Forms of Import Tariffs
(i) Specific Tariff: A specific tariff is an import duty that assigns a fixed monetary tax per physical unit of the good imported. It is calculated on the basis of a unit of measure, such as weight, volume, etc., of the imported good. Thus, a specific tariff of `1000/ may be charged on each imported bicycle. The disadvantage of specific tariff as an instrument for protection of domestic producers is that its protective value varies inversely with the price of the import. For example: if the price of the imported cycle is ` 5,000/,then the rate of tariff is 20%; if due to inflation, the price of bicycle rises to ` 10,000 , the specific tariff is only 10% of the value of the import. Since the calculation of these duties does not involve the value of merchandise, customs valuation is not applicable in this case.
(ii) Ad valorem tariff: An ad valorem tariff is levied as a constant percentage of the monetary value of one unit of the imported good. A 20% ad valorem tariff on any bicycle generates a `1000/ payment on each imported bicycle priced at `5,000/ in the world market; and if the price rises to ` 10,000, it generates a payment of `2,000/. While ad valorem tariff preserves the protective value of tariff on home producer, it gives incentives to deliberately undervalue the good’s price on invoices and bills of lading to reduce the tax burden. Nevertheless, ad valorem tariffs are widely used the world over.
There are many other variations of the above tariffs, such as:
(a) Mixed Tariffs : Mixed tariffs are expressed either on the basis of the value of the imported goods (an ad valorem rate) or on the basis of a unit of measure of the imported goods (a specific duty) depending on which generates the most income( or least income at times) for the nation. For example, duty on cotton: 5 per cent ad valorem 0r ` 3000/per tonne, whichever is higher.
(b) Compound Tariff or a Compound Duty is a combination of an ad valorem and a specific tariff. That is, the tariff is calculated on the basis of both the value of the imported goods (an ad valorem duty) and a unit of measure of the imported goods (a specific duty). It is generally calculated by adding up a specific duty to an ad valorem duty. For example: duty on cheese at 5 per cent ad valorem plus 100 per kilogram.
(c) Technical/Other Tariff: These are calculated on the basis of the specific contents of the imported goods i.e the duties are payable by its components or related items. For example: `3000/ on each solar panel plus ` 50/ per kg on the battery.
(d) Tariff Rate Quotas : Tariff rate quotas (TRQs) combine two policy instruments: quotas and tariffs. Imports entering under the specified quota portion are usually subject to a lower (sometimes zero), tariff rate. Imports above the quantitative threshold of the quota face a much higher tariff.
(e) Most-Favored Nation Tariffs: MFN tariffs are what countries promise to impose on imports from other members of the WTO, unless the country is part of a preferential trade agreement (such as a free trade area or customs union). This means that, in practice, MFN rates are the highest (most restrictive) that WTO members charge one another. Some countries impose higher tariffs on countries that are not part of the WTO.
(f) Variable Tariff: A duty typically fixed to bring the price of an imported commodity up to the domestic support price for the commodity.
(g) Preferential Tariff: Nearly all countries are part of at least one preferential trade agreement, under which they promise to give another country's products lower tariffs than their MFN rate. These agreements are reciprocal. A lower tariff is charged from goods imported from a country which is given preferential treatment. Examples are preferential duties in the EU region under which a good coming into one EU country to another is charged zero tariffs. Another example is North American Free Trade Agreement (NAFTA) among Canada, Mexico and the USA where the preferential tariff rate is zero on essentially all products. Countries, especially the affluent ones also grant ‘unilateral preferential treatment’ to select list of products from specified developing countries .The Generalized System of Preferences (GSP) is one such system which is currently prevailing.
(h) Bound Tariff : A bound tariff is a tariff which a WTO member binds itself with a legal commitment not to raise it above a certain level. By binding a tariff, often during negotiations, the members agree to limit their right to set tariff levels beyond a certain level. The bound rates are specific to individual products and represent the maximum level of import duty that can be levied on a product imported by that member. A member is always free to impose a tariff that is lower than the bound level. Once bound, a tariff rate becomes permanent and a member can only increase its level after negotiating with its trading partners and compensating them for possible losses of trade. A bound tariff ensures transparency and predictability.
(i) Applied Tariffs: An 'applied tariff' is the duty that is actually charged on imports on a most-favoured nation (MFN) basis. A WTO member can have an applied tariff for a product that differs from the bound tariff for that product as long as the applied level is not higher than the bound level.
(j) Escalated Tariff structure refers to the system wherein the nominal tariff rates on imports of manufactured goods are higher than the nominal tariff rates on intermediate inputs and raw materials, i.e the tariff on a product increases as that product moves through the value-added chain. For example a four percent tariff on iron ore or iron ingots and twelve percent tariff on steel pipes. This type of tariff is discriminatory as it protects manufacturing industries in importing countries and dampens the attempts of developing manufacturing industries of exporting countries. This has special relevance to trade between developed countries and developing countries. Developing countries are thus forced to continue to be suppliers of raw materials without much value addition.
(k) Prohibitive tariff : A prohibitive tariff is one that is set so high that no imports will enter.
(l) Important subsidies : In some countries, import subsidies also exist. An import subsidy is simply a payment per unit or as a percent of value for the importation of a good (i.e., a negative import tariff).
