The word tariff derives from Arabic where it means a list of “fees to be paid”. A tariff is a tax on goods coming into a country. They can either be a fixed sum per unit of a good or a fixed proportion of its value. So, a tariff on video games might be set at £10 per game, or at 10% of the game’s value. Tariffs set at fixed proportions of the value are more common and are also known as “ad valorem” tariffs. Tariffs are also known as “customs duties”.
Customs duties have historically been set by national governments, and are charged when goods enter one country from another. They have long been used as a way of raising funds, as well as to “protect” home industries. So, for example, suppose that in one country, video games cost £150 to produce, but other countries can produce them for £100 each. Adding a tariff of £100 to imported videogames increases their price to £200 each. And so the consumer will be more inclined to buy the home game at £150, rather than the imported game at £200. The country gains £100 in tax revenue, but the consumer is £50 worse off than if there were no customs duties and he/she could have bought the imported videogame at £100.
Customs duties therefore help home producers, but they hurt home consumers. They are a form of “trade barrier”. Imposing duties to help home industries is known as “protectionism”. President Trump’s policies are protectionist because he has imposed customs duties on a wide range of imports to the US, including Scotch whisky. However, most countries have sought to reduce tariffs over the last few decades, and international trade has grown rapidly.
Some countries, instead of setting their own customs duties, come together to form a customs union. In a customs union, the member countries do not charge tariffs on goods traded between them, and they set the same tariffs on goods imported from ‘third countries’ (countries outside of the customs union territory).
All countries in the European Union (known as member states) are part of the EU customs union. This means that they do not impose customs duties on goods traded between them, and the same tariff is charged on goods coming into the country from outside the customs union. They follow the same rules (known as the EU customs code) for dealing with goods coming into, leaving or passing through their territories. The EU negotiates trade deals with ‘third countries’ on behalf of its member countries.
The UK will leave the EU customs union at the end of the transition period (31 December 2020). This means that the UK will be free to negotiate its own trade deals, including with the EU. If a “free trade” deal with the EU is not agreed, tariffs will be charged on UK exports as they enter the EU and on EU imports as they enter the UK. This would make European goods more expensive for British buyers and make British goods more expensive for European buyers. The result: a likely reduction in trade with Europe, which is currently the UK’s largest export market. Along with the higher prices that consumers would have to pay for European goods, the reduction in exports would likely hurt workers’ incomes and make the average British citizen worse off economically.