In business terms, a tariff is any fee or tax the government collects. In other instances, the word tariff can be used in a not-so-strictly trade context such as when used in railroad tariffs. Nonetheless, tariff as a term usually refers to the tax levied on imported goods at the border or point of entry.
It is important to note that countries have been applying tariffs for centuries as this is one of the most common ways that governments have been using to collect revenue. For the most part, it has been so since there is nothing simpler than having customs officials at the border to collect a fee on any imported goods coming in. Administratively, tariffs have to be one of the easiest taxes governments collect.
Understanding Import Tariffs and Duties in International Trade
Generally, tariffs are the main way countries protect or liberalize their economies. Still, it is important to note that this is not the only way as many countries also put in place measures such as quotas, subsidies, and other regulations which often affect trade flow between different countries.
When we talk about liberalization this usually refers to the deliberate reduction of tariffs on imported goods which means that imported products come in at a lower cost. Since this makes trade more profitable, trade becomes more free over time. In economic speak, the total elimination of tariffs and other trade barriers is what is referred to as free trade.
On the other hand, an increase in tariffs is usually referred to as protectionism or protection. Given that tariffs increase the cost of imports from abroad but not from local firms, they usually make domestic firms more competitive as compared to importing firms.
How are Customs Duties Calculated in Global Trade
Since this is a beginner’s guide to customs tariffs and fees, we are only going to look at the two primary ways tariffs are levied: ad valorem and specific tariffs.
Specific Tariffs
This refers to a fixed charge levied for every unit of imported goods. For instance, the American government charges a specific tariff of $0.51 for every wristwatch brought to the US. As such, importing a thousand watches into the United States means the government will collect tariff revenues of $510. In this instance, $510 is collected whether the watch is a Rolex that costs $5,000 or a watch that goes for $40.
Ad Valorem Tariffs
This refers to a fixed percentage levy on the value of the product that is being imported into the United States. Ad valorem is a Latin word that means in proportion to the value or on value. For instance, the US levies an ad valorem tariff of 2.5% on all imported cars. As such, if importers bring in $100,000 worth of automobiles, the government with earn tariff revenues of $2,500. In this instance, the government will collect $2,500 whether ten $10,000 Hyundais are imported or two $50,000 BMWs.
Occasionally, countries will apply both an ad valorem and a specific tariff simultaneously on the same product. This is usually referred to as a two-part tariff. For instance, wristwatches brought into the US are subject to the specific $0.51 tariff in addition to an ad valorem tariff of 6.25% on the strap and case and a 5.3% ad valorem levy on the battery.
Looking at the above example, governments usually apply different tariffs on different products imported into a country. Most governments will not apply the same tariff to all services and goods imported into their country.
However, it is important to note that several countries are the exception to this. For instance, Chile is known to charge 6% on every imported product regardless of its category. The same can be said of the UAE which levies a 5% tariff on just about everything even as Bolivia levies tariffs ranging from 0%, 2.5%, 5%, 7.5%, or 10%. Nonetheless, these constant and simple tariffs are rare.
As such, instead of a single tariff rate, some countries have a tariff schedule specifying the tariff that has to be collected in every particular service and good. In the United States, this is usually referred to as the Harmonized Tariff Schedule (HTS) of the United States. The commodity classifications are derived from the Harmonized System set up by the World Customs Organization which has sometimes been called the Harmonized Commodity Coding and Classification System.
Tips for Reducing Customs Duties
Customs duties, taxes, and other levies often end up accounting for a significant proportion of the finished cost of imported goods. These are charges that you will usually have to pay to tax organizations, customs, warehouse owners, terminal operators, and customs brokers.
The good thing is that you can usually reduce some of these costs by taking advantage of factors that have been found to reduce the total costs of imported goods. These are:
Free Trade Agreements
One of the most effective and easiest ways to reduce customs duties is through free trade agreements that your country has signed with other governments. FTAs usually refer to treaties that set up preferential trade rules such as simplified customs procedures, zero or lower tariffs, and mutual recognition of standards. When you import goods from a country with an FTA with your country you will have preferential treatment as long as you provide the necessary documentation and comply with the rules of origin.
For instance, if you are an importer of textiles into the United States from Vietnam, you get duty-free access from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
Duty Drawbacks
You can also reduce customs duties while importing by applying for duty drawbacks. These are refunds of duty paid for goods that are later destroyed or exported. These are meant to stimulate exports and eliminate or reduce double taxation on goods crossing multiple borders.
If you import goods that are typically reexported without much change in their conditions or goods that are inputs for exported products, obsolete or damaged, you can claim duty drawbacks subject to certain limitations and conditions.
For instance, if you bring in steel from China to the United States and are charged a 25% tariff and subsequently export the steel to Canada, you can get back most of your money from duty drawbacks.
Choose the Right Valuation Method
One of the best ways to reduce customs duties while importing is to go for the right valuation method for your goods. The valuation method refers to how the authorities usually determine the value of imported goods so that they can determine how much duty to charge.
There are half a dozen methods of valuation but the most commonly used is the transaction value. This is usually pegged on the price payable or paid for the goods by the buyer to the seller. However, sometimes the transaction value may not be a true reflection of the value of goods or may not be acceptable or available by the customs authorities.
In such instances, you can make use of alternative methods such as the fallback value, the value of similar or identical goods, the computed value, or the deductive value. You can significantly reduce the duty amount and lower the value by using the most appropriate valuation.
Tariff Classification
Another effective way of reducing customs duties while importing is to optimize tariff classification for your imports. Tariff classification refers to assigning each of your goods a code based on the Harmonized System for international trade. The HS code determines the duty that is supposed to be paid for the particular duty in addition to other restrictions and requirements for your goods.
