What are Tariffs?

‘Tariffs’ – a word we have been hearing a lot of recently. But what exactly are they and how do they relate to intellectual property (IP)? Simply put, a tariff is a duty levied by a government, customs territory, or supranational union on goods when they cross national borders. Most commonly, tariffs apply to imported goods to make foreign products more expensive in the domestic market. They can be calculated as a percentage of the item's value (an ad valorem tariff) or as specific fees per unit of goods.

Tariffs have their pros and cons. Advantages include generating revenue for governments and protecting domestic industries, by making imported goods more expensive, which can help local industries grow and maintain jobs within the country. They can also serve as a powerful trade negotiation tool by encouraging other nations to lower their trade barriers or improve their trade practices. However, tariffs can also lead to higher prices for consumers, limit the variety of goods available, and potentially reduce product quality due to less competition. Moreover, other countries might retaliate with their own tariffs, sparking trade tensions that disrupt global trade and harm economies.

Tariffs can be a key tool in shaping foreign trade policy and have been at the forefront of recent U.S. trade actions. These recent tariff changes have had widespread effects, including increasing operational costs and disrupting established supply chains for companies dependent on international manufacturing.

What are Intellectual Property Royalties?

Intellectual property (IP) royalties are fees paid by a licensee to a licensor for the right to use the licensor's IP. These royalties can apply to various forms of IP, including patents, trademarks and copyrights. The payment structure can vary but is often either based on a percentage of revenue generated from the use of the IP or is a fixed fee.

In recent years, IP royalties have accounted for as much as 13.1% of the US service trade revenues. In particular, the IP royalties the US receives from China represent one-fifth of the total royalties obtained from the Asia-Pacific region and account for 5% of the US’ global IP royalty revenue.

Are Tariffs paid on IP Royalties?

The relationship between tariffs and IP is complex. IP is often a factor in trade disputes and tariff implementation. For example, countries may impose tariffs as a means of pressuring other nations to strengthen their IP protection and enforcement, such as combating counterfeit goods, which infringe on trademarks and copyrights, by making them more expensive and less competitive.

However, tariffs are generally not paid on IP royalties. Tariffs are typically imposed on physical goods that are imported or exported across borders, while royalties are payments for intangible assets, not goods.

Can the effects of Tariffs be mitigated?

Customs authorities typically do not include royalty and license fees in the dutiable value of imported goods. Businesses can therefore potentially mitigate the financial impact of tariffs by strategically managing their IP royalties.

One approach is to separate the royalty payments for using the IP underlying a product and pay these to a separate firm. If IP royalties fall into a non-dutiable category, this separation can reduce the dutiable value of the imported goods, thereby reducing the overall tariff burden.

If tariffs make importing products difficult or expensive, companies could also leverage their IP rights to generate income through licensing deals with international partners.

Bottom Line

The tariff landscape is unpredictable. Thus, the long-term effects of recent changes are uncertain. Given this flux, measures put in place by businesses now may not remain relevant in the future. Companies must stay agile, continuously monitor regulatory changes, and adapt their strategies accordingly to navigate the complexities of international trade and IP management effectively.

Amid the rapidly changing international trade and political landscape, it is important to remember the long-term value in protecting your IP. 

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The financial impact of tariffs could possibly be mitigated by shifting some of the costs to non-dutiable categories, such as royalties and service fees