No one could have imagined at the beginning of 2025 that customs work would be so fashionable around the world. It's curious that such a technical, specialized, and yet unknown activity for the general public would be present in every economic forum, whether for individuals or businesses, or among friends and acquaintances. From not knowing much about tariffs due to their specialty, they have moved on to talking about them with varying degrees of knowledge.
What has happened in the world to cause this development? It's as simple as the United States, the main or one of the main players in international trade, adopting tariff policy, and more specifically its main tool, the tariff, as an instrument of negotiation and pressure in its trade relations with all its partners.
If we add to this the large volume of trade it represents (approximately 25% of the total) and therefore the wide-reaching and significant impact of its unilateral measures, it is easy to understand why such an attitude has managed to convulse global international trade.
If we analyze the situation that has arisen, we have gone from an era in which the priority was promoting free trade and concluding trade agreements that facilitated commercial exchanges, to another era in which the exact opposite is imposed: increasing tax burdens on international trade, promoting its reduction or limitation.
In this essay, always from a technical rather than a political perspective, we will attempt to analyze the situation that has arisen, assess the appropriateness or otherwise of promoting free trade agreements versus the opposing position of moving toward increased protectionism through a widespread increase in tariffs, examining their effects and the advantages and disadvantages of the measures to be adopted.
To reach any conclusion, we must start with a detailed study of what a tariff is, its objectives and purposes, how it affects the economy, considering its advantages and disadvantages, even analyzing the effects of so-called reciprocal tariffs. At the same time, we must conduct a similar and parallel study of the opposite activity, that which seeks to negotiate free trade agreements with third countries, analyzing their object, purpose, and the advantages and disadvantages that their conclusion entails.
1. The customs tariff: objective and effects
The tariff is perhaps one of the oldest taxes in existence in humankind. It began as a tax on the entry of goods into cities, or the mere transit or transportation of products within a single country, and over time it has shifted to the outside world, that is, to the borders of each country. Its taxable purpose is to tax foreign goods upon their entry into the national territory.
This is a mechanism that seeks to protect domestic production against products manufactured abroad by imposing an economic burden, called a tariff, which is added to the cost of production and passed on through prices to imported products, causing their costs to rise, thereby making domestic consumption more attractive than foreign products.
We must bear in mind that the establishment of a tariff essentially produces two effects:
a. A protective effect on domestic products compared to foreign products through the price increase it causes, which we have been referring to.
b. A revenue-raising effect, as it allows the countries that establish them to raise funds for the public treasury through the transit of foreign goods through their customs offices, which for many of them is of vital importance to their national budgets.
Tariff policy would therefore be the set of rules that seek to harmonize the two effects, that is, to provide resources for the public treasury on the one hand, but also to exercise a certain protectionism with respect to national productions, in such a way that a good tariff policy would be one that knows how to harmoniously combine the needs of national protection with the needs for collection, being at the same time selective in terms of the products on which it should fall and those that are to be protected, avoiding the imposition of generalized and indiscriminate tariffs that, although they fulfill the purpose of collecting revenue, would have harmful effects, mainly the increase in inflation and the contraction of consumption with its impact on the negative evolution of the national Gross Domestic Product.
Therefore, we can conclude that an indiscriminate increase in tariffs will lead to a considerable increase in tax revenue, but it would weaken the protectionist effect, exponentially increasing the inflationary spiral that it necessarily entails.
2. Effects of the so-called reciprocal tariffs.
The first thing we need to do is analyze the economic effects of so-called reciprocal and generalized tariffs, and all of this from a dual perspective: from the perspective of the country that establishes them and from the perspective of the foreign country to whose goods they will be applied.
🟦AA country that imposes indiscriminate and widespread tariffs: We can say that the country that imposes these measures suffers the most from the adverse effects of tariffs and sees their benefits diminished, since its consumers will be the ones to bear the cost of the price increases. As the saying goes, "it's shooting itself in the foot," meaning the harmful effects of these tariffs will far outweigh their positive effects.
Thus, on the one hand, the main advantage for the country that establishes them is that tax revenue will increase considerably, providing an additional source of funding for its budget, although at the expense of its citizens, who will have to pay this new tax bill given that, as already mentioned, the tariff is passed on to consumers via prices.
