What Are Tariffs and How Do They Work?

Tariff is a tax or customs duty imposed by a government on imported or exported goods. 

Tariffs may influence what goods cost, how they’re sourced, and how they move across borders. Understanding how tariffs work – and how to mitigate their impact – can help businesses manage costs, navigate customs clearance, and stay competitive in global trade.

Introduction: What is a Tariff?

Tariffs are charges placed on goods that enter a country. They are typically applied when products cross a national border and may affect the final cost of those goods.

Tariffs are used to regulate trade, protect domestic industries, and generate revenue. However, tariffs can also raise costs and complicate global shipping.

Trade and tariffs are deeply linked in that tariffs play a central role in how countries regulate imports. For example, governments might use a tariff to protect local businesses, raise income, and control trade flows. 

But there are downsides too. Tariffs can increase the cost of goods and lead to supply chain challenges. So, understanding how tariffs work and how tariffs affect trade prices is vital for importers and exporters.

What Does Tariff Mean?

Tariffs are typically applied during customs clearance, and can influence the types of goods businesses choose to import and how much those goods cost when they reach consumers.

Tariffs are typically based on the country of origin of the goods, which is where goods are made, not necessarily where they are shipped from. This may affect whether tariffs apply and at what rate.

Tariffs, import duties, and taxes are sometimes grouped together and the terms used interchangeably to refer to the fees paid when importing goods. However, these terms have different meanings. 

Tariffs are one kind of import duty, but not all duties are tariffs. Other types of import duties can include:

• Countervailing duties: May be added when a product has received government subsidies in its home country.   

• Anti-dumping duties: May apply when goods are sold at prices lower than fair market value.

Taxes, such as Goods and Services Tax (GST) or Value Added Tax (VAT), are different. They are typically added after customs clearance and apply to imported and locally-made goods. 

Taxes are usually based on the sale price and are not primarily used to manage international trade.

Types of Tariffs Explained

There are a few different types of import tariffs, including:

• Ad valorem tariffs 
  These are calculated as a percentage of a product’s declared value, and typically used for high-value goods like electronics, vehicles, and furniture. The “reciprocal tariffs” introduced by the US in 2025 are an example of an ad valorem tariff.  

• Specific tariffs 
  These are fixed fees charged per item or quantity. They are commonly used for items such as food, textiles, and raw materials.

• Compound tariffs 
  These combine ad valorem and specific tariff types and charge a percentage of the item’s value plus a flat amount per unit. They are often used for luxury or specialty goods.

Tariff types in practice:

General Agreement on Tariffs and Trade (GATT)

To better understand the purpose of tariffs, it helps to understand the General Agreement on Tariffs and Trade (GATT) and how its legacy continues to shape trade relationships today by promoting non-discriminatory trade.

GATT was signed in 1947 and forms the legal framework for the World Trade Organization (WTO). It aims to lower barriers between member countries and encourage more open trade

To achieve this, GATT requires countries to treat imports from all member nations equally. It also discourages countries from setting extreme tariffs or using trade policies that unfairly benefit local industries. 

This helps create a more stable and predictable environment for international trade, which gives businesses greater confidence to operate across borders. 

Who Pays Tariffs and Duties?

Typically, the importer of record is the one who pays a tariff.  

However, in international e-commerce or logistics contracts, the seller, a customs broker, or a freight forwarder may also act as the importer of record.

How do tariffs impact importers, exporters, and consumers?

To better understand who pays for tariffs and how tariffs affect trade prices, it is helpful to understand how costs move through the supply chain. 

While importers typically pay for tariffs, they may raise prices to cover the costs which can directly affect both wholesale buyers and end consumers. The impact of this can be heavily felt by small businesses who rely on imported goods. For example, they may be forced to raise prices, reduce profit margins, or shift to alternative suppliers.  

Tariffs can also impact exporters. They may feel forced to lower the cost of goods to compensate for tariffs or risk losing out on business if importers switch to suppliers in tariff-free zones.

Example: An Australian retailer imports electric scooters from China. A 10% tariff increases import costs. The retailer raises prices, which lowers demand. They consider sourcing from Vietnam instead, where no tariff applies.

 Example: A Hong Kong SAR electronics distributor imports smart watches from Mainland China then sells them to the US. When the United States increases tariffs on goods from China, the company looks to sell into new markets to maintain profit margin. 

