Understanding Tariffs in the European Union
As the European Union grapples with the implications of the latest wave of trade protectionism from US President Donald Trump, the spotlight once again falls on the role of tariffs. But what exactly are tariffs, how do they function within the EU, and who ultimately bears the cost?
Tariffs, also known as customs duties, are taxes imposed on goods imported from foreign countries. They come in various forms, with the most common being the “ad valorem” duty, calculated as a percentage of the product’s value. The EU also employs “specific” tariffs, which are fixed amounts per unit, such as per kilogram or litre.
According to data from the CCI-Cepii database, the global average tariff in 2022 stood at 3.6 per cent, resulting in imported goods costing an average of 3.6 per cent more than domestically produced goods. However, these figures vary significantly across countries and product sectors.
Why Are Tariffs Imposed?
Tariffs primarily serve to protect domestic industries by increasing the cost of imported goods, thereby assisting local producers in maintaining competitiveness. In many developing nations, tariffs also play a crucial role in generating government revenue, with some African and island countries deriving over 30 per cent of their public funds from these duties.
Moreover, tariffs can be used to regulate a country’s trade balance by discouraging excessive imports. This approach aligns with the current protectionist stance observed in US trade policy.
How Are Tariffs Decided in the EU?
Within the EU’s customs union, all 27 member states adhere to a common set of customs tariffs for goods entering the bloc. Internal customs duties have been eliminated, and the common external tariff is determined by the Council of the EU, based on recommendations from the European Commission.
The tariff rates vary depending on trade agreements and the economic sensitivity of the product. Essential imports like oil or liquefied gas face minimal duties, as they are not widely produced within the EU. Conversely, agricultural products such as beef and dairy are heavily protected, with tariffs and quotas ranging from 40 to 60 per cent, significantly higher than the EU’s average tariff of 2.2 per cent in 2022.
Since 2023, the Commission has implemented a system for a “graduated response” to trade threats, outlining the EU’s countermeasures in the event of significant increases in foreign tariffs.
Who Pays the Tariffs?
In general, it is the EU importer, rather than the foreign exporter, who bears the cost of customs duties. The burden may then be passed on to consumers, depending on the product’s importance and the ability of businesses to raise prices without impacting sales. Companies also consider alternative sources for the product or explore different export markets.
How Are Tariffs Collected, and Where Does the Revenue Go?
Each EU member state is responsible for collecting customs duties and ensuring that their customs authorities have the necessary resources for adequate checks and controls. With the escalation of global trade tensions, the monitoring and verification of imports and exports have become increasingly crucial.
Between 2021 and 2027, EU countries retain 25 per cent of the customs duties they collect to cover administrative expenses and promote efficient collection practices. The remaining 75 per cent is channeled into the EU’s central budget, accounting for approximately 14 per cent of the EU’s total revenue.
