Everything you need to know about tariffs
The threat of tariffs mean businesses must check their exposure and figure out what’s going on in their supply chains, says Tim Sarson
I’ve decided to write an article on tariffs. I don’t do this lightly. Not only is it political, it is dominating the news agenda. So I’ll steer clear of the politics or the macroeconomic rights and wrongs, and instead give you an explainer about what they are, why they’re important and why they’re another reason to know what’s happening in your supply chain.
So what exactly are tariffs? The closest most of us come to them is when we walk through the ’nothing to declare’ channel at an airport. Those officials with their dogs are not just looking for contraband – they are also there to collect customs duty, also known as ‘tariffs’.
Customs duties are a form of tax collected when goods move across a border. They are probably the world’s oldest form of taxation. You find them in texts from ancient Mesopotamia onwards, paid at the gate to a city or village and administered by the original middleman, the customs broker. They’ve been around so long for a reason: they are easy to collect. There is something tangible to tax, you can collect it on spec and if the carrier doesn’t pay you can deny their goods entry.
They almost certainly gave rise to the first tax-efficient supply chains too, as ocean-going vessels plied new routes around the coasts circumventing those expensive middlemen and customs borders.
The way they’re collected has changed over the millennia, but not that much. Remember the talk before Brexit about automated frontiers? In most cases those remain more aspirations than reality, hence the lorry parks along the M20. Most duty is assessed online these days, but at every customs border, you’ll still find plenty of officers in high viz with clipboards.
Duties add to the cost of the goods being imported. The amount is based on the rate multiplied by either the volume (usually weight) or the value of the product. The rate depends on the thing being moved (the “commodity code”) and its origin, that is where it was made. The highest rates are in categories where there is most trade protectionism, particularly agricultural goods.
Sometimes your commodity may be subject to a “tariff quota”: a maximum amount that a country can ship to another country each year before a higher rate of duty kicks in.
The role of the WTO
Customs duty these days is levied at the national or supra-national level. But, the ways in which it is administered – classifications, determination of origin, valuation methods and the terms on which buyers and sellers trade across borders – are codified by the World Trade Organisation (WTO). When the Brexiteers and Remainers argued about “falling back on WTO terms”, they didn’t mean a free for all. They meant reverting to a detailed textbook on how to trade.
But the WTO like all multilateral institutions is only as powerful as its members want it to be. It can’t stop tit-for-tat trade wars, nor does it prevent individual countries or blocs from forming their own mutually beneficial agreements. That’s what negotiations between the USA, Mexico and Canada or those post-Brexit trade deals are all about. That’s why the origin of goods is so important.
Taking this all into account, you can probably see there is plenty of scope for a smart business to organise its supply chain so that it doesn’t pay higher tariffs than necessary. This can give it a competitive advantage if it can maintain margins while holding down pricing and that’s good for the customer, too.
Multinational companies can and do restructure their supply chains to get inside tariff barriers or modify the origin or value of traded goods. This, in turn, has macroeconomic effects, which politicians and trade experts are now arguing about.
You can’t reorganise your supply chain unless you know what’s there in the first place
But you can’t reorganise your supply chain unless you know what’s there in the first place. I spent time helping companies map their trade flows ahead of Brexit and was regularly surprised by how opaque those supply chains were. Brexit brought this into sharp definition. Even though the Trade and Cooperation Agreement in the end delivered tariff-free trade it did introduce new frictions and costs.
The coming Atlantic trade upheavals will create more. So will the Carbon Border Adjustment Mechanism (CBAM) in the EU from 2026 and the UK from 2027. Not to mention new measures like modern-slavery legislation and sanctions on Russia.
In the past decade, as deglobalisation has accelerated, knowing your supply chain has become strategically urgent. Tariffs may come and go, but other trade frictions will remain, and the risks to international trade, as we saw during Covid or in the Houthi campaign in the Red Sea, will keep coming.
If you can lift your eyes from the latest news for a moment and take a critical look at your exposure not just to new tariffs, but to everything that goes on when goods and services move from one place to another, you’ll not regret it.
Tim Sarson is head of tax policy at KPMG