A tariff is a customs duty charged on imported goods. Trade barriers are the wider group of measures that restrict trade between countries: tariffs, plus non-tariff barriers such as quotas, embargoes, subsidies and technical regulations. Governments use them to protect domestic industry or raise revenue, and businesses pay for them through higher costs and, at times, retaliation from other countries.
This guide explains how tariffs are calculated, the main types of trade barriers and their effects on trade.
What are tariffs?
The WTO defines tariffs as customs duties on merchandise imports. A tariff raises the price of imported goods, which protects domestic producers from foreign competition, and it brings in revenue for the government. Countries also use tariffs to correct trade imbalances or for national security reasons.
Tariffs are charged in two main ways:
- An ad valorem tariff is a percentage of the value of the goods.
- A specific tariff is a fixed amount per unit, for example per kilogram or per item.
The WTO page also separates bound rates, the maximum a member has committed to in its WTO schedule, from applied rates, the rates actually charged at the border.
How the tariff on a product is decided
A country’s tariff schedule sets a rate for each tariff line, and each line is a product code. National tariffs are built on the six-digit Harmonized System (HS) and add their own digits beyond that: eight digits in India’s customs tariff and the EU Combined Nomenclature, and ten in the US HTS, where the duty rate is set at eight digits and the last two are statistical. To know the duty on a product, you first have to classify it correctly. A wrong code means the wrong duty, and if customs disagrees with the code later, the importer may owe the difference plus penalties.
Because each country adds its own digits and rates, the same product can pay very different duties in different markets. Our article on country-specific tariff variations works through this, and the legal anatomy of HS classification explains how the code itself is determined. The classification errors that most often lead to wrong duty are listed in common HS classification mistakes.
Types of trade barriers
Trade barriers restrict or obstruct the free movement of goods and services between countries. They fall into two broad groups: tariff barriers and non-tariff barriers.
Tariff barriers
Tariffs make imported goods more expensive and so less competitive against domestic products. That price effect is what makes a tariff a barrier.
Non-tariff barriers
Non-tariff barriers are policies or regulations that restrict trade by means other than a duty. The main types are:
- Quotas, which limit the quantity of a product that can be imported.
- Embargoes, which prohibit trade with a particular country.
- Subsidies, which give financial support to domestic producers and so an advantage over foreign competitors.
- Technical barriers to trade: technical regulations, product standards and conformity assessment procedures that imported goods must meet before they can be sold. The WTO’s Agreement on Technical Barriers to Trade aims to keep these measures non-discriminatory and to stop them creating unnecessary obstacles to trade.
The effects of tariffs and trade barriers
Tariffs and trade barriers can shield domestic industries from international competition, which can preserve jobs and support economic growth at home. The cost falls on consumers and on businesses that use imported goods, because they pay higher prices. The economic case for open trade, from comparative advantage onwards, is set out in our article on international trade theory.
Barriers also invite retaliation. If Country A raises tariffs on goods from Country B, Country B may answer with tariffs on goods from Country A. A trade war can follow, and it can harm the world economy well beyond the two countries involved.