Navigating international trade tariffs

The unpredictability of the US tariff policy continues to prove difficult to navigate, with sudden tariff hikes, pauses, and threats of escalation disrupting supply chains, increasing costs, and complicating long-term planning for multinational companies.

It is therefore vital for businesses to understand how tariffs work, what rules apply, and how to navigate the challenges where possible.

What are tariffs?

Tariffs, also known as customs duties or import duties, are taxes imposed by governments or, in the EU, the European Commission, on goods entering a country or customs union.

Governments may use tariffs for several reasons, including to protect local industries from foreign competition; to support the creation, or maintenance, of local jobs; to raise state revenue; and to correct trade imbalances.

What are the different types of tariffs?

There are a number of different types of tariffs used across the world.

‘Ad valorem’ tariffs

These are the most common type of tariffs. They are expressed as a percentage of the value of the imported good. Their protective value remains constant regardless of an increase or decrease in the value of the imported good in question.

For example, a 5% tariff on imported cars. If a car is valued at £20,000, the tariff would be £1,000. 

Specfic tariffs

These are levied as a fixed fee per unit of an imported good, regardless of its value. These tariffs are simple to calculate and administer, but their protective effect diminishes as the price of the good increases.

An example may be a tariff of £10 per imported bicycle, regardless of whether the bicycle is a budget model or a high-end racing bike.

Compound tariffs

These tariffs combine aspects of both specific and ad valorem tariffs. These tariffs can be used to provide a minimum level of protection (specific tariff), while also capturing a share of the value of higher-priced goods (ad valorem).

For example, a tariff of £0.50 per kilogram plus 3% of the value on imported cheese.

Tariff-rate quotas

A quota-based tariff system permits a specific quantity of a particular prouduct to be imported at a lower (or zero) tariff rate, with imports that exceed the quota taxed a higher tariff rate.

For example, 10,000 tonnes of sugar can be imported at a 1% tariff, but any sugar imported above 10,000 tons is taxed at a 50% tariff.

Who pays tariffs and how are they collected?

Tariffs are levied on importers – typically domestic businesses such as wholesalers, retailers, or distributors bringing goods into the country. While the importer pays the tariff at the border, the cost is often passed along the supply chain, meaning that consumers often bear the ultimate burden.

The customs authority of the importing country collects the tariff. In the UK, this is HM Revenue & Customs (HMRC). In the EU, it is the customs authority of each member state, noting that 75% of collected duties are destined to the EU budget.

How are tariffs regulated under World Trade Organisation rules?

The World Trade Organisation (WTO) is an international organisation concerned with the regulation of international trade. It has 166 members that account for around 98% of world trade. The WTO members’ obligations are set out in various agreements, including the General Agreement on Tariffs and Trade (GATT) 1947 and the GATT 1997, which also contain procedures for resolving disputes between WTO members.

WTO member are bound by schedules of tariffs that were primarily negotiated during multiple comprehensive GATT negotiation rounds. Newer members have negotiated their schedules during accession negotiations. Member schedules list, line by line, the maximum tariff rates (or bindings/bound tariff rates) that a member has agreed not to exceed for each product. There are processes in place for the renegotiation of tariffs as set out in member schedules that would normally involve reciprocal concessions.

WTO members may apply lower tariffs in practice, known as “applied tariffs”, but they are prohibited from exceeding the bound rates. If a WTO member wishes to raise a bound tariff rate, it must engage in multilateral negotiations with other WTO members, typically offering compensatory concessions. This principle ensures predictability and stability in international trade by locking in tariff commitments and encouraging a gradual reduction in trade barriers over time.

Article VI of the GATT allows WTO members to raise tariffs beyond bound tariff rates when applying trade remedies.

Under the most-favoured-nation (MFN) principle set out in Article I of the GATT 1994, any advantage – such as a lower applied tariff rate than the bound rate – granted to one WTO member must be extended unconditionally to all other members. This ensures equal and non-discriminatory treatment among trading partners. Accordingly, the lowest applied tariff offered to any WTO member becomes the MFN tariff applicable to all.

WTO members can apply tariffs that are lower than MFN tariffs in certain circumstances. First, WTO members are permitted to form customs unions, such as the EU, or enter into free trade agreements (such as the US-Mexico-Canada Agreement). These preferential arrangements are allowed provided they cover “substantially all the trade” between the parties and do not result in higher barriers to trade with non-parties. Second, WTO members may grant developing countries preferential, non-reciprocal tariff treatment. This allows developed countries to unilaterally lower tariffs on imports from developing countries without extending the same treatment to all WTO members. These preferences may be conditioned on certain non-tariff commitments, such as adherence to labour or environmental standards.

Do any exceptions apply to the WTO rules?

Article XX of the GATT provides a set of general exceptions that allow WTO members to adopt measures which would otherwise be inconsistent with their WTO obligations, provided certain conditions are met. These exceptions, among others, include measures necessary to protect public morals; to safeguard human, animal, or plant life or health; and measures relating to the conservation of exhaustible natural resources.

Article XXI of the GATT addresses national security exceptions. It permits WTO members to take measures that deviate from WTO rules where necessary to protect their essential security interests. However, the scope of this provision has long been debated, particularly regarding the extent of discretion it affords members. For instance, the US invoked Article XXI to justify tariffs on imports of steel and aluminium, citing national security concerns – an action that many other WTO members viewed as economically protectionist rather than security-related.

WTO members and ‘trade remedies’

Article VI of the GATT allows for WTO members to impose so-called trade remedies. Trade remedies usually take the form of an additional duty placed on imports of specific products, in order to protect domestic industries against injury caused by unfair trade practices or unforeseen surges in imports.

There are different types of trade remedies covered under the WTO agreements, for instance, anti-dumping measures. These involve imposing additional duties on imports that are “dumped” by a WTO member. A product is considered dumped if it is exported at a price lower than its normal value – typically the price in the exporter’s domestic market. If that price is unavailable or inappropriate, the normal value may be determined based on the price in a suitable third-country market or the cost of production plus a reasonable profit. Before anti-dumping duties can be imposed, the importing WTO member must conduct an investigation to show that dumping is taking place, calculate the extent or “margin” of dumping, and demonstrate that the dumping is causing or threatening to cause material injury to the domestic industry. The additional duties imposed must not exceed the dumping margin.

Anti-subsidy, or countervailing, measures address imports that benefit from subsidies granted by foreign governments. The Agreement on Subsidies and Countervailing Measures (SCM Agreement) (44-page / 230KB PDF) regulates the types of subsidies WTO members may provide and the remedial actions available to other members. Where a domestic industry is harmed by subsidised imports, the affected WTO member may impose countervailing duties to offset the adverse effects of the subsidy. The SCM Agreement contains detailed rules regarding the imposition of countervailing measures, including on the initiation and conduct of investgations, the imposition of provisional and final measures, the use of undertakings and the duration of countervailing measures.

Safeguards are emergency actions taken to protect a domestic industry from an unforeseen surge in imports. Under the Agreement on Safeguards, a WTO member may impose safeguards – typically in the form of increased tariffs – if it can demonstrate that the increased imports are causing or threatening to cause serious injury to the domestic industry. Safeguard measures may only be imposed following an investigation conducted by the importing WTO member. They must be applied on a MFN-basis – to the imported product irrespective of its country of origin. Safeguard measures must be limited to what is necessary to prevent or remedy serious injury and to help the affected industry to adjust. In principle, safeguard measures may not last longer than four years, although an extension of up to eight years is permitted in limited circumstances.

Why is the US tariff policy controversial?

A central point of contention is that many of the tariffs imposed by the US appear to breach WTO obligations, particularly the MFN principle and bound tariff commitments. For example, the US has imposed tariffs on over 60 countries, including India and China, citing national security grounds. However, experts argue that these measures are inconsistent with WTO rules and that the national security justification is being applied arbitrarily.

The Trump administration has used tariffs not just as economic instruments but as tools of political leverage. This approach has led to critics arguing that it erodes trust in the rules-based global trading order.

Dealing with the current uncertainty created by US tariff policy

To navigate this uncertainty, businesses should consider diversifying supply chains and reducing dependency on suppliers located in regions heavily affected by US tariffs. Building relationships with alternative suppliers across different countries or regions can help mitigate risk and enhance resilience.

Businesses may also want to review and/or renegotiate contracts. Since importers are typically responsible for paying tariffs, businesses in this position should assess whether their contracts allow for the recovery of such costs. This may include activating price adjustment mechanisms that enable importers to pass tariff-related expenses on to exporters. Contracts should also be reviewed for the presence of “change in law” provisions, which might entitle the importer to renegotiate pricing if tariff increases qualify as governmental action covered by such provision. Additionally, termination clauses and any minimum purchase or exclusivity obligations should be carefully examined to determine whether the importer has flexibility to source goods from alternative suppliers in response to the impacts of tariffs.

Additionally, businesses should consider holding additional inventory of tariff-sensitive or high-priority goods to buffer against potential supply-chain disruptions caused by sudden tariff changes.

It is also important to monitor trade developments. Businesses should stay informed about ongoing trade negotiations and developments and keep aware of potential policy shifts to allow for proactive planning and risk mitigation.