A lot has been heard and read about tariffs in the last few months, well before President Trump returned to the presidency of the USA.
Compliance specialist, Mike Court breaks down the what, why and how of tariffs in the current context.
In this fast-changing global market, I am mindful of the fact you may be reading this and the position on tariffs may have changed, but I have included examples and facts as they are at time of writing. So, it is time to chat briefly about tariffs in international trade.
What are tariffs?
A tariff is a tax imposed by a country’s government or by a customs union such as the EU on imports or exports of goods.
Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and policy that taxes foreign products to encourage or safeguard domestic industry. Tariffs can be good when they help domestic industries, raise revenue for governments, or address unfair trade practices. However, it’s important to note that tariffs can also have a direct impact on consumers, potentially leading to an increase in prices for everyday goods. Tariffs being used in this fashion are often referred to as “protectionism” as opposed to “liberalisation”.
Tariffs can be reasonable to protect domestic industries as they can help new industries compete with foreign competitors.
What types of tariffs are there?
Here are some examples of tariffs across the globe:
Compound tariffs
A combination of specific and ad valorem (cost/value of the goods) tariffs which allows governments to protect domestic industries and generate revenue. For example, a compound tariff could be a 5% ad valorem tax plus a $20 specific fee per unit.
Preferential tariffs
These form part of a preferential trade agreement, where countries agree to charge a lower rate than the most favoured nation (MFN) rate.
Fixed percentage tariffs
The most common form of international trade tariffs is levied as a fixed percentage of the value of the imports. An example of UK tariffs can be seen when it places a specific tariff on imported butter, at £158 per 100kg. This means that if a UK-based importer imports a kilo of butter from a country without a free trade agreement with the UK, a tariff of £1.58 would be applied.
How are tariffs applied, and why?
Recently and constantly, we have heard and read about US President Donald Trump’s announcement that he will impose extra tariffs on all steel and aluminium imports to the US as he tries to reshape America’s trading relationship with the world. Of course, any increase in tariffs will adversely affect trading partners in commodities that have been subject to these extra tariffs. The protectionist measures driven by the US president are not new. In Trump’s first presidency, a trade war was conducted between not only China but also the EU trading block.
The US president says these import taxes are needed to help the US economy and to “protect” the country from illegal immigration and the flow of drugs. So, the US consumer will face increased prices on those commodities.
Any USA position change will impact their direct trading neighbours such as Canada and Mexico especially as Canada is the biggest supplier of aluminium to the US. Trump has also threatened to introduce tariffs on other products from these countries later.
Of course, if US trading partners such as China, Canada, and Mexico retaliate by levelling extra tariffs on US-made products, the global consumer will end up paying more.
What is the exposure risk for China, Canada and Mexico?
China, Mexico and Canada accounted for more than 40% of imports into the US last year, making them some of Trump’s most valuable trade partners.
Chinese products, for example, have been hit with an immediate tariff increase of 10% on all goods sent to the US, this took effect on 4 February. Furthermore, the US has stated that this is just the start of an escalating tariff policy on Chinese goods entering the US marketplace. China, as an independent trading nation, retaliated with its own increase tariffs, which took effect on 10 February. These include a 15% tariff on US coal and liquefied natural gas products and a 10% tariff on crude oil, agricultural machinery, and large-engine cars.
Canada, as the USA’s largest trading neighbour, has seen a temporary pause for 30 days from a proposed US tariff of 25% on all goods entering from Canada—which was due to begin on 4 February. Canada, in turn has paused its own retaliatory tariff of 25% on $107 bn (£86bn) of US imports. Canada is currently trying to enhance its border controls with the US to try and stop the flow of Fentanyl1, one of the reasons cited for the tariff changes.
This delay in imposing import tariffs will allow the US to see “whether or not a final economic deal with Canada” can be reached. It is important to note that these trading partners already have a trade agreement known as the USMCA (United States-Mexico-Canada Trade Agreement).
The US is proposing 25% tariffs against Mexico, which have also been delayed a month, as have Mexico’s tit-for-tat measures against US goods. Mexico’s President Claudia Sheinbaum agreed to send 10,000 members of the National Guard to the US-Mexican border to “prevent the trafficking of drugs, in particular fentanyl” something that had already been agreed between the two administrations. President Sheinbaum said the US had, in turn, agreed to increase measures to prevent the trafficking of high-powered US weapons into Mexico.
As with President Trump’s first term in office, the US is expected to apply increased tariffs on all Chinese imported goods rather than selected goods.
If the measures against goods from Mexico and Canada ultimately go ahead, a range of items are expected to become more expensive for consumers both sides of the US border.
Car manufacturing could bear the brunt of the effects of tariffs. Vehicle parts cross the US, Mexican and Canadian borders multiple times while a vehicle is assembled. Some financial analysts have suggested that the average US car price could increase by as much as $3,000 because of import taxes.
Goods from Mexico that could be affected include fruit, vegetables, spirits, and beer. Canadian goods such as steel, lumber, grains, and potatoes would also likely become more expensive for US consumers.
What is the UK’s trading position?
UK businesses exporting aluminium into the US could see a 25% increase immediately, levied on top of existing duties. This could be a ‘devastating blow’ to the UK industry. The US is the UK’s second-largest export market after the EU.
At a time of shrinking demand and high costs, rising protectionism will stifle exports to damage over £400m worth of the steel sector’s contribution to the UK’s balance of trade. The UK supplies the US with products for defence, aerospace, stainless, and other critical sectors, exporting around 200,000 tonnes annually.
A leading UK business leader is quoted as saying, “It is deeply disappointing if President Trump sees the need to target UK steel, given our relatively small production volumes compared to major steel nations,”
Existing Steel Safeguard measures partially shield the UK from the effects of trade diversion, but these expire in June 2026. The UK Carbon Border Adjustment Mechanism (CBAM), a tax measure on high-emission steel imports, will not come into force until January 2027. The introduction of further US tariffs will inevitably divert global trade flows, potentially redirecting excess steel to the UK market.
Looking forward:
Now is the time for the UK to reinforce watertight UK trade measures in 2026 to prevent import surges following the expiry of the UK’s steel safeguards. Accelerating the UK’s CBAM (Carbon Border Adjustment Mechanism) to 2026 could provide additional protection against unfairly priced steel. The UK Government must act decisively to shield our domestic industry from rising global protectionism driven by the US.
It remains unclear whether the US will cancel all or some of the previous arrangements on existing Section 232 (US Department of Commerce, Investigation on the effects of imported steel on US National Security) arrangements (25% tariffs on steel and 10% tariffs on aluminium). Certain countries like Canada and Mexico were exempted when Section 232 tariffs were first imposed in 2018. Later, the UK the EU, and Japan negotiated a tariff-rate quota system.
Until now, customers in the US could also apply for product-specific exemptions to import products not made in the US tariff-free. Any changes to these current agreements between the UK and the US could have a hugely damaging impact on the UK steel sector, both directly and via trade diversion from countries that may be barred from exporting to the US and see the UK as a receptive market.
Current global steel overcapacity means that when the US imposes tariffs on multiple countries, excess steel is forced elsewhere. Without strong trade shields, this risks a surge of unfairly priced imports, undermining UK steelmakers, distorting competition, and threatening the industry’s viability.
Want to know more? Get in touch with Mike today!
- Fentanyl is a highly potent synthetic piperidine opioid primarily used as an analgesic. It is 30 to 50 times more powerful than heroin and 50 to 100 times more potent than morphine (US Drug and Enforcement Administration); its primary clinical utility is in pain management for cancer patients and those recovering from painful surgeries. ↩︎