On the contrary, the protective effect of tariffs is diluted by the very generality of the measure.
Furthermore, it's worth highlighting the harmful effects of the inflationary spiral that tariffs will trigger, which will in turn lead to a contraction in consumption, a consequence of the widespread rise in prices, and consequently, the country's economic activity will be reduced.
🟦B. From the point of view of the manufacturing/selling country towards the country that establishes the generalized tariff, a certain harm is also produced since when prices rise in the country of consumption (consequence of the establishment of the tariff), its demand will be reduced to a greater or lesser extent depending on the type of product and its elasticity, such that if it is a product of first necessity and therefore of inelastic demand, its consumption will not vary much, although it will necessarily cause a reduction in the disposable income of the consumer by having to pay a higher price for it.
On the other hand, if the elasticity of demand for the product is very high, citizens will stop consuming these goods as a result of their price increase, reducing their imports. Therefore, the exporting country will find itself with a surplus of manufactured products that it will have to allocate to other markets (or store if it cannot find other destinations), and its expectations of business profits will be reduced.
This means that any exporting company whose main customer reduces or hinders its purchases will necessarily face storage or overproduction problems, forcing it to seek alternative markets for its products if it wants to maintain the same level of sales.
It should be noted that the significant impact of reciprocal tariffs worldwide is due to the size of the country imposing them. If it represents approximately 25% of global trade, it will cause financial difficulties for many companies around the world that ship their products to that market.
But we must also keep in mind that the main difficulties and disadvantages of these tariffs will be borne precisely by the citizens of the very country that imposes them. As proof of this, we simply need to analyze the capital movements taking place in the world today. For example, if we analyze the stock markets of the Old Continent, we see that they are trading at record highs, while those of the United States are either in losses or flat. Likewise, if we analyze currencies, we can see that the euro continues to rise while the dollar continues to fall. This is because, as experts in the field say, money is very cowardly and has neither sex, religion, nor politics.
3. Free trade agreements and economic development.
Until this year, when this new restrictive and protectionist tariff policy emerged, international trade was guided by a free trade trend, reflected in the significant development of free trade agreements as a mechanism to promote wealth among the partners who enter into them.
These free trade agreements have a series of mechanisms that allow or seek to achieve their objectives, including the elimination or reduction of tariffs on trade between trading partners, the establishment of free market access for companies and goods from the other contracting party, the recognition of national brands between the countries participating in the agreement, and the elimination of trade restrictions, among other measures.
In our study, we will focus on reducing or eliminating tariffs applicable to trade between trading partners.
To understand the process of creating free trade agreements, it is important to understand that everything begins with the elimination of intra-zone tariffs. In other words, the tax authorities of the trading partners must take the first step in this process by eliminating tariffs and, therefore, ceasing to collect the tariff duties that were in force at that time. This represents a direct and immediate cost to the public treasuries of all countries involved in the agreement.
This fact is precisely the trigger for all the advantages that will be produced for the trading partners and that is realized in a spectacular increase in trade between the signatory countries of the trade agreement, understanding that it is generated as a consequence, precisely, of the elimination of tariffs and causing the logical reduction in the price of the exchanged goods with the consequent increase in their consumption, and therefore in their production, which in turn will increase the productivity of companies and their profits, will promote the improvement in employment through new labor contracts and social contributions, also increasing the number of commercial transactions.
All these advantages bring with them the economic return derived from the fiscal effort with which the trade agreement began, derived from the elimination of tariffs, since greater tax collection will be generated derived from greater income generated by the tax that taxes the profits of companies, through new social contributions and full employment, through an increase in the collection of the tax that taxes the income of individuals derived from this greater hiring, and, finally, through the increase in the collection of the value added tax, derived from the increase in economic transactions that occur, more than offsetting the initial fiscal effort made by the customs authorities and that sets in motion the entire process described, achieving, for the countries involved in the association agreement, greater economic development, an increase in the gross domestic product and, ultimately, a process of greater economic and social wealth.
An analysis of European Union trade data reveals the repetitive and constant fact that immediately after a free trade agreement signed by the Union comes into force, there is an inevitable increase in the volume of trade in goods within that agreement, lasting for several years and with double-digit percentage growth.
