Types of Tariffs

A tariff or customs duty is a financial charge in the form of a tax, imposed at the border on goods going from one customs territory to another. Tariffs applied to imports are usually collected by customs officials of the importing country when goods are cleared through customs for domestic consumption. Tariffs can also be imposed on exports also but the import tariffs are the most common type of tariffs and have been the main focus of attention of GATT/WTO negotiations.

There are different types of tariffs, depending on the way they are calculated. Two of the most common types of tariffs used are ad valorem tariffs and specific tariffs.

Ad valorem tariff

A tariff calculated on the basis of the value of the imported good, expressed as a percentage of such value. For example, an ad valorem tariff of 10% on an imported car worth US$ 10000 would lead to a requirement to pay US$ 1000 as customs duty.

Specific Tariff

A specific tariff is a tariff calculated on the basis of a unit of measure, such as weight or volume, of the imported good. For example, a tariff of Rs. 1000 per gram of Gold on imported Gold.

Impact of Tariffs

There are two main purposed of imposing tariffs by the Governments.

• To protect their domestic industries from the competition of imports.
• To collect revenue.

This means that the tariff levied on an imported product imposes costs on both, the country “exporting” the product and the country “Importing” that product and imposing the tariff. The imposition of import tariffs increases the domestic price of the imported good. This usually brings gains for domestic producers of the good and the government in the importing country, but also losses for consumers (who will buy less of the product since the price is higher) and for other domestic producers who use that good as an input.

Tariff Binding

A “bound tariff” is a tariff for which a WTO Member accepts a legal commitment not to raise it above a certain level. In the WTO, Members commit to ”bind” their tariffs (during negotiations), and the “bound rate” represents the maximum level of import duty that can be levied on a product imported into that Member. A member is always free to impose a tariff that is lower than the bound level.

^^Tariff negotiations are not only about negotiating tariff reductions, but also about negotiating tariff bindings. Tariffs bindings provide predictability to traders by setting an upper limit on the amount of duty that can be levied on a product. In other words, traders know that the import tariff that they will have to pay for a product cannot be higher than the bound level recorded in the Schedule of concessions for that product.

For example, if assume that India is a WTO Member who made a commitment to bind its tariff on diapers at 10% ad valorem. This would imply that:

• India cannot impose a 12% ad valorem tariff on diapers imported from other WTO members.
• India can apply a 15% ad valorem tariff to a non-WTO member
• India can apply a 5% tariff that is “lower” than the bound level. However, such “lower” tariff has to be applied on an MFN basis, that is, to like diapers imported from all WTO Members

Why countries agree to reduce tariffs?

There are many implications, however major three have been discussed as below:

• It results in enhanced market access and predictability for traders. As tariff barriers are reduced in both developed and developing countries, increased market access opportunities will allow Members to improve welfare by expanding export volumes and revenues and through better access to their markets for imports
• The WTO rules say that the Tariff negotiations shall be held on a reciprocal and mutually advantageous basis. This is called ”reciprocity”. Generally, this requirement implies that negotiations for the reduction of tariffs should achieve a result that is mutually beneficial to all participants. However, the principle of reciprocity does not apply in the same manner to tariff negotiations between developed and developing country Members since it has been adapted to take account of the principle of special and differential treatment. This involves requiring from developing countries ”lesser” liberalization than from developed countries in multilateral rounds of negotiations – a principle originally referred to as “non-reciprocity” or, more recently, as “less-than-full reciprocity”.
• The MFN principle plays an important role in enhancing market access for goods. With respect to tariff negotiations, the MFN rule serves to avoid concession-erosion after tariff negotiations (see example below). In addition, for developing countries and others with little bargaining power in the negotiations, the MFN principle ensures that they will benefit from the best tariff treatment resulting from the negotiations.

General elimination of quantitative restrictions

As a general rule, the WTO members cannot impose quantitative restrictions such as bans or quotas on the goods imported from or exported to another Member.  While tariffs are allowed as long as they do not exceed the bound levels and are applied on a non-discriminatory basis, quantitative restrictions are generally prohibited. But there are exceptions which allow the imposition of quantitative restrictions in certain circumstances and subject to specific conditions. These exceptional rules permit the imposition of quantitative measures under limited conditions and only if they are taken on policy grounds justifiable under the GATT such as critical shortages of foodstuffs and balance of payment problems. As long as these exceptions are invoked formally in accordance with GATT provisions, they cannot be criticized as unfair trade measures.

Implications of Quantitative Restrictions

The quantitative restrictions are considered to have a greater protective effect than tariff measures and are more likely to distort free trade that is why they are prohibited. When a trading partner uses tariffs to restrict imports, it is still possible to increase exports as long as foreign products become price competitive enough to overcome the barriers created by the tariff. When a trading partner uses quantitative restrictions, however, it is impossible to export in excess of the quota no matter how price competitive foreign products may be. Thus, quantitative restrictions are considered to have such a greater distortional effect on trade than tariffs that their prohibition is one of the fundamental principles