Tariffs — a key term that every importer should know and be well-versed with. Tariffs are important for every business that plans to trade internationally, and you should be well-prepared on the tariff rates and the kinds of tariffs that you may face in your international business.
Read on to find out what exactly is a tariff, how the tariff on your shipment is calculated and how you can reduce your tariff rates
This article at a glance:
1. What are tariffs?
A tariff is a tax imposed by a country’s government on imported goods that enter its borders. There are certain reasons why tariffs are levied, read on to find out more.
2. What kinds of tariffs are there?
There are four types of tariffs that you must know in order to calculate your payable tariff — ad valorem tariffs, specific tariffs, compound tariffs, and tariff-rate quota.
3. How do I calculate my tariff based on my product?
You can either do a search using HS codes or use an easier way, an online calculator. In the sections below, we show you how to calculate your tariff efficiently.
What are Tariffs?
A tariff is a type of tax that is levied by the government of the country when goods and shipments are at the border, waiting to be imported into the country. Tariffs can also be imposed on export goods, although import tariffs are much more common.
What you need to know about import tariffs
You may hear import tariffs being called customs fees, duties imposed, or import fees. They could mean the same thing — the tax that the government collects when a product or good is brought into the country.
Export tariffs, as the name says, is the tax the government places on products brought out of the country. There are times when the government feels that the country requires a huge amount of a certain local product (usually one that helps the country maintain economic stability) and decides to discourage local manufacturers from selling these products overseas. Thus, the export tariff is levied in a bid to dishearten these domestic manufacturers by raising the cost of exporting their products.
Why Are Tariffs Levied?
Why does the government need to collect tax on imported goods? There are several reasons for this.
To protect local and domestic manufacturers For political and economic reasons
Imagine if all the products in a country are imported, who will use domestic products and how will local manufacturers survive? In such cases, imposing tariffs on imported products increases the price of the product itself, discouraging consumers from buying imported goods and opting for the less expensive domestic goods instead.
For political and economic reasons
Power in trade is important when a country is trying to achieve its political aims. For example, the US-China trade war where the US raised tariffs on imports from China (and some other countries as well). This was seen as a way to exert political leverage over other countries and establish the US as a stronger economy.
To protect newer and important industries
Imposing higher tariffs on goods that are facing international competition is the government’s way to protect local industries that are considerably new and important to that country in question. For example, Ghana has every reason to protect its cocoa manufacturing industry. By imposing tariffs on imported cocoa, they increase demand for the cheaper local cocoa.
What Types of Tariffs Are There?
There are four types of tariffs that you may come across when dealing internationally.
Ad valorem Tariffs
“Ad valorem” means “according to value” in Latin. What this means is that the tariff is calculated based on the value and worthiness of the product. This tariff rate is usually presented in percentage.
For example, Ben is importing designer plates into the EU. The current tariff rate is 10% for kitchen and household products. If the amount of his total shipment of plates is worth €50,000, he will need to pay €5,000 in tariffs. If his plates are worth €500, he will only need to pay €50 as tariff.
Specific tariffs are counted by a unit of a product, usually with a fixed fee. This type of tariff cannot be imposed on products that change value drastically often, such as artwork, vehicles, or diamond goods.
For example, Jerry imports $100,000 worth of tees into a country that imposes $5 for every shirt that is imported in. In contrast to ad valorem tariffs, specific tariffs are calculated based on every unit, therefore every shirt. In Jerry’s case, he will need to declare how many tees are in his shipment, instead of the total worth.
If he has 10,000 tees in that shipment, how much tariff will he be required to pay? Seeing that the tariff is $5 for every tee, Jerry will need to pay $50,000 for that shipment (10,000 x $5). Of course, the tariff rate differs by product and country, it is not a fixed rate for every type of product.
Compound tariffs are a combination of both ad valorem and specific tariffs, which also makes it a tad more confusing and difficult to calculate. Here’s an example to help you understand better.
Catherine is importing soft toys into a country that imposes a 10% ad valorem tariff and a $2 specific tariff. Remember, an ad valorem tariff is calculated by the percentage of the total value of the product, whilst a specific tariff is based on every unit of the product. Catherine plans to import 500 (worth $10,000) soft toys, with each toy costing $20. Let’s calculate how much she needs to pay in tariffs.
Cost of soft toys = $10,000
Ad valorem tariff = $1000 (10% x $10,000)
Specific tariff = $1000 ($2 x 500)
Total tariffs = $2000 (ad valorem + specific)
Total cost she needs to import her soft toys = $12,000 (cost of soft toys + total tariffs)
The tariff-rate quota works differently from the previous three types of tariffs as it is based on the quota of your imports up to a certain amount.
For example, Tom wants to import 5,000 phone chargers. The tariff imposed is $2 on each charger, up to 1,000 chargers. This means that the quota is the first 1,000 chargers. However, the rate goes up to $4 on each charger after the quota has been met. How much will Tom need to pay for his shipment?
