Understanding Customs Tariffs: What They Are and How They Impact Global Trade

Introduction to Customs Tariffs

In the ever-evolving landscape of international trade, customs tariffs play a crucial role in shaping global commerce. As businesses expand their reach across borders, understanding the intricacies of these tariffs becomes essential for successful trade operations. In this comprehensive guide, we'll delve into the world of customs tariffs, exploring their definition, types, calculation methods, and impact on international trade.

Recent data from the World Trade Organization (WTO) shows that global average tariff rates have been steadily decreasing over the past decades, from around 40% in 1947 to less than 10% today. However, tariffs remain a significant factor in international trade, with some countries maintaining high rates for specific sectors or products.

What Are Customs Tariffs?

Customs tariffs, also known as import duties or import tariffs, are taxes imposed by customs authorities on goods entering a country. These tariffs serve multiple purposes, often overlapping in their objectives:

• Protecting domestic markets and ensuring their competitiveness by raising the prices of imported products
• Increasing state revenue through taxation on imports
• Penalizing certain countries by applying higher tariffs to their products
• Retaliating against countries that impose high tariffs (a key point in the ongoing trade tensions between China and the United States)

When goods are imported in an international trade operation, they must be declared to customs upon arrival. This declaration must be accompanied by various documents, including the Bill of Lading, packing list, and commercial invoice, along with any other documents required by the customs authority.

Import tariffs are a crucial factor in estimating the cost of international transport. Given that they can add a significant amount to the total cost of the operation, they should not be underestimated during commercial negotiations. As an importer, you should also consider this cost when setting the selling price of your imported products.

Types of Customs Tariffs

There are several ways to apply customs tariffs. The most common is the 'ad valorem' method, but there are other formulas such as 'specific', 'mixed', and 'compound' duties.

1. Ad Valorem Tariffs

This is the most common type of tariff. A percentage of the value of the imported products is paid. The taxable base on which it is calculated is given by the customs value of the goods or CIF value (Cost, Insurance, and Freight).

Example of an ad valorem tariff: 4.5% of the total value of imported cushions.

2. Specific Tariffs

These are calculated based on measures related to the quantity of product imported, such as weight or number of units.

Example of a specific tariff: Australia applies a tariff of $1.22/kg for certain types of cheese.

3. Mixed Tariffs

In these cases, an ad valorem tariff is added to a specific one.

Example of a mixed tariff: Pakistan applies a mixed tariff on some petroleum products of 25% + 0.88 rupees/l.

4. Compound Tariffs

A main tariff is established that can be ad valorem, specific, or mixed, but the total to be paid is delimited with a minimum or maximum amount. It can also be a combination, that is, an interval between a minimum and maximum.

Example of a compound tariff: €0.5 per unit but with a minimum of €1000 and a maximum of €3,500.

Common Customs Tariff and Additional Tariff Measures

In addition to the common customs tariff, there are other additional tariff measures that protect the health of international free trade. We could say that the common customs tariff is the norm, and the additional measures are the exceptions. The most common are countervailing measures, anti-dumping measures, and safeguard measures.

Common Customs Tariff

As its name suggests, the common customs tariff is the basic tariff imposed on imported goods. Local governments decide whether to impose these customs tariffs as ad valorem, specific, mixed, or compound duties.

Anti-dumping Measures

Anti-dumping measures are designed to protect a country's local industry, preventing foreign companies from exporting at a price lower than they would apply in their own markets (known as dumping). These measures raise the import price of products to cover that difference and ensure fair competition in the market.

Safeguard Measures

Safeguard measures are applied to products that have been imported into a country in such large quantities that it could be considered a threat to the local industry. They are imposed to protect a country's local economy and are often calculated based on the potential monetary loss it could mean for the local industry.

Calculating Customs Tariffs

The amount an importer must pay to customs authorities for goods is officially known as the 'customs debt'. This is calculated based on three factors:

1. The customs value of the cargo
2. The applicable tax rate or tariff
3. The origin of the goods

1. Customs Value of the Cargo

The customs value of the cargo is a fundamental element in calculating international transport costs, as it forms the basis for determining the taxation of an import. Both import VAT and tariffs are determined based on the customs value.

The main method for calculating the value of an import is the 'transaction value' method. This is based on the amount of money the buyer has paid the seller for the goods, including all costs involved in transporting the goods to the point of import.

2. Applicable Tariff

The tariff applicable to an imported product depends on the product's classification in a system called the 'harmonized system', which organizes all possible products into codes. The code for each product implies a tax rate, or in other words, the percentage that should be applied to the customs value to calculate the payment of tariffs.

3. Origin of the Goods

Depending on the country of origin of the goods, import restrictions and tariffs may vary. It's very important to check if there's any type of preferential agreement between the country of origin and the destination that facilitates the entry of imported goods.

Other Aspects to Consider When Calculating Customs Tariffs

Free Trade Agreements (FTAs)

Free Trade Agreements or FTAs are agreements to facilitate trade exchange between two countries. Before importing, check if there are any of these treaties between the country you're importing from and the destination country.

Minimum Thresholds

Each country establishes the minimum threshold from which taxes and tariffs are paid. Below these thresholds (called De Minimis Thresholds or DMTs in English), tariffs are not applicable.

Payment

Verify the different tariff payment methods and deadlines of the customs authority of the country you're importing from. In most cases, payment must be made as soon as the goods enter the country, but sometimes extensions can be obtained in the payment term.

Customs Broker

There's a specialized figure that can help you with the calculation and payment of customs taxes and tariffs and with all the management of the release of the goods: the customs broker at destination. These are experts in the customs procedures of a particular country (paperwork, payment of tariffs, restrictions, etc.) who will handle everything related to customs clearance.

How FreightAmigo Can Help Navigate Customs Tariffs

As a Digital Logistics Platform, FreightAmigo offers several powerful features that can assist businesses in managing the complexities of customs tariffs:

1. Real-time Tariff Information: Our platform provides up-to-date information on tariff rates for different countries and product categories, helping you stay informed about potential costs.
2. Automated Documentation: FreightAmigo's system can automatically generate and manage necessary customs documents, reducing the risk of errors that could lead to tariff-related issues.
3. Customs Clearance Assistance: We offer customs clearance services through our network of experienced partners, ensuring smooth processing of your shipments.
4. Cost Calculation Tools: Our Digital Platform includes tools to help estimate total shipping costs, including applicable tariffs, allowing for more accurate budgeting and pricing.
5. Expert Support: Our 24/7 logistics expert support can provide guidance on tariff-related queries and help resolve any issues that may arise during the import process.

By leveraging FreightAmigo's Digital Logistics Solution, businesses can navigate the complex world of customs tariffs more efficiently, potentially saving time and reducing costly errors.

Conclusion

Understanding customs tariffs is crucial for anyone involved in international trade. These taxes play a significant role in shaping global commerce, protecting domestic industries, and generating revenue for governments. While the calculation of tariffs can be complex, involving factors such as the customs value of goods, applicable rates, and country of origin, tools and expertise are available to help navigate this landscape.

As the global trade environment continues to evolve, staying informed about tariff regulations and leveraging digital solutions like FreightAmigo can give businesses a competitive edge. By streamlining the process of managing tariffs and other aspects of international shipping, companies can focus on what they do best - growing their business in the global marketplace.

We encourage you to explore how FreightAmigo's Digital Logistics Platform can support your international trade operations and help you navigate the complexities of customs tariffs. Contact us today to learn more about our comprehensive logistics solutions.