If we take the agreement the European Union signed with Korea in 2011 as an example, we see that to date (excluding the years affected by the pandemic), trade growth between the two regions has exceeded 10% annually. However, this should not be considered an isolated case; on the contrary, a similar figure is derived from the European Union's 2017 agreements with Canada, and with Japan and Vietnam, among other agreements analyzed.
Only one clarification remains to be made for this to be strictly true: it concerns the need to comply with the so-called rules of origin in preferential trade agreements, rules that must be included in a protocol within any free trade agreement.
The rules of origin will therefore be the norms that attempt to determine the economic nationality of the goods, determining the specific place where they are obtained so that only they will benefit from the tariff reductions provided for in each Agreement.
4. The European Union Agreement with Mercosur and its entry into force
Based on the above and in accordance with each country's trade policy, there are two options:
1. Opt for a protectionist policy by increasing the applicable tariffs, there being in turn two possibilities, that said tariff increase be selective, that is, that they are only applied to those goods susceptible to being protected, leaving the rest of the exchanges free, option that would be the best, economically speaking, or the second possibility by the establishment of a linear and generalized tariff applicable to all trade (which is what is being proposed at the present time), and which is undoubtedly the worst option, given that it enhances the negative effects that the implementation and elevation of a tariff causes and, therefore, increases the negative consequences that this tariff policy has in relation to international trade and the economy of the countries that apply it, given that raising a tariff causes an increase in the prices of imported goods, increasing inflation in the country that establishes it, causing a contraction in its consumption with the consequent decrease in its gross domestic product, which could even lead to an economic recession.
2The second option within the current tariff policy would be to sign free trade agreements with our trading partners. This, as we have said, will lead to a reduction in the prices of goods traded and imported from the preferential zone. This will lead to increased consumption, production, and productivity of the companies involved, resulting in an increase in the gross domestic product and, ultimately, greater and improved economic development.
In my opinion, I think this second approach is the right one, but I go further. I believe that the establishment of generalized tariffs is nothing more than a maneuver to obtain or force the signing of these trade agreements that facilitate international trade.
At this point, it is worth noting that many voices in Europe have been raised suggesting that this could be a great time to launch the entry into force of the agreement signed between the European Union and Mercosur, since it meets the necessary requirements imposed by the current situation, namely:
◾The size of the market created: The trade zone created by the agreement between the European Union and Mercosur would encompass a population of more than 780 million people, which alone is representative of the economic power of this agreement.
(I.e.Status of the negotiation: Considering that the negotiation period for any trade agreement ranges from five to ten years, we again find ourselves with the advantage that this agreement is in a prime position for implementation, given that it has already been negotiated and signed, so the only thing missing is its ratification.
◾Appropriate tariff level: From the European Union's perspective (the situation of MERCOSUR is not analyzed), the Commission has calculated that the elimination of EU tariffs on trade with MERCOSUR would amount to €4.000 billion or, in other words, imports of goods originating in MERCOSUR imported into the European Union on the basis of the signed agreement would become €4.000 billion cheaper within EU markets, which would lead to a significant increase in demand as a result of this price reduction.
(I.e.Reasons for opportunity: The entry into force of the European Union-Mercosur agreement would have the capacity to absorb potential business surpluses resulting from tariff restrictions imposed by the United States as a result of the implementation of generalized reciprocal tariffs. This would have an extraordinarily beneficial effect on exporting companies, which would be able to place these surpluses in alternative markets.
For these reasons, I believe we are witnessing a crucial moment in which the entry into force of this agreement should be promoted, as it would benefit both parties.
Furthermore, if we take into account the axiom that states that "a good agreement is one that leaves both parties dissatisfied," we have to think that its implementation, although it could cause certain difficulties in certain sensitive sectors, as a whole, could be considered satisfactory for both parties. 🤝
The author holds a degree in Law and is a lawyer from the Complutense University of Madrid. He currently works as an Inspector for the State Agency for Tax Administration (AEAT) and is the former Administrator of the Customs of Coslada and Barajas (Spain). He is also a consultant for the Inter-American Development Bank (IDB).
