The EU abolished tariffs between its member states when the customs union was created in 1968. Goods imported to the EU from the rest of the world are subject to tariffs that follow the rules and principles of the World Trade Organization.
What are tariffs?
A tariff is a tax levied on imports of goods. A tariff is usually expressed in ad valorem terms (i.e. a percentage of a declared value of goods) or in absolute terms (e.g. €100 per tonne). Less often, it can be expressed as a compound value made up of both of the abovementioned elements.
Tariffs are mostly levied on imports, but there are also cases of tariffs on exports.
Tariffs raise revenue for the government and increase the prices of imported products, giving domestically produced products a price advantage.
For example, if the EU imposes a 20% tariff on electronic devices from China, a company importing a smartphone worth €200 would pay €40 in tariffs. The company may pass on this extra cost to customers, making the smartphone more expensive.
The primary purpose of tariffs is to:
- promote local businesses and jobs
- protect domestic industry from unfair competition
The EU single market, a tariff-free area
With the establishment of the customs union in 1968, tariffs between EU member states were eliminated, creating a single market where goods, services, capital, and people move freely.
Without tariffs, businesses can operate at lower costs, expand more easily across borders, and access a larger customer base. Consumers benefit from more choice, better prices, and high safety standards for products and services.
This single market integration benefits both citizens and businesses across the region and is a key driver of EU competitiveness and growth.
How do tariffs work?
Thanks to the customs union the customs authorities of all EU countries work together as if they were one. They apply the same tariffs to goods imported into their territory from outside the EU.
75% of the collected customs duties are destined to the EU budget, representing 13.7% of the total budget for 2024.
When it comes to tariffs, the European Union follows the principles and rules established by the World Trade Organization (WTO), of which it has been a member since 1995. All EU member states are also part of the WTO in their own right.
One of the main WTO principles is known as most-favoured-nation treatment. It means that countries cannot normally discriminate between their trading partners. Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries.
What are trade wars?
A trade war is an economic dispute between two countries. It can occur when one country retaliates against another’s perceived unfair trading practices with restrictions, such as tariffs, on imports. Trade wars result in higher costs for both businesses and consumers in the countries involved.
For example, in 2018, the US imposed tariffs on EU steel and aluminium. In response, the EU placed tariffs on US products like motorcycles and bourbon whiskey.
The EU uses trade defence instruments, such as anti-dumping duties, to protect EU industries from international trade distortions. The EU’s use of trade defence instruments is based on World Trade Organization rules.
The EU anti-coercion instrument provides the EU and its member states with the means to deter and respond to economic coercion from third countries. It aims to de-escalate and induce discontinuation of coercive measures in trade and investment through dialogue.
The EU can also appeal to the WTO’s dispute settlement system, which provides mechanisms for resolving trade disputes between its members.
On the basis of pre-defined rules, any WTO member can lodge a complaint over breaches of WTO rules. The WTO helps to prevent trade disputes escalating.
Since the WTO’s creation in 1995, the EU has been involved in 201 cases: 110 as a complainant and 91 as a respondent.
Lower tariffs through trade agreements
The EU negotiates trade agreements with third countries to reduce tariffs and facilitate trade.
Some of the agreements focus mainly on tariff elimination, while others include broader commitments on services, investments, government procurement, competition, various regulatory issues, sustainable development and other topics.
Currently, the EU has the largest trade network in the world. The EU has 44 agreements in place with over 70 countries and regions.
The EU currently holds the status of:
- world leader in trade in goods and services
- top trading partner for 80 countries
- the second largest exporter and importer of goods worldwide
Source – EU Council