With talk of tariffs and a trade war dominating global news headlines, there is a plethora of information to digest on what the potential implications are, what the future of trade looks like, and how it could affect your business. With the thought of ‘less is more’ in mind, I’d like to examine some of the basic questions that are swirling around the discussions surrounding tariffs and how you can best navigate this territory to properly manage your supply chain.
1.) What is a tariff and how do countries manage them?
In short, a tariff is a tax levied on an imported good all countries around the world have these duties/taxes placed on goods that enter their country/commerce.
Tariffs are one of the oldest trade policy instruments, with their use dating back to at least the 18th century. Historically, the main objective of a tariff was to raise revenue. In fact, before ratifying the 16th Amendment in 1913 and formally creating the income tax, the U.S. government raised most of its revenue from tariffs.
Notably, there are two types of tariffs: unit, and ad valorem. A unit or specific tariff is a tax levied as a fixed charge for each unit of a good that is imported – for instance, $300 per ton of imported steel. Most goods will fall under the second type, an “ad valorem” tariff, which is levied as a proportion of the value of imported goods. An example is a 10 percent tariff on imported clothing apparel, but both tariffs yield the same results.
Even so, the main purpose of a tariff these days tends to be about protecting particular domestic industries from foreign competition, alongside raising revenue.
2.) What is a tariff code?
A tariff code is a product-specific code as documented in the Harmonized System (HS) maintained by the World Customs Organization (WCO.) Tariff codes exist for almost every product involved in global commerce. A complete tariff code is no less than six digits and can be up to 10.
Tariff codes are used to identify the rate of duty that will be assessed for the import or if a Free Trade agreement is available for use. They are used in international transactions to report out specific export goods that leave all countries around the world and used in the process for import declaration at the time of entry. The classification used for the identification of the export good may or may not be the number used for the imported goods by your customer.
Does a difference in the number (export versus import) indicate a wrong or fraudulent classification? I say no, so long as your customer has a reasonable explanation as to why the different number is used.
Just because one country classifies a good as a candy does not make it mandatory that all countries around the world adopt the same exact classification. Each country manages their tariff codes and how products should be classified according to their own legislation and standards.
For example, if Germany classifies a product as a festive article should the US be bound to use the same number? Having a good classification process that is documented to support your work and decisions is a good business practice for all companies involved in international trade.
Finally - do not be fooled by selecting codes by the lower duty rate; be confident with your decisions and always work with your customers or partners to best understand their selection!