Beginner’s Guide to Tariffs & Trade Barriers | FlavorCloud
The rise of technology has helped make everything more accessible. The exchange and availability of information, ideas, products, and services multiplied exponentially once the internet helped ease the logistical obstacles that previously presented a challenge. The result is an entire world full of options versus the local communities we were once limited to—benefitting consumers and businesses alike.
However, everything—including opportunity—comes at a cost. The reality is that geographical boundaries still exist, and cross-border shipping comes with complexities, including trade and tariff barriers—which are all part and parcel of running a global business.
FlavorCloud automates this incredibly complex and fluid world of logistics and global trade by making the customer purchase experience predictable by accurately calculating all costs, including tariffs, duties and the nebulous world of fees at checkout. This means costs are transparent for the customer, which reduces cart abandonment rates, increases sales conversions, and more importantly, leads to repeat customer purchases for greater customer lifetime value.
Going global represents a huge opportunity to grow your business, and ecommerce has undoubtedly introduced more convenience into the process of buying and selling. However, cross-border shipping, taxes, tariffs, and trade barriers can still be a complicated landscape to navigate as a merchant and will continue to change rapidly within the regulatory realm of each country as they cope with the pace of ecommerce growth—which is why we’ve created this guide to equip you with relevant tariff and trade barrier knowledge.
What Are Tariffs and Trade Barriers?
A tariff is a tax on imported goods. Types of tariffs include specific tariffs, which means there is a fixed tax on one unit of a particular type of product, or ad valorem tariffs, which are based on a percentage of the value of an imported good. Trade barriers include tariffs and are government restrictions on international trade.
Both are relatively simple concepts by definition. However, tariffs and trade barriers serve a larger purpose than to collect additional income or enforce guidelines; they’re also utilized to protect the following:
A government may impose a tariff to protect its population from potentially dangerous imported goods. For example, a tariff may be used to protect consumers from products or materials that could be tainted or harmful.
Outsourcing production to another country often results in lower manufacturing costs, making it an appealing operational strategy for businesses. Consequently, there are fewer jobs available domestically, resulting in a higher level of unemployment. Some countries use tariffs to offset the pricing advantage in an effort to protect domestic workers, which can also benefit the economy as a whole.
Import Substitution Industrialization (ISI) is a strategy that is often used by developing countries that involves levying tariffs on imported goods to protect infant industries domestically. Increasing the prices of imported goods gives their domestic counterparts a competitive pricing advantage, which helps protect and foster growth in newer industries.
Tariffs can also serve as a type of protective trade barrier. For instance, domestic defense-oriented industries are often critical to national security. Becoming dependent on another country’s goods can introduce unnecessary risks so developed nations can strategically impose tariffs as a method of protection.
Tariffs can be leveraged as a form of retaliation if one country fails to honor an agreement or goes against a country’s foreign policy objective. Tariffs can harm a country’s exports, so they can be used as an effective tool for negotiation or punishment or to enforce and protect existing agreements.
Barriers to Trade
Customs duties are a type of tariff, and duties and fees are implemented to act as trade barriers. For instance, an anti-dumping duty is a fee governments place on imported goods that are priced below fair market value in order to protect local businesses and the domestic economy. Import duties, levies, and/or fees vary based on location and often affect pricing, profitability, and the ease of cross border shipping.
Tariffs aren’t the only barrier to trade. Non-tariff barriers include:
- Licenses: Some governments require a specific license to import a particular type of good.
- Import Quotas: A country may restrict the amount of a particular product that can be imported.
- Local Content Requirements: As an alternative to import quotas, a government may require that a certain percentage of a product be produced domestically.
- Voluntary Export Restraints: Voluntary export restraints (VER) are created by the exporting country and are often part of a voluntary reciprocal agreement with the importing government, which offers a VER on one of their own exports.
How Do Tariffs Affect Prices?
Tariffs raise the prices of imported goods. Although this can be seen as a negative consequence to export businesses and consumers who desire those goods, domestic businesses can produce products that are priced competitively with imported items, which are usually available at a lower price due to the reduced cost of labor and/or materials.
When the volume of imported goods decreases due to tariffs, a greater number of domestic companies become interested in producing those products.
However, some tariffs, like those on steel or other materials used to produce domestic goods, can result in higher prices on a wide range of products, regardless of where they were manufactured.
Global Trade Rules
Global trade rules are covered under international trade law and include the regulations, rules, and customs governing trade between countries and are overseen by the World Trade Organization (WTO).
Two of the governing principles of global trade rules include:
- National Treatment Principle (NTP) which dictates that once goods have been imported, foreign and domestically-produced products should be treated equally.
- Most Favored Nation Principle (MFN) states that if a WTO member removes or reduces a trade barrier, or opens a market, it must do the same for all other WTO members.
There are also regional trade agreements (RTA) that cover trade issues that are not covered by the WTO, including agricultural issues, health and safety problems, ecommerce, and investment protection. Countries notify the WTO of any RTAs they’ve negotiated and the WTO tracks those in a public database.
How FlavorCloud Can Help
Understanding the specifics of tariffs and trade barriers in various countries, and determining how those affect your cross-border business, is critical to your success…and often far from simple.
Partnering with an end-to-end cross-border ecommerce service like FlavorCloud can take the complexities out of understanding landed costs and eliminate the need to waste precious resources on researching tariffs and trade barriers.
In theory, it’s easier than ever to go global as a business, but the reality is that geographical borders exist even as technology increases our connections. Expand into new opportunities without acquiring the extra workload and risk associated with learning the often-changing duties, tariffs, trade barriers, rules, and regulations of each and every destination by using FlavorCloud as your fully integrated global ecommerce guide. We accurately calculate landed costs while providing the best-negotiated shipping rates and routes through our global carrier network.
Ready for more? Learn how to integrate hassle-free global shipping into your ecommerce store in as little as one day.