What is a tariff?
18 March 2025
Tariffs can have a significant impact on the automotive industry. But what are the different types of tariffs, why are they implemented and who ends up paying for them? Tom Hooker, Autovista24 journalist, explores the subject.
Nations are limited by their available natural resources and technical abilities to produce certain goods. This necessitates the need to trade with other countries. However, trading partners can become frustrated with perceived imbalances, sometimes leading to the introduction of tariffs.
A tariff is a form of trade regulation designed to tax foreign products. Governments can set, raise or lower tariffs on goods imported from another country. Tariffs can also be applied to goods exported to another country.
Import tariffs can increase the price of goods as companies pass on the additional costs. This can make imported items less attractive to domestic consumers. Locally made alternatives can become more attractive as they are not subject to tariffs.
Tariff types
There are two main types of tariffs. A specific tariff is a fixed fee based on the type of product being imported or exported. For example, a €500 tariff on every new car imported into a country, regardless of its original price.
Then there are ‘ad-valorem’ tariffs, which are based on an item’s value, such as a 6% import rate. Tariffs can be implemented for multiple reasons. Punitive measures are introduced to punish a perceived market behaviour, such as unfair trade practices.
Like all taxes, tariffs provide a source of government revenue. They can be used to protect struggling domestic industries from international competition by raising the price of foreign products. This is often done to safeguard companies and jobs.
A country may implement tariffs if foreign goods are sold at lower prices than in their home market. Furthermore, they can provide stability by making prices more predictable.
Who pays for a tariff?
Funds raised by tariffs are collected by the national customs authority of the country receiving the goods. This means the money raised goes to the government imposing the tariff.
The tariff is occasionally paid by the company exporting the product, but usually, the company importing the product pays the rate. Companies may choose to pass on these costs to customers. They can also choose to absorb the cost, meaning their revenue from each sale will be reduced.
The implementation of tariffs can come with other undesirable side effects. With foreign goods now more expensive, domestic producers could raise their prices while remaining competitive. This means consumers must spend more regardless of which product they pick.
Industries using domestic products may also see their purchasing power decline due to higher domestic prices. Furthermore, exporters may have to move production inside the country to avoid the additional costs.
Placing high import tariffs can create tensions between trading partners, leading to retaliatory action. This can start a trade war, with countries exchanging and increasing rates, hitting businesses and consumers.
Automotive implications
Tariffs can have a significant impact on the automotive industry. This is because many carmakers are heavily reliant on international trading. New-car prices can rise when tariffs are implemented.
Some brands use supply chains that can crisscross across multiple borders. This means certain parts need to cross the border many times before a car rolls off a production line.
Carmakers can choose to move production into a country imposing tariffs. However, the start-up cost can be exceptionally high. Regardless of how a carmaker tries to adapt to a tariff, their profit margins are likely to fall.
Conversely, used cars can benefit from tariffs. They can become a more attractive option to consumers looking to avoid more expensive new models.