(m) Tariffs as Response to Trade Distortions: Sometimes countries engage in 'unfair' foreign-trade practices which are trade distorting in nature and adverse to the interests of the domestic firms. The affected importing countries, upon confirmation of the distortion, respond quickly by measures in the form of tariff responses to offset the distortion. These policies are often referred to as "trigger-price" mechanisms. The following sections relate to such tariff responses to distortions related to foreign dumping and export subsidies
(i) Anti-dumping Duties: Dumping occurs when manufacturers sell goods in a foreign country below the sales prices in their domestic market or below their full average cost of the product. Dumping may be persistent, seasonal, or cyclical. Dumping may also be resorted to as a predatory pricing practice to drive out established domestic producers from the market and to establish monopoly position. Dumping is an international price discrimination favouring buyers of exports, but in fact, the exporters deliberately forego money in order to harm the domestic producers of the importing country. This is unfair and constitutes a threat to domestic producers and therefore when dumping isfound, anti-dumping measures which are tariffs to offset the effects of dumping may be initiated as a safeguard instrument by imposition of additional import duties so as to offset the foreign firm's unfair price advantage. This is justified only if the domestic industry is seriously injured by import competition, and protection is in the national interest (that is, the associated costs to consumers would be less than the benefits that would accrue to producers). For example: In January 2017, India imposed anti- dumping duties on colour-coated or pre-painted flat steel products imported into the country from China and European nations for a period not exceeding six months and for jute and jute products from Bangladesh and Nepal.
(ii) Countervailing Duties: Countervailing duties are tariffs that aim to offset the artificially low prices charged by exporters who enjoy export subsidies and tax concessions offered by the governments in their home country. If a foreign country does not have a comparative advantage in a particular good and a government subsidy allows the foreign firm to be an exporter of the product, then the subsidy generates a distortion from the free-trade allocation of resources. In such cases, CVD is charged in an importing country to negate the advantage that exporters get from subsidies to ensure fair and market oriented pricing of imported products and thereby protecting domestic industries and firms. For example, in 2016, in order to protect its domestic industry, India imposed 12.5% countervailing duty on Gold jewellery imports from ASEAN.
(j) Escalated Tariff structure refers to the system wherein the nominal tariff rates on imports of manufactured goods are higher than the nominal tariff rates on intermediate inputs and raw materials, i.e the tariff on a product increases as that product moves through the value-added chain. For example a four percent tariff on iron ore or iron ingots and twelve percent tariff on steel pipes. This type of tariff is discriminatory as it protects manufacturing industries in importing countries and dampens the attempts of developing manufacturing industries of exporting countries. This has special relevance to trade between developed countries and developing countries. Developing countries are thus forced to continue to be suppliers of raw materials without much value addition.
(k) Prohibitive tariff : A prohibitive tariff is one that is set so high that no imports will enter.
(l) Important subsidies : In some countries, import subsidies also exist. An import subsidy is simply a payment per unit or as a percent of value for the importation of a good (i.e., a negative import tariff).
(m) Tariffs as Response to Trade Distortions: Sometimes countries engage in 'unfair' foreign-trade practices which are trade distorting in nature and adverse to the interests of the domestic firms. The affected importing countries, upon confirmation of the distortion, respond quickly by measures in the form of tariff responses to offset the distortion. These policies are often referred to as "trigger-price" mechanisms. The following sections relate to such tariff responses to distortions related to foreign dumping and export subsidies
(i) Anti-dumping Duties: Dumping occurs when manufacturers sell goods in a foreign country below the sales prices in their domestic market or below their full average cost of the product. Dumping may be persistent, seasonal, or cyclical. Dumping may also be resorted to as a predatory pricing practice to drive out established domestic producers from the market and to establish monopoly position. Dumping is an international price discrimination favouring buyers of exports, but in fact, the exporters deliberately forego money in order to harm the domestic producers of the importing country. This is unfair and constitutes a threat to domestic producers and therefore when dumping isfound, anti-dumping measures which are tariffs to offset the effects of dumping may be initiated as a safeguard instrument by imposition of additional import duties so as to offset the foreign firm's unfair price advantage. This is justified only if the domestic industry is seriously injured by import competition, and protection is in the national interest (that is, the associated costs to consumers would be less than the benefits that would accrue to producers). For example: In January 2017, India imposed anti- dumping duties on colour-coated or pre-painted flat steel products imported into the country from China and European nations for a period not exceeding six months and for jute and jute products from Bangladesh and Nepal.
(ii) Countervailing Duties: Countervailing duties are tariffs that aim to offset the artificially low prices charged by exporters who enjoy export subsidies and tax concessions offered by the governments in their home country. If a foreign country does not have a comparative advantage in a particular good and a government subsidy allows the foreign firm to be an exporter of the product, then the subsidy generates a distortion from the free-trade allocation of resources. In such cases, CVD is charged in an importing country to negate the advantage that exporters get from subsidies to ensure fair and market oriented pricing of imported products and thereby protecting domestic industries and firms. For example, in 2016, in order to protect its domestic industry, India imposed 12.5% countervailing duty on Gold jewellery imports from ASEAN.
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