For 1,000 chargers = $2,000 ($2 x 1,000)
For the remaining 4,000 chargers = $16,000 ($4 x 4,000)
Total tariffs = $18,000 ($2,000 + $16,000)
How Do Tariffs Work?
As you can see, how much tariff you pay depends on which model the country you are importing to follows, which will determine your total tariffs. It also depends on the value of the imported goods, the rate of each country, and how many units you are importing.
As an importer or international merchant, you should always check how much the tariffs you need to pay before importing your products into a certain country. Sometimes, you may find that it is not worth paying that amount of tariff for your import. Also, keep in mind that as your imported goods will probably be more expensive as compared to local products, consumers may choose to pay less for domestic goods, causing your revenue to drop in the long run.
Tariffs and Duty
A duty and a tariff may sound like the same thing, but in fact, they are different. Tariffs are counted and referred to as a percentage (a tariff of 2%). A duty is counted based on the amount you have to pay ($200). Thus, if someone asks you how much is the percentage of a country, they are probably referring to the tariff rate, and not the import duty.
How Do You Calculate How Many Tariffs You Need to Pay?
You can look up tariffs in the country you want to import from using HS codes. HS codes are used to categorize different products and goods. Let’s use the UK government service to look up “shoes” and see what comes up.
Searching for “shoe” brought up a number of subheadings that categories every type of shoe, including snowboard boots and footwear with uppers of rubber or plastics, with the code 6402.
Alternatively, a search on “T-shirt” brought up a code of 6109 and other sub-headings as below.
Thus, if you’re importing cotton t-shirts, your HS code is 6109100010.
An easier method would be to use an online calculator, which shows you how much you need to pay to import a certain product into a country. A google search for online tariff calculators could bring you to the right place. Here’s an example we did use the Customs Duty Free online calculator.
We did a simple input on the online form to import shirts from Brazil to the UK.
Here’s what we got:
Of course, there are numerous online calculators for you to explore. You can look around and find the one that works best for you. If you don’t remember your HS code, no worries. A lot of these calculators allow you to search using a product name as well. The rule to remember is to enter the country you are exporting from and importing into correctly, as it determines how much tariff and VAT you may need to pay.
How Can You Reduce Tariffs Imposed On Your Goods?
Tariffs can be legally avoided by using free trade zones and certain workarounds which we will cover in the section below.
Free trade zones
Also referred to as FTZ or foreign trade zones, there are actually many free trade zones located around the world which you can use to your benefit. What exactly are free trade zones and how do they help you reduce your tariffs?
Free trade zones are certain areas situated near borders of different countries where you can buy/sell goods, manufacture products, store your stock, import and export products without barriers to trade.
For one, you’ll be delighted to hear that free trade zones do not have tariffs. You can ship your raw materials that are bought from your local country into a free trade zone, manufacture your finished product using those raw materials, then ship the product to another country. These processes will not be taxed, as they are done in the free trade zone. These zones are also nearer to certain borders, allowing you to choose which zone you want to ship your raw materials to, in order to potentially save on shipping costs into that country as well.
Secondly, when you ship goods into a free trade zone, you do not have to pay any duties until the products leave the zone and are imported into the next country. This way, you do not have to pay duties in a lump sum but instead split the cost of duties. You can also choose to manufacture raw materials directly at the free trade zone so that you can save on tariffs imposed on the raw materials.
If your destination country imposes the Tariff-rate Quota model for tariffs, you can make use of free trade zones as well. For example, if the quota is 10,000, you can ship up to 10,000 units of your product first into the destination country. Then, you could wait till the next quota period to ship your remaining goods. This makes sure that you are getting the lowest tariff rate due to the quota.
Create multiple manufacturing facilities and distribution channels
If you have different places where you manufacture your raw materials into the finished product and multiple channels where you can distribute your completed products to your destination countries, you can potentially save on tariffs the legal way.
For example, as mentioned in our recent podcast by one of our guests, “We deal with the US tariffs by supplying into the US out of Malaysia. We can avoid tariffs. And we can be more competitive that way with the US market. We still supply out of China to other markets where there's free trade agreements in place."
A Simpler Way to Handle International Trade and Business Operations
Now that you are familiar with tariffs and how they work, let’s move on to how you can handle international payments more efficiently than using traditional banking options.
Traditional bank transfers are time-consuming and incur heavy forex exchange rates.
At Silverbird, we offer a global business account that allows you to hold, transfer and exchange over 30 currencies, with direct IBANs, and fast EU/US/UK transactions – so you don’t have to go through the trouble to open multiple ones. Our secure onboarding is 100% online with just a single account for all your transactions.
If you’re an importer or international merchant looking for a simple way to receive and send money abroad, start onboarding today.
Author: Silverbird Content Team
Illustration: Kate Faldina