What is a Tariff?

Nick Whelan

Image: Facebook

Last Wednesday, in what was quoted as ‘liberation day’ by the Trump administration, sweeping tariffs were announced against the global economy in a drastic attempt to correct the major trade deficit the US has run for years. The tariffs were applied to states ranging from China to Afghanistan.

The UK was hit with the global base-rate of 10%, with rates as high as 46% on Vietnam and 49% on Cambodia. (personally, I think the latter 2 deserve a bit of a break from the US given their recent shared histories).

The move wiped trillions of dollars off the global economy. All 3 of the major stock indexes in the US plunged by more than 5%. Notably, its steepest fall since covid when the world came to a halt over the pandemic. So, what is the big, suspiciously orange money man doing?

A tariff is essentially a charge added onto a good that must be paid in order for it to enter and circulate in the economy it has been imported to.

They are often calculated as percentages of the market value of the good (ad valorem) or as a fixed amount per unit (specific).

Whilst importers pay the tariffs initially, the costs are eventually passed onto consumers as businesses and sellers must raise their prices to cover their additional acquisition costs of the goods.

Often, the intention of Tariffs is to encourage consumers to consider alternative, domestically produced goods as they should be cheaper because they are not subject to the tariffs specifically.

However, the risk with a blanket tariff is that domestically produced goods often require foreignly produced materials that have been imported to manufacture them. As a result, domestic goods will be subject to a rise in manufacture costs, and higher purchase prices for consumers.

There are various goods that simply cannot be domestically produced as their origins are essential to the goods' marketability.

Take an Arbroath Smokie for example. Smokies would become less attractive to American consumers, and as such, the Arbroath Smokie seller here in Scotland would suffer a drop in demand, and a loss of income.

The interstate dependencies of the world economy are too deeply ingrained to avoid harm to the domestic consumer.

This is not without historical precedent. Tariffs were applied heavily during the US’s period of isolationism during ‘the great depression’ of the 1930s. The aim was to revive and prop-up domestic manufacturing industries in the wake of the first world wars devastation, thus creating jobs and strengthening their economy.

The truth? The economic benefits of the measures were not evenly distributed, enabling wealth disparities to grow to obscene levels. But that is for another article.

So where does that leave us? Likely worse off than before. A quick visit to St Andrews will highlight that Americans love of all things Scotland. Including their personal connections to us, often through rather distant historical relatives. The president himself hails from the MacLeod clan through his isle of Lewis born mother.

The US is the most important overseas market for Scotch whiskey makers (one of our biggest exports in Scotland), worth 971m a year. The tariffs are expected to be costly for our biggest industries.