What Do Trade Tariffs Actually Mean?

Updated March 2025

The topic of tariffs, trade wars and protectionism has come back into the spotlight after Donald Trump recently announced a 25% tariff on imports from Canada and Mexico, and a 10% tariff on imports from China.

This move has sent the markets spiralling, with the S&P500 down around 4% at the time of writing.

This ‘America-first’ mentality might seem positive, but the reality means re-negotiating decade-long deals that the US holds with other countries. In the UK, the government is still working through its post-Brexit trade policies, even many years later.

But what do tariffs really mean, and how do they affect businesses, consumers and political relationships?

What are Trade Tariffs and What do They Mean?

A tariff is a type of tax that is applied to goods that are imported from another country. This tax is also known as ‘customs duty’ and is applied to any item moved from one country to another.

Tariffs exist for a number of reasons. Firstly, they help build and define trade agreements between countries. Secondly, they incentivise businesses within their economy to source goods locally where possible, in order to avoid these taxes.

Lastly, tariffs help generate revenue for the government – as with other tax types.

The newly announced Trump tariffs, which target Canada, China, Mexico and the EU, have caused many to think about the pros and cons of protectionism over free trade.

The Effects of Protectionism

Protectionism is the concept of taxing foreign imports in order to protect a country’s domestic industries.

Whilst protectionism and its policies aim to ‘protect’ the country in question by supporting local businesses that are otherwise competing against foreign importers, these policies can actually have an adverse effect.

In the example of the Trump administration, the problem with an ‘America-first’ policy is that it can lead to:

• Higher costs of imports for businesses that rely on products from abroad.
• Supply chain problems for those that have relied on certain agreements for long periods of time.
• Complicated new trade deal agreements, which could take a lot of man power to push through.
• Reciprocal tariffs, where countries also charge high amounts – reducing demand for US products.

The Benefits of Free Trade Economies

The problem with protectionism is that countries around the world will continue to look inwards, impacting global trade. Many economists argue that free trade agreements are actually a better route to economic prosperity, as they allow people to have access to more products in more markets.

As with most things, when you widen access to products, you increase competition, drive quality upwards and give people better choice around affordability.

If we look at the UK for example, it has secured a number of trade agreements since leaving the EU, but whether these are any better remains to be seen.

Also, given the EU is still one of the UK’s biggest trade partners, it’s hard to tell whether the post-Brexit trade strategy has actually worked.

How Do Tariffs Actually Work?

Tariffs are a type of tax that are paid on imported goods. They are set by the government and enforced by customs authorities when they arrive at a country’s borders.

The tariffs for imports are paid to HM Revenue & Customs (HMRC) in the UK.

Typically, these taxes are paid by the consumers or businesses that import the product, not the country who has sent them over.

So how does this work in practice?

Well, say the UK has a 10% tariff on imports from The US but 5% on imports from Canada.

UK companies that import products from the US will pay an extra 10%, whereas they will only pay 5% on those coming in from Canada. What this means in practice is that a UK business might choose to work with Canadian businesses to reduce this tax, potentially impacting sales in America.

It’s worth noting that just because one country charges a percentage on another, does not mean it’s reciprocal. For example it’s entirely possible for UK businesses to pay 10% of US imports, but US businesses to only pay 5% on UK imports.

This is where trade agreements come into play.

How Do Businesses Respond To Tariffs?

When tariffs go up, businesses can respond in a number of ways.

For example, they can increase the costs of their products to account for this rise. This usually hurts consumers as it drives up inflation.

Alternatively, they can look to trade with countries that have lower import duties. In more extreme cases, they may lobby the government to change trade agreements, in order to prevent hurting the economy.

The Different Types Of Tariffs

When it comes to tariffs, there are 4 main types. These are:

Specific tariffs: Charged per unit, ie 1 tonne of wheat = £20.

Ad valorem: A percentage of the product’s value i.e 25% of the cost of an electronic device.

Compound tariffs: A combination of the above, so a percentage per unit plus a percentage of the product price.

Tariff-rate quota: Allowing a certain amount (a quota) of items in at a lower price, before raising it.

Tariffs For Trade Wars

Tariffs can also be used as political tactics. In fact, Trump’s latest tariff rises are believed to be just that – targeting countries like Canada, China and Mexico.

For example, if Donald Trump places a 25% tariff on imported goods from these countries, it disincentivises American businesses and consumers from buying them. This hurts them economically, giving the US the upper hand.

According to Reuters, this move by Trump could impact nearly $2.2 trillion in annual trade.

What Are Customs Arrangements?

Customs arrangements, often referred to as a customs ‘union,’ are arrangements between countries in a group.

In the case of the European Union (EU), the union agrees that countries inside the EU do not have to pay tariffs on importing and exporting products.

This encourages better trade between them, whilst also imposing a level of protectionism.

One of the major impacts of Brexit was that the UK left this union, and had to start agreeing tariffs on a case by case basis.

What Are The Downsides Of A Customs Union?

Whilst the EU’s customs arrangement may have the potential to save businesses both time and money, there are strong arguments against it.

Countries in the EU for example, that are part of the Customs Union, are not free to negotiate their own trade deals and relationships with countries outside of the EU. These deals are decided as a collective, with rules for global trade applying to every EU country.

This could work for some countries, but may impact the economic growth of those with valuable industries that they may have otherwise levied.

How Tariffs Impact The Global Economy

Tariffs play a huge part in both economics and politics. In the case of Trump, we can see how these policies have been used as leverage on the political stage, threatening to impact country’s economies.

In other cases, tariffs can be a great way to encourage trade between partners. But one thing is clear – with Trump at the helm we will all be waiting to see how global markets react to these new policies.