BIZCHINA / Trade
Updated: 2006-10-13 14:21 A tariff is a tax on imported goods. When a ship arrives in port a customs officer inspects the contents and charges a tax according to the tariff formula. Since the goods cannot be landed until the tax is paid it is the easiest tax to collect, and the cost of collection is small. Smugglers of course seek to evade the tariff.
An ad valorem tax is a percentage of the value of the item, say 10 cents on
the dollar, while a specific tariff is so-much per weight, say $5 per ton.
Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and, according to an agreed formula, the participating countries share the revenues from tariffs on goods entering the customs union.
If a country's major industries lose to foreign competition, the loss of jobs and tax revenue can severely impair parts of that country's economy. Protective tariffs have been used as a measure against this possibility. However, protective tariffs have disadvantages as well. The most notable is that they increase the price of the good subject to the tariff, disadvantaging consumers of that good or manufacturers who use that good to produce something else: for example a tariff on food can increase poverty, while a tariff on steel can make automobile manufacture less competitive. They can also backfire if countries whose trade is disadvantaged by the tariff impose tariffs of their own, resulting in a trade war and disadvantaging both sides.
There are two main ways of implementing a tariff:
An ad valorem tariff is a fixed percentage of the value of the good that is
being imported. Sometimes these are problematic as when the international price
of a good falls, so does the tariff, and domestic industries become more
vulnerable to competition. Conversely when the price of a good rises on the
international market so does the tariff, but a country is often less interested
in protection when the price is higher. They also face the problem of transfer
pricing where a company declares a value for goods being traded which differs
from the market price, aimed at reducing overall taxes due.
(For more biz stories, please visit Industry Updates)