Tariffs have become more common as governments look for ways to protect their economies and gain leverage over others. So, what are they and how do they work?
Want to buy a shiny new electric vehicle from one of China’s car companies? That’s going to cost you, dear European.
Tariffs are nothing new, but they are back with a vengeance.
US President Donald Trump’s second term is doubling down on the trade wars he started in his first. Following up worldwide tariffs on steel and aluminium, as well as Chinese goods and certain ones from Canada and Mexico, Trump announced substantial global tariffs in a White House address this week.
With stock markets plunging on the news, economists, investors and global leaders are still digesting what they mean.
Trumps “Liberation Day” announcement includes a flat 10% tariff against all imports not already hit with existing ones. Dozens of countries will face additional, tailor-made tariffs. The European Union faces a gross import levy of 20%.
The EU was swift to condemn Trump’s move. Speaking to MEPs in Strasbourg before the details became clear, European Commission President Ursula von der Leyen said if it is necessary, “we have a strong plan to retaliate and we will use it.”
That includes potentially targeting US services, which unlike goods enjoy a trade surplus.
The EU, however, is not only a target of tariffs, but an executor of them. In an effort to protect its single market and help a lagging automotive industry, tariffs against Chinese EV manufacturers have been in place since late last year.
The EV duties vary by company, based on how much Chinese state aid the EU assesses each one has received. To get around them, some Chinese companies have started setting up shop inside the bloc. Tariff supporters have praised the shift as evidence that they work.
What are tariffs and how do they work?
Whereas taxes are part of everyday life — the additional sum, like VAT, is added at the point of purchase — tariffs take place at the place of import.
“It’s a tax that you are introducing at the border,” Luisa Santos, deputy director general at BusinessEurope, a confederation of European businesses, told The Parliament.
As ever, the EU is quirky when applying tariffs. It is the bloc’s “exclusive competence on trade policy,” she said, which means tariffs are not applied by member states but instead negotiated by the EU on their behalf.
“If there is a common external tariff of the EU, that applies to all EU member states,” Santos added.
Why are tariffs implemented?
The World Trade Organization (WTO), founded in Geneva in 1995, oversees tariff policies at the global level. If one of the organisation’s 166 member countries creates a tariff or makes a change to a tariff, it must justify it to the WTO. It is also designed to be the final arbiter of trade disputes.
“The aim of the tariff is to make foreign goods more expensive so that domestic producers can become more competitive,” Varg Folkman, a policy analyst at the European Policy Centre, told The Parliament.
What constitutes fair and unfair competition, and thus the use of tariffs to level the playing field, is subjective. When tariffs are used “as an aggressive thing, like for instance in trade wars,” Folkman said, they can be coercive or pressure others to create more favourable trade policy.
Read the full piece on The Parliament here.
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