However, it is important to note that the HS code is not always straightforward or clear and there may be different options or interpretations for your imports. By researching the HS code, hiring a professional broker, or consulting customs authorities, you can find the most favorable and accurate classification for your goods and avoid underpaying or overpaying duties.
Customs brokers can help importers reduce costs through time management. For instance some borders usually close at specific hours of the night or day. This can be detrimental for particular types of goods such as perishables.
For instance, a truck delivering fresh produce from Mexico to the US may take 20 hours to reach the US retailer. If something happens during that time and it arrives at the border at night to find it closed, the products will have to wait until morning to be processed and a significant part of it might be lost.
Moreover, you may have to bear additional warehousing costs, after-hour charges, and additional freight costs among other risks. By working with a good customs broker, will help you plan and account for border closure times to reduce the instances of delays and increased costs.
Streamlined Customs Management
Customs management involves two critical aspects.
Firstly, it is essential to meticulously manage the process of ensuring the required information is provided to customs on time and as efficiently as possible. This often involves determining what are the core elements for customs (such as valuation adjustments, origin, and classification), and getting the necessary documentation and information to a third-party service provider to make the declaration.
Well-planned processes will usually result in streamlined procedures and lower costs but you can usually get much more significant savings by making use of software solutions.
Secondly, it is important to note that customs compliance is usually subjected to audit-based control. Failure to meet customs obligations can result in clearance delays, penalties, investigations, and additional duty demands. For this reason, many businesses spend a lot of resources to perform checks of customs declarations.
Again, streamlined processes can result in significant savings but the good thing is that there are software developments in the process that will significantly help in sei automating customs control. For instance, CustomsCity has software that pulls in customs data electronically from CBP which can create exception reports and check for errors
Autonomous Tariff Suspensions
Customs duties are all about protecting domestic industry as opposed to simply collecting revenue. You can usually apply for autonomous suspensions to remove customs duties on imports such as components or raw materials that are not sufficiently available in the country to which you intend to import.
As an importer, you can lobby and apply for tariff suspensions and if your request is approved, these can result in tariff suspensions sometimes for several years. There are many suspensions that importers are not aware of and if you do your research on individual tariffs you can be surprised at how much cost savings are to be had.
Navigating Free Trade Agreements
Fair trade agreements between the US and several carefully selected trading partners usually offer duty-free or low-duty access among other benefits for importers. Some of these include fair treatment of American investors. Stronger intellectual property protection, opportunities for American service providers, exporter input in the development of country product standards, and opportunities to compete for foreign government procurements.
United States Free Trade Agreements
The US currently has several free trade agreements that have been agreed with several countries mostly in North, Central, and South America, and a few with countries from the Caribbean.
These include multi-nation agreements such as CAFTA-DR the Dominican Republic-Central America Free Trade Agreement which includes most Central American nations and the Dominican Republic, and NAFTA which is the North American Free Trade Agreement that covers Mexico, Canada, and the United States. There are also separate trade agreements with nations from Peru to Australia.
As it stands the United States has Free Trade Agreements with at least 20 countries which accounts for about 40% of exports in the United States.
Overall, these agreements mean that approximately 50% of goods imported into the United States get in without any tariffs being levied. Still, it is important to note that all the agreements do not result in free trade under the most traditional definition of the word. Due to lobbying by special interest groups in the US, there are numerous trade restrictions on many products such as denim, steel, beef, sugar, tuna, milk, and automobiles.
Nonetheless, by adopting a step-by-step procedure when navigating free trade agreements, you can significantly reduce customs costs and enhance the competitiveness of imported goods.
Here is how to do it:
Market Scoping
This makes it possible to identify which free trade agreements are still in effect and what benefits your business stands to gain. This step also shows you what aspects of agreements you may need to investigate more.
You can typically go online on the Harmonised Tariff Schedule to find information about products imported to the United States. Through the HTS which is something of an import duties guide, you will be able to:
- Access every free trade agreement and determine if it is beneficial to your business.
- Find product classification codes to classify your products correctly.
Detailed Assessment
During this step, you will determine what requirements of the free trade agreements you will have to adhere to, to take advantage of the FTA.
This step will usually include confirming:
- Tariff rates and product classification codes.
- Rules of Origin can be obtained from the U.S International Trade Commission, the United States Trade Representative, or from the Rules of Origin Facilitator.
- Documentation requirements such as the Self Declaration of Origin or the Certificate of Origin.
- Shipping requirements – you need to be careful with goods passing through intermediary countries as this could impact eligibility under Rules of Origin requirements.
- Other requirements – This is the time to also look into other import requirements. Some products may need compliance or approvals with packaging, labeling, and plant or animal safety requirements before they can be imported.
Once you have confirmed import requirements, you will also need to engage in the market. However, some things to keep in mind include:
- You will need to keep your in-market partners active and informed throughout the process.
- You need to work with freight forwarders and confirm what is acceptable freight content.
- You can also get market help from the Customs and Border Protection Agency of the United States
Start Exporting
This step helps to ensure that you get all the benefits that you can from a free trade agreement as long as you have the right documentation. Some of the documentation that you will need includes:
- Verification that the imported goods are from a country that has a free trade agreement with the United States. This will usually require filing a Certificate of Origin form which you can find on the CBP website.
- Proof of compliance with any transit requirements to ensure your goods do not lose Origin status.
Keep Up to Date
Once you begin exporting, you will need to review information related to FTAs periodically to ensure that you are getting the most out of them. You will need to:
- Keep an eye out for any amendments that will help your business
- Reassess tariff updates to ensure you comply with all requirements even as your business is evolving.
- Notify key parties of any changes in process/business.
- Review supply chain opportunities.
