Want to buy a shiny new electric vehicle from one of China’s car companies? That’s going to cost you, dear European.
Tariffs are nothing new, but they are back with a vengeance.
US President Donald Trump's second term is doubling down on the trade wars he started in his first. Canada, China and Mexico have all been hit with new tariffs, albeit some were quickly delayed. Now it's the European Union's turn to face the trade-war music.
A global 25% blanket tariff on steel and aluminium imports sees no exemption of America's transatlantic allies. The EU was swift to condemn the move — and ready its own tariffs in response.
The response is not the EU's only effort to protect its single market. Tariffs against Chinese EV manufacturers have been in place since late last year — a bid to rev up a European auto industry struggling to keep up with technological advancements in transport.
The EV duties vary by company, based on how much Chinese state aid the EU assesses each one has received. To get around them, some Chinese companies have started setting up shop inside the bloc. Tariff supporters have praised the shift as evidence that they work.
What are tariffs and how do they work?
Whereas taxes are part of everyday life — the additional sum, like VAT, is added at the point of purchase — tariffs take place at the place of import.
“It's a tax that you are introducing at the border,” Luisa Santos, deputy director general at BusinessEurope, a confederation of European businesses, told The Parliament.
As ever, the EU is quirky when applying tariffs. It is the bloc's “exclusive competence on trade policy,” she said, which means tariffs are not applied by member states but instead negotiated by the EU on their behalf.
“If there is a common external tariff of the EU, that applies to all EU member states,” Santos added.
Why are tariffs implemented?
The World Trade Organization (WTO), founded in Geneva in 1995, oversees tariff policies at the global level. If one of the organisation’s 166 member countries creates a tariff or makes a change to a tariff, it must justify it to the WTO. It is also designed to be the final arbiter of trade disputes.
“The aim of the tariff is to make foreign goods more expensive so that domestic producers can become more competitive,” Varg Folkman, a policy analyst at the European Policy Centre, told The Parliament.
What constitutes fair and unfair competition, and thus the use of tariffs to level the playing field, is subjective. When tariffs are used “as an aggressive thing, like for instance in trade wars,” Folkman said, they can be coercive or pressure others to create more favourable trade policy.
Who pays for tariffs?
Though the idea is to punish or raise the price on the exporter, it is often the importing side that feels the financial sting. Tariffs increase the cost of doing business across the supply chain, which can also have inflationary effects.
“If you have a huge increase in duty at the border,” Santos said, "then of course you will likely have to pass that price onto the consumer.”
The additional revenue passes to government coffers through customs authorities. Most economists doubt Trump's claims that his tariffs could raise so much money that they would substantially offset the tax cuts he desires.
What are the different types of tariffs?
While all tariffs act as an import tax, Folkman said, there are different types. Custom duties are the least controversial and generally kept low. Anti-dumping tariffs prevent companies from selling goods at steep discounts to undercut competitors, while anti-subsidy ones — such as those against Chinese EVs — counteract state support.
The other kind of major tariff are known as safeguarding ones. Their aim is to protect industries at risk of serious harm, such as the EU’s steel sector.
Do tariffs work?
In trade disputes, tariffs are a reactive tool used in response to a threat. Trade wars result when they are imposed too often, which is why governments tend to be “really selective,” Folkman said.
That helps explain why the renewed passion for erecting trade barriers marks such a departure from economic orthodoxy.
“We have more and more products that are being imported,” Santos said, which is bad news for domestic consumers.
A country can lower a tariff against another to help a struggling or developing economy — or deepen trade relations with it. When tariffs go up, however, a tit-for-tat chain reaction often ensues that can lead to a “general breakdown in world trade, which would be extremely harmful,” Folkman said.