Trade Tariffs and Cross-Border Shipping – Part One
If you’ve been reading the blog here at Redwood lately, you may have noticed something. You’ve probably noticed that we have been talking about international trade and shipping tactics a bit more than usual. On Monday, we talked about the risks of cross border shipping, and yesterday, we dropped a few tips on you regarding cross border insurance. With new trade tariffs, mandates, and constant international trade policy changes making headlines every day, we figured it’s probably the best time to start talking about these issues again.
Unfortunately, many shippers, and people in the general logistics space often don’t understand some of the concepts introduced in international shipping policies. And one of the biggest head-spinners out of the bunch seems to be trade tariffs, specifically. Even more specifically, the types of trade tariffs.
So, over the course of the next few days, we will be publishing a 5-part series on just trade tariffs! We hope that by the end of this mini-series you will have a firm understanding of trade tariffs. We are going to look at the different types of tariffs, how to remain in compliance with them, and how they benefit their respective countries.
Let’s get started…
What are the Types of Trade Tariffs
Did you know that trade Commerce between Mexico and the United States of America equate to $620 Billion each year? Did you also know that 80% of this freight moves via trucks, either LTL or FTL carriers between the two countries?
Hundreds of thousands of hard-working individuals depend on the transportation industry for their livelihood in both countries. It is this reality, combined with a consumer base that depends on goods from both countries, that is influencing the rising and inconsistent trade tariffs between cross border countries.
For those unaware, there are two types of tariffs.
The first type of tariff is a “unit”. This unit is a monetary charge for each type of imported product.
For example, a tariff of $100 per ton of imported aluminum is charged by the importing country. It’s basically a tax for the right to sell products in that country.
The second type of tariff is an “ad voloren”. This term is just a fancy way of referring to a percentage of the value of a commodity. A recent example of this was an imposition of a flat 5% tariff on all goods entering the United States. (This recent example never actually came to pass.)
Tariffs have been used by governments as a primary source of taxation for hundreds of years. Prior to the ratification of the 16th constitutional amendment in 1913, tariffs were critical to the US. Importing tariff charges was actually the leading source of revenue for the USA until federal taxes became a thing.
How Tariffs Generally Impact Cross-Border Shipping
If you’re a fan of poker, you could understand how valuable being a chip leader is in the game. The more chips you have, the less risk you have in playing more hands. This is basically how tariffs impact different countries.
In most situations, the biggest impact on rising tariffs hits the individual company that is selling the commodities to a foreign nation, or customers in foreign nations.
Here is a practical example. Let’s say that you own a manufacturing business that sells T-shirts in the United States. The country of Mexico will impose a tax or tariff for you to sell to customers in that country. Due to Mexico’s financial strength, or lack thereof, the tariff or tax you will pay will likely not have a major impact on your sales to your Mexican customers.
Now let’s reverse that situation, but in this case, your T-shirt company is based in Mexico and sells to United States customers. It is likely that you will be paying a higher tariff or tax to sell your product’s to US-based consumers.
Distributors and Manufacturers get hit Hardest with Trade Tariffs
The impact is direct to the manufacturer or distributor of the product. In order to maintain a viable profit margin during rising tariff fees, they need to also raise their retail price. However, this poses a rather sizeable problem. If their products are too expensive, customers will simply not purchase them, or they will seek out other suppliers.
Generally, fluctuating tariffs have the following impact on the supply chain:
- As tariffs are low between both countries, shipping tends to increase. Consumers are comfortable spending money with companies in Mexico and the USA. It’s beneficial to both countries, as they can likewise double-down on taxing retailers who sell those goods to direct consumers in their countries.
- When tariffs rise, shipping tends to decrease. Rising tariffs create a competitive marketplace, where some customers will look for the best ‘deal’. This is where importing from China and other overseas countries tend to increase.
- When speculation of pending trade wars, it creates a stagnant period of the business. However, it can also lead to spikes in sales and freight movement as companies will look to ‘stock up’ on goods when the pricing is low.
In this blog post, we took a quick look at the different types of trade tariffs that you will encounter and how they generally impact cross border shipments. In general, trade tariffs are actually pretty easy to understand. Having said that, however, there is still plenty to discuss. We hope that you will stick with us as we head into part two of our series on trade tariffs!
In part two of this series, we’ll explain the role that tariffs play in the retail marketplace.