TARIFF FAQs

Authored by Andrea Ewart

Q: What is a tariff?

A: A tariff is a tax that a government or territory imposes on a product that is being imported.

Q. Who pays the tariff?

A: The business or person importing the product – the importer – pays the tariff. The importer usually passes the cost of the tariff unto consumers. Typically, the lower the tariff, the lower the cost of the product to the consumer.

Q: What is the function of tariffs?

A: A tariff is an instrument or tool of a country’s trade policy. Governments use tariffs to achieve different policy goals.

1. Raise Revenue: Taxing goods as they enter the country is an easy way to raise revenue for the national budget. Importers are a captive audience because they need to pay the duty or tariff in order to get their goods. In 1912, the United States average duty rate was 20% and the revenue raised from the tariffs contributed almost one-third of its budget. While this is no longer the case for the U.S. and most developed countries, many developing economies continue to rely on tariffs as a primary source of revenue.

• Protect Domestic Industry from Competition: Tariffs may be used primarily to make imported goods more expensive, and therefore less appealing, than the alternative(s) available locally. Some countries are notorious for using high tariffs to protect their domestic industries. The Trump Administration has increased the duties on imported aluminum, iron, and steel products from specified countries in order to deter their imports and increase reliance on US producers.

• Health & Safety:Alcohol and tobacco products attract the highest tariffs in general. Countries typically use a combination of tariffs and sales taxes (imposed when the product is bought) to deter consumption of these products, while also raising revenue. Countries also rely on other trade policy tools, such as requiring that a product be licensed to enter the country, to address health and safety concerns. These requirements, if unreasonable, can act as non-tariff barriers (NTBs) to trade.

Q: Do tariffs work?

A: It depends. Tariffs can be an effective instrument of trade policy. Like any tool, though, it must be properly used. As beneficiaries of the Caribbean Basin Economic Recovery Act (CBERA) trade preference program, the products of most Caribbean countries currently enjoy duty-free access to the US market. CBERA and similar programs exist because of a deliberate policy by developed countries to unilaterally grant tariff-free access to their markets to support economic growth in the beneficiary countries. While many US products entering Caribbean countries still have to pay a tariff, the region’s dependence on US imports means that the U.S. enjoys a very healthy trade surplus with most Caribbean countries. Caribbean countries import much more, in goods and services, from the U.S. than they export to the U.S. Consequently, the US policy of granting duty-free access for Caribbean products has not harmed its economy.

The recently announced “Liberation Day Tariffs” would impose base-line tariffs of 10% on products entering the U.S. from all countries, including from the Caribbean. This change is intended to remove the duty-free access granted by CBERA. If U.S. importers have to pay the 10% tariffs on imported Caribbean goods, these costs will be passed onto U.S. consumers. Exports from the region will decrease, undermining the original policy. Decreased exports will result in decreased revenue for Caribbean countries, which will in turn reduce their ability to buy goods and services from the U.S.