffs?

As a consequence of the effects outlined above, tariffs can have an impact on every segment of the economy, including:

• Consumers. Domestic consumers might face higher prices, fewer choices, and/or shortages of certain items.
• Businesses. Tariffs and the resulting supply chain disruption can result in higher costs and lost revenue, both for manufacturers that import components, such as semiconductors, and for companies that import and resell foreign-made finished goods.
• Workers. Tariffs can have a positive effect on domestic employment, if the tariffs lead to more local jobs in protected industries. Unfortunately, can also result in domestic layoffs if a trade war leads to an economic recession.
• Nations. Trade wars between nations can curb economic growth and expansion, as companies in both countries face higher costs, reduced revenue, and less access to lucrative overseas markets.

Who Uses and Authorizes Tariffs?

Governments and legislative bodies use tariffs to achieve both economic and political goals.

• National governments: In most countries, national government bodies have the authority to pass tariff laws. In the United States, the US Congress authorizes tariffs, but the president has authority to enact tariffs under certain circumstances.
• Supranational organizations: The European Union passes laws that govern trade among its 27 nations, while the European Commission is responsible for negotiating trade deals. The World Trade Organization is the only global international organization dealing with the rules of trade between nations. When countries join the WTO, or when member nations negotiate trade agreements, each country commits to a bound tariff rate for a given commodity.
• Developing countries: Tariffs tend to be higher in developing countries because their domestic industries aren’t as advanced as those in the developed world, or because their governments have fewer sources of revenue to rely on.

Tariffs and Global Trade Dynamics

Tariffs and trade have traditionally focused on manufactured goods. As governments change tariff rates, renegotiate trade agreements, and sign new deals, trade regulations have become more complex and difficult for companies to navigate. For example, reports on the North American auto industry’s compliance with complicated rules-of-origin requirements under the US-Mexico-Canada Agreement show many car companies expressing frustration with the administrative burden of compliance.

A proposal for applying tariffs to digital products is under negotiation at the WTO. Digitally delivered services—which include e-commerce, online banking, telecommunications, and streaming services (e.g., Netflix)—have increased fourfold in value over the past 20 years, significantly outpacing the growth of other services and manufactured goods.

To manage all this complexity, more companies are turning to global trade management, a set of processes and practices that help them navigate the complexities of international trade. This discipline requires a nuanced understanding of international regulations, supply chain logistics, and market dynamics. Because these dynamics are so complex, and can change quickly, global trade managers often rely on software systems for support. These global change management applications are often part of supply chain management suites.

How to Mitigate the Effects of Tariffs: 8 Strategies

Global trade management can help companies mitigate the effects of tariffs on their business. Here are 8 strategies.

1. Diversify your supply chain. Casting your supplier net as widely as possible can help you find the most cost-effective and least risky ways to source the raw materials or components your company needs. Source from multiple companies, countries, and regions so that you can change suppliers quickly when necessary, with minimal disruption.
2. Explore free trade agreements. Whether sourcing or selling, look to countries with trade agreements that can provide tariff exemptions or lower rates.
3. Automate for efficiency. Automation can reduce costs. This has long been the case with mechanized production lines, but with the rise of AI, automation is taking hold in other areas of operation. For example, AI-based software that can summarize procurement negotiations or write draft RFPs can free up global trade managers for more important jobs, such as finding and procuring the best sources of materials.
4. Tap technology more broadly. Global trade management applications can help companies identify ways to save on tariffs, manage trade incentive programs, clear customs more quickly, meet regulatory requirements, and manage other cross-border trade processes more effectively (more on those capabilities below).
5. Be flexible with pricing. Sometimes, passing on the cost of tariffs to your end customers is unavoidable. However, configure-price-quote applications or subscription management can help you bundle products or services in a way that makes them more attractive to your buyers.
6. Switch to local products. The easiest way to avoid import tariffs is to buy from domestic suppliers. Diversifying your supply chain, as mentioned above, can help you make the switch quickly and smoothly.
7. Adjust your product mix. By adding services to your product (for example, adding monthly data plans to your smartphones), manufacturers can at least partially offset the cost of tariffs imposed on components.
8. Reconfigure your supply chain. Multinational companies often decide to buy from suppliers in countries not subject to tariffs (for example, they import textiles from India instead of China).

History of Tariffs

Tariffs date back to ancient times and have been used throughout the Middle Ages into the modern age. One of the most notable implementations over the last century was the Smoot–Hawley Tariff Act of 1930, a law that implemented protectionist trade policies in the United States near the start of the Great Depression. The goal was to protect American jobs and farmers from foreign competition, but the act prompted retaliatory measures from US trading partners, whose economies were also suffering. While Smoot-Hawley didn’t cause the Depression, most economists and historians agree that the act worsened its effects, shrinking American exports by 31%.

Over the past century, global trade has exploded, particularly in the aftermath of World War II and the establishment of increasingly open trade policies worldwide. As globalization increased in the 1990s and 2000s, many Western nations found that important domestic industries, such as agriculture and manufacturing, were threatened by foreign competitors, as countries with lower wages and educated workforces attracted more investment from multinational companies. As popular discontent with these upheavals has grown, countries and trading blocs have reacted by enacting protectionist laws and regulations, including tariffs.

Navigate Tariffs, Trade, and Regulations with Oracle

Oracle Global Trade Management helps companies of all sizes centrally manage the business processes related to cross-border trade, including tariffs. The applications help companies screen for tariff savings opportunities, manage trade incentive programs, and accurately estimate total landed costs, including transportation, handling fees, insurance, duties, and taxes.

Another key feature is export screening, which helps shipments clear customs more quickly and helps exporters spot regulatory compliance issues before they stop shipments in their tracks. This, in turn, helps companies reduce order-to-cash cycle times and minimize the impact on revenue.

Oracle Global Trade Management can play a key role in helping trade managers address global trade regulations. By automating compliance checks and centralizing information, the applications help to reduce the likelihood of fines and other legal issues. The applications improve visibility into supply chain disruptions and alternative sourcing options; help companies obtain trade financing, such as letters of credit; and leverage data analytics to, for example, help companies monitor exchange rates and reduce their currency risk.

Tariffs FAQs

What does tariff mean?
“Tariff” refers to a category of import duties that a country charges on goods coming from another country.

Are tariffs good or bad?
Tariffs can offer short-term benefits but they often come with long-term trade-offs such as reduced business efficiency and innovation, strained international relations, and diminished global economic growth.

Is a tariff a tax?
Yes, a tariff is a type of tax specific to international trade, namely, a tax imposed by governments on products imported from another country. Tariffs are different from an income or sales tax, which are imposed directly on citizens and domestic consumers.

What is a tariff in simple terms?
A tariff is a tax on goods imported from another country.

Who benefits from tariffs?
Governments that impose the tariffs and protected domestic companies can benefit from tariffs.

What is a tariff best defined as?
A tariff is best defined as a fee added onto goods that originate in another country, paid by the company or entity that imports the goods.