 Example: A Singapore-based fashion retailer imports handbags from Italy. Due to a bilateral free trade agreement, the goods are not subject to import tariffs. This allows the retailer to maintain competitive prices while expanding its luxury product line.

 Example: A Chinese machinery exporter faces anti-dumping duties when shipping certain equipment to the European Union. To manage the impact, the company shifts production of some components to partner factories in Southeast Asia where lower duties apply. 

Calculating Tariffs and Duties

Want to know how to calculate import duty and tariffs? Following are steps to help guide you in calculating tariffs, including classifying products using Harmonized System (HS) Code and checking for relevant  trade agreements or exemptions.

Navigating Customs Clearance

Customs clearance is the point where goods are officially reviewed and approved to enter a country. Tariffs and trade rules help determine how a shipment is handled during this process and whether it is subject to formal or informal clearance. 

If a shipment’s value is below a set threshold, it may qualify for informal clearance, which usually means fewer forms, lower costs, and faster processing. 

However, if the declared value is high or specific tariff rules apply, the shipment may have to go through formal clearance. This typically involves more paperwork, longer review times, and closer checks by customs officials. 

For customers, the type of clearance may affect delivery times, the total cost of importing, and how much involvement is needed to move goods across the border. 

Shipping best practices to facilitate customs clearance:

1. Provide a clear product description, including what it is made of, what it is used for, and the country or territory where it was manufactured.
2. Provide 10-digit HS Codes on the air waybill and commercial invoice. 
3. Provide Manufacturer Identification Code (MID) on the airway bill and commercial invoice for commercial shipments of any textile and apparel products regardless of customs value (not required for personal use textile shipments) .
4. Employer Identification (EIN) or Social Security Number required for products using formal entry for the clearance process into the US.
5. When shipping product containing steel or aluminum into the US, provide additional details such as country of melt/smelt and percentage of steel/aluminum content.

Common clearance challenges:

Managing International Tariff Costs

So, how can businesses reduce tariff costs? It starts with smart sourcing. That means carefully choosing where and how you purchase goods to reduce your exposure to high tariffs. 

For example, you might consider:

• Choosing suppliers in a country or territory that have free trade agreements with your destination. 

• Checking that you’re using the correct HS code to ensure you're not overpaying duties or face delays or penalties during customs clearance.  

• Confirming the declared value accurately reflects the transaction to keep you compliant and cost-efficient.

A well-managed supply chain can also help reduce the impact of tariffs on small businesses in addition to lowering shipping costs and improving delivery speed. 

Small businesses should generally familiarize themselves with shipping zones and rates, how shipping costs are calculated and look for opportunities to save on shipping as this can help to offset the impact of tariffs.  

Here are three strategies that businesses can use to improve resilience and manage international trade challenges more effectively.

Frequently Asked Questions (FAQs) 

Tariffs are a type of duty charged on imports. Duties can also include fees like anti-dumping or countervailing duties.

The importer of record is typically responsible for paying for tariffs, but the cost may be passed on to buyers or absorbed by sellers.

Calculation of tariffs is based on product classification (HS Code), declared value, origin, and applicable trade rules.

Tariffs can raise trade prices by increasing the landed price of goods. This may influence sourcing decisions, as businesses may look for suppliers in lower-tariff countries to reduce costs. Tariffs may also impact demand by raising retail prices, which can reduce consumer spending or shift preferences toward locally produced alternatives.

Use accurate HS codes, explore FTA exemptions, consolidate shipping, and rely on expert partners like FedEx.

The General Agreement on Tariffs and Trade (GATT) a global pact that helps reduce tariffs and supports fair trade practices.

There are three different types of tariffs. These include ad valorem, specific, and compound tariffs.

Tariffs may increase the landed cost of goods. If not accurately calculated and paid on time, tariffs can also lead to clearance delays which can add to shipping and storage costs. 

Conclusion

Tariffs shape sourcing, pricing, and global logistics. Knowing what are tariffs, how tariffs are calculated, and who pays for tariffs helps businesses manage cost and compliance.

As trade rules change often, it is also important to stay informed on tariffs and how to reduce risk and protect margins.  

For businesses shipping to the US and navigating the evolving landscape of U.S. import tariffs, FedEx has created an information hub to keep you informed and help you adapt.