As any US importer knows, a tariff is a customs duty, an import tax imposed by the US federal government upon many goods imported into the Customs Territory of the US (the 50 states, Washington, DC, and Puerto Rico). Historically, governments have used tariffs as a primary means of collecting revenue. Today, other kinds of taxes – like income and sales taxes – account for most government revenue in developed countries, although tariffs can be significant with respect to certain categories of imported items. Tariffs are now primarily employed by governments to protect domestic industries or as leverage in foreign trade negotiations and disputes. In this blog, we will take a look at the history of US Tariffs and how they play a significant role in trade negotiations and the economy.
The US Constitution, Tariffs, And US Presidents
While tariffs may not be levied upon exported goods, the US Constitution explicitly grants the US Congress the power to levy tariffs on imported goods. The US Constitution states in Article 1 Section 8 that, “The Congress shall have the power to lay and collect Taxes, Duties, Imposts, and Excises.” Until the early years of the Great Depression, Congress passed general tariff legislation. However, in a move to stimulate badly diminished US international trade, the Legislative Branch granted the Executive Branch the power to negotiate tariff reductions within levels pre-approved by Congress. This was accomplished through the Reciprocal Trade Agreement Act of 1934, which enabled President Franklin D. Roosevelt to become the first President to levy tariffs and negotiate bilateral trade agreements without the approval of Congress. Over the years, Congress has given more power to the Executive Branch with regard to Article 1 Section 8 of the Constitution. Congress now cooperates with the President to set tariff policy by granting authority to negotiate trade agreements and to adjust tariffs in certain other circumstances, like some of the ones described below.
By way of numerous statutes, Congress grants the President the power to address and adjust tariff rates in response to specific trade-related issues that are of executive interest like foreign policy, national security, or matters requiring administrative findings by US departments and agencies. For example, Section 232 of the Trade Expansion Act of 1962 grants the President the authority to adjust tariffs on imports that threaten to impair US national security. In addition, Section 5(b) of the Trading with the Enemy Act and Section 203 of the International Emergency Economic Powers Act empowers the President in a time of war or emergency to impose tariffs on all imports, an extraordinary power. Further, Section 201 of the Trade Act of 1974 grants the President the ability to increase tariff rates temporarily when the US International Trade Commission (ITC) finds that a sudden surge of imported goods has caused or threatened serious injury to a domestic industry. Congress has empowered US agencies to impose duties on goods to offset injurious unfair trade practices, based upon industry petitions or through initiation by the US Department of Commerce.
CBP, The HTSUS, And Tariffs
US Customs and Border Protection (CBP), an agency within the US Department of Homeland Security, administers the collection of tariffs at all US ports of entry pursuant to the rules and regulations prescribed by the Secretary of the Treasury. When an imported item enters a US port of entry, the item is then classified and tariffs are assessed based upon the Harmonized Tariff Schedule of the United States (HTSUS), which was enacted by Congress and made effective on January 1, 1989, replacing the former Tariff Schedules of the United States. Maintained by the US International Trade Commission, the HTSUS comprises a hierarchical structure for describing all goods in trade for duty, quota, and statistical purposes. The HTSUS structure is based upon the international Harmonized Commodity Description and Coding System, or Harmonized System (HS), administered by the World Customs Organization in Brussels, Belgium.
General Note 1 of the HTSUS states that all goods imported into the Customs Territory are subject to duty unless specifically exempted by another General Note to be found within the HTSUS. If a duty is levied at the time of importation, it is to be paid by the Importer of Record (IOR) – that is, the party responsible for payment of all duties, fees, and charges.
Applicable duty rates on imported items depend upon a number of factors such as their HTSUS classifications, country of origin, whether the items are subject to antidumping or countervailing duties, tariff-rate quotas, and special duty rates like the Sections 232, 203, and 201 that can be imposed by the President.
Tariffs And Trade Wars
As many importers well know, particularly with regard to items produced or manufactured in the People’s Republic of China (PRC), an increase and expansion of tariffs can very quickly turn the importation of certain products into costly nightmares. Starting in 2018, the US imposed nearly $80 billion worth of new taxes on American importers by levying tariffs on thousands of products, which was equivalent to one of the largest tax increases in decades. Pursuant to what is known as Section 301, the US is currently imposing a 25% tariff on approximately $250 billion of imports from the PRC and a 7.5% tariff on approximately $112 billion worth of imports from the PRC. Section 301 tariffs on many items from the PRC currently remain in place and account for $70.9 billion of the $78.7 billion in tariff revenues.
As a result of the “trade war” between the US and the PRC, the latter being responsible for as much as one-third of all the manufactured goods in the world, many items listed in all but 17 HTSUS chapters are subject to high US duty rates. In return, the PRC has retaliated with high tariffs against all kinds of American products and manufacturers.
US importers have tried to deal with higher duty rates on PRC-made goods in many ways that hurt US companies and purchasers more than they hurt their Chinese business partners. These means involve accepting lower profit margins; passing on increased duty costs to American companies and consumers; deferring employee wage increases; slashing jobs, wages, and benefits; moving US manufacturing companies out of the PRC and into countries whose products are not subject to harsh US import tariffs; and establishing relations with non-PRC manufacturers and vendors, especially those who are a lot closer to the US, to strengthen the availability of the product and improve the viability of their supply chains.
Manufacturers and vendors in countries that are parties to US free trade agreements (look in the General Notes of the HTSUS to find which countries) that can provide products made in accordance with applicable country of origin rules are particularly desirable business partners, as are manufacturers and vendors in those countries.
As you can see, tariffs play a significant role in trade and the economy. To learn more about tariff and correct classification, watch our latest How To Classify A Product webinar.