Venturing into international trade calls for an understanding of technical terms such as tariffs, duties, and importers of record.
Imagine what importing would be like if goods moved unrestricted from country to country! Think about insecurity, illicit trade, and all possible risks the world would face. These risks lay the foundation of trade barriers, tariffs, and duties.
Governments impose duties on goods with specific characteristics to determine how freely the goods can move across the borders. A certain fee is also imposed on specific goods from specific countries at specific times, usually called tariffs.
As an importer, you don’t want these duties and taxes to catch you by surprise, as you must budget for all expected import expenses. As such, you must stay updated with current tariffs and duties applying to specific goods for varied import destinations.
However, catching up with trade duties and tariffs can be daunting, especially when you do not have global trade expertise. That’s where the importer of record comes into play.
This article discusses what trade tariffs and duties are and how the importer of record can help navigate them. You will also learn the goal of trade barriers in-depth and the varied types of tariffs.
Let’s dive into the discussion!
What are trade tariffs?
If the flow of goods into a country is uncontrolled, the local industry may suffer unfair trade. Hence, governments determine the amount of tax that should apply to foreign goods to safeguard the national economy and encourage domestic production.
So, trade tariffs are a form of regulation that determines the tax or fee payable on imported goods. It is a fee that the government levies on goods and services imported between varied countries.
It can be a fixed percentage agreed upon by the importing country and the country of destination for all imported goods. Its primary aim is to protect domestic manufacturers from unfair competition. For instance, the EU has developed over 40 trade agreements with varied countries that control the movement of goods within and outside the partner countries.
Trade tariffs can also be a fixed fee for specific categories of goods. To determine the trade tariffs applicable to a particular type of goods, you must ensure accurate classification of the imported goods.
Types of trade tariffs
Here are the four significant types of trade tariffs:
Tariff-rate quotas (TRQ)
TRQ applies to specific limited goods that:
- Can be imported within a specific period at lower customs duties rates than the usual
- Can be expressed in a unit of measure such as volume, weight, value or quantity.
Tariff quotas allow importers to import a certain amount of goods at lower tariff rates, with goods above the set amount charged at higher rates.
Compound tariffs
Compound tariffs are a combination of specific tariffs and ad valorem tariffs. It imposes a tax on imported goods based on their value and quantity. For example, when importing petroleum products to Pakistan, you must pay Rs. 0.88 per litre, plus 25% ad valorem.
Specific tariffs
A specific tariff is a fixed fee levied based on the product type. For instance, if you import wristwatches into the United States, you pay a $0.51 specific tariff per wristwatch.
Ad Valorem tariffs
An ad valorem tariff is a fee levied based on the value of imported goods. For instance, if importing automobiles from the US into Japan worth $20,000, you are charged a 15% ad valorem tariff. Hence, you are expected to pay $23,000 to Japanese consumers.
What are custom duties?
Customs duties are taxes the government imposes on goods and services manufactured and sold within a country or imported from another country.
Customs duties vs tariffs [the difference]
Duties and tariffs can be used interchangeably in some instances. The critical difference between them is how they are applied. Duties are indirect taxes levied on the consumer for domestic goods, imported goods, or intrastate transactions. On the contrary, tariffs are direct taxes levied on imported goods from another country.
Objectives of trade barriers
There are four main reasons governments impose trade tariffs:
- To generate revenue: Trade tariffs and duties are a significant source of revenue for the public sector, especially in developing countries. The revenue is generated when higher prices and tax revenues apply to imported goods.
- To protect domestic trade: Foreign investors can quickly take over new firms before they find their footing on the global market. Trade tariffs allow these firms to grow and stabilise, encouraging local investors. This can be achieved through raising the tax requirements of specific foreign products.
- Safeguard national economy: Protective tariffs allow domestic industries to grow and strengthen the national economy by making some imports more expensive than local products.
- Promote fair trade: Tariffs help avoid trade deficit (when imports exceed exports value), encouraging a balanced exchange and promoting economic stability.
Challenges in navigating trade tariffs and duties
Trade tariffs and duties are some of the reasons small businesses are reluctant to engage in international trade. This is because, if not carefully controlled, it can slash your profit margins.
Here are the challenges facing businesses when navigating trade tariffs and duties:
A drastic change in the price of imported goods
The percentage increase in tariff is calculated based on the value of the imported goods. The charges are usually passed on to the end consumer, affecting their buying behaviours. This, in turn, leads to losses on the importer.
Rapidly changing tariffs
Trade disputes, geopolitical tensions, and policy changes significantly impact import data records. Sudden embargoes, trade barriers, and sanctions disrupt import supply chains and can lead to detainment of imported goods or penalties.
HS code classification
Accurate classification of goods is essential as it determines the valuation of goods and the duties and taxes payable. Incorrectly classifying your goods can lead to compliance issues, undervaluation, or overvaluation.
New importers or importers who haven’t specialised in international trade find classifying goods challenging. This is because some products have overlapping characteristics, and others may fall into multiple categories.
For instance, classifying imported software can be challenging when determining if it should be classified as a product or a service.
The role of an IOR in fulfilling trade tariffs and duties
The importer of record plays a significant role in fulfilling trade tariffs and duties. Here are the five critical ways the IOR can help importers navigate tariffs and duties:
Accurate HS classification
Every country has a list of restricted and prohibited goods, classified using unique codes (HS codes). Restricted goods can be classified based on the destination country, the nature of the goods, or the intended end use.
Accurate identification of the goods is critical as it determines the import requirements, including licensing requirements and expected duties and tariffs. However, without the cross-border trade experience, it can be challenging to identify the correct category for your goods. Importers of record leverage their cross-border shipping experience and expertise to help assign accurate codes for imported goods. This ensures faster customs clearance. It also helps avoid penalties and seizure of goods at the border due to non-compliance.
Identifying customs requirements for the goods
With an accurate HS code, you want to understand the relevant legal documents required (if any) to authorise the shipment of your goods. You also want to identify the documentation expected during customs clearance. The importer of record helps navigate all the import requirements in time for submission and processing.
Obtaining relevant licensing and paperwork
With all the import requirements identified, the next thing you want is to apply for any licensing requirements. You also want to ensure you have filled out and submitted all required paperwork, including shipping labels and commercial invoices.
The importer of record can seamlessly navigate the application and processing of required licences. Even better, the IOR can use their existing credentials to ace customs clearance instead of fulfilling the lengthy procedures of verifying the importer. The IOR also helps identify the relevant tariffs that apply to specific goods or services. This applies to goods moving physically or via ecommerce sites.
Goods valuation
The value of your goods determines the type and amount of tariffs and duties that apply. With valuation, you factor in all the expenses to be incurred during the import transaction, including shipping costs, dutiable costs, and charges. Inaccurate estimation of these costs can lead to overvaluation or undervaluation of the goods.
The IOR’s experience and expertise are significant in identifying hidden costs, such as taxes and associated risks, to accurately value the goods and ensure your profit margins are met.
Settling duties and tariff fees
You have settled on the amount of duties and tariffs payable. But between the importer and the buyer, who is responsible for settling the expenses?
The importer of record settles the expenses, depending on the shipping terms agreed upon between the seller and buyer. We previously discussed the roles and responsibilities of the buyer and seller on DAP, DAT, and DDP incoterms.
Over to you
Navigating trade tariffs has never been a walk in the park, primarily if you do not specialise in cross-border trade. You need an understanding of the nuts and bolts of trade barriers, including tariffs and duties, so that you can meet your profit margins. While the tariffs and duties favour domestic trade, you can seamlessly find a way into the global market with an importer of record.
Besides, an established importer of record such as Blackthorne handles all aspects of duties, taxes, and tariffs. We also maintain the documentation, records, and paperwork for the minimum period required by law, helping avoid future fines and taxes.
Hence, if you need help navigating trade tariffs and duties, get in touch so we can discuss your importation needs. You can also learn more about our IOR services and how we ensure a seamless experience when importing to foreign destinations.
