What Are Tariffs?
A tariff is a TAX imposed by a government on GOODS imported from other countries. The main goal is to make imported goods more expensive, encouraging consumers to buy domestically produced alternatives. Tariffs can also be imposed on SERVICES. Tariffs are usually product-specific.
Tariffs were a major source of revenue for many countries. It's also a tool used to protect local industries, balance trade deficits, and generate revenue.
Who Pays Tariffs?
They’re paid by importers — typically companies within the country that imposes the tariff. These costs often trickle down through the supply chain and eventually show up in the final retail price.
Bottom line: Consumers pay tariffs indirectly through higher prices on imported products.
Where Does Tariff Money Go?
The money collected from tariffs goes to the government’s general fund. In the U.S., this revenue is handled by U.S. Customs and Border Protection and deposited into the Treasury.
While it may seem like a bonus for public funds, the economic cost to consumers and businesses often outweighs this benefit, especially during extended trade conflicts.
Are Tariffs Good or Bad?
It depends on the perspective:
Good for: Protecting local industries, reducing trade deficits, and giving domestic manufacturers a competitive edge.
Bad for: Manufactures and Supply Chain (as they need to absorb such cost) or End Consumers (who will need to bear the cost if the manufacturers don’t absorb), global trade relations, and businesses that rely on global supply chains.
Many economists argue that free trade benefits consumers through lower prices and greater choice, while tariffs distort market efficiency.
Pros and Cons of Tariffs Pros- Protects small and local industries.
- Encourages local production.
- Increases government revenue.
- Can be used as leverage in trade negotiations.
- Trade opportunities for other Countries
- Raises prices on imported goods.
- Can lead to retaliatory tariffs aka trade wars.
- Reduces consumer choice.
- Hurts exporters and manufacturers reliant on global parts.
Why Are Tariffs Bad?
Tariffs may sound good in theory, but in practice, they often lead to:
- Higher consumer prices: Importers pass on the costs.
- Trade wars: Other countries retaliate, creating economic strain.
- Global supply chain disruption: Industries that depend on imported materials or components suffer.
How Do Tariffs Affect Consumers?
The most direct impact is increased prices. Over time, tariffs can reduce your purchasing power and even lead to inflation if widespread enough.
How do the tariffs apply?
A first step for businesses is to understand the tariffs that apply. Considerations that apply include:
What is the country of origin of the goods in question?
This is often not a straightforward question if the product being imported is the result of multiple materials and components, and assembly or manufacture in different countries. In relation to the US tariffs, the identification of the country of origin can make a material difference to the tariff that applies;
Check the product value: as tariffs are imposed as a percentage of value of the goods to be imported, it is important for importers to ensure the correct valuation methodology;
Negotiation and challenge? What are the avenues for negotiating a bespoke tariff exemption or challenging the validity of a tariff?
For businesses engaged in international trade, tariffs introduce financial and operational risks.
In most international trade contracts, the responsibility for tariffs, duties and other import-related costs is determined by the contract's terms and/or by reference to Incoterms 2020. Unless expressly agreed otherwise, the importer typically bears responsibility for these costs.
Companies must carefully structure contracts to mitigate the impact of tariff-related cost increases and supply chain disruptions. New Legal Clauses like financial hardship or material adverse impact clauses or the clause explicitly includes tariff-related government action, importers will generally remain bound to contractual terms despite higher costs.
UAE Dubai Free Zone Formation Advantage
Re-Export and Manufacturing Strategies
One of the most effective tools for tariff mitigation is re-exportation.
By routing goods through the UAE—either as-is or with minor modifications—companies can change the country of origin or at least shift the commercial documentation and supply chain narrative.
Alternatively, companies may consider light manufacturing or final assembly in the UAE, which can allow products to qualify as UAE-origin goods under applicable rules of origin. This approach, while requiring more investment, can unlock tariff exemptions and give companies a foothold in regional markets as well.
Depending on the specific HS code of the product and applicable trade agreements, these strategies can significantly reduce or eliminate tariff exposure.