Tariff Talk: Answers to the hidden truths

This is probably the question we are most frequently asked. The UK is a services-dominated economy, so it’s especially relevant to our clients here. The answer? It’s a conditional ‘no’. That’s because a ‘tariff’ on services would actually have to be in the form of a tax (rather than a customs duty, which is what a tariff on goods actually is). Whereas President Trump has the power to raise an executive order levying a tariff on goods, a tax on services would need to go through Congress. It would be a completely different process. The same would apply for the EU. It’s often speculated that the EU’s biggest retaliatory measure against the US would be to impose a ‘tariff’ on services given that there is a trade deficit on services with the US, but this would need to be the subject of a unanimous vote in the European parliament – and it would be highly unlikely to receive unanimous support. That said, we can’t necessarily rest easy on this point. The proposal for tariffs on non-US made films, for example, is a step towards a tariff on services and would have an impact on many service providers in the film industry. There are also a couple of bills already with Congress that have quite strong Republican support to impose US taxes on services from EU businesses, in retaliation against what is viewed as unfair global minimum tax rules and also Digital Services Taxes (DSTs) such as the UK imposes on US Big Tech companies. If these bills are passed, they could have a cataclysmic effect. This is definitely one to watch.

This is another very common question. The answer here is ‘yes’. Different tariffs can be added together in a cumulative effect. For example, Chinese plastic toys can be subject to the standard rate of duty applicable at c5%, plus 25% ‘Fentanyl’ tariffs and the (reduced) 10% reciprocal tariff. In the last few weeks, the administration has changed the way certain tariffs stack, so it really depends on the product and the country of origin. There is also scope to recover duties in particular manufacturing processes, e.g. car parts. But the general guide is that tariff stacking is a feature of the regime. This makes it really important to examine carefully what stacking will apply with your products so that you aren’t caught by surprise and can plan ahead accordingly.

This is another frequent question, but there is better news here. The concern is that, if a product is assembled in several stages in different countries and criss-crosses borders, there will be an accumulation of tariffs each time. However, as long as you have your paperwork in order, follow the right procedures, and apply for the right reliefs, this shouldn’t be the case. There are a range of customs reliefs that mean businesses should be able to avoid paying tariffs more than once. These include bonded warehouses, Free Trade Areas and Processing reliefs. It can be complex – you need to map the supply chain very clearly and ensure all the correct processes are followed – but this should be a scenario that businesses with good advice can avoid.

This is a related question that we are often asked. If a product is made in China, for example, then shipped to the UK where it is modified/completed, and then shipped to the US, how much does it need to be changed in the UK for that to be regarded as the origin of the product (and therefore avoid a potential Chinese tariff)? The answer here is quite complex – but generally speaking, you must be able to prove that there has been “substantial transformation” of the product. Adding a few small embellishments or putting it into its final packaging, for example, would not be enough. It’s a detailed area that often brings in transfer pricing aspects where expert advice may be required. There is case law where parties have moved manufacturing or final assembly locations to circumvent tariffs and been caught out. A detailed global trade assessment by an expert would certainly be recommended.

In the old American phrase, this is one of the 64 million dollar questions. The simple answer is – it’s very hard to say. Perhaps the biggest area that UK clients are asking about is pharmaceuticals. Globally, there haven’t been tariffs on medicines for decades. In most developed countries where government-owned public health services are the biggest buyers of medicines, imposing a tariff would effectively be to impose a charge on yourself. But the US has a much more decentralised healthcare market where private insurance companies are the biggest buyers. There is a strong belief amongst many politicians in the US that imposing tariffs on pharmaceuticals would spur a welcome repatriation of medicine manufacturing and IP. It’s another area where we will just have to see what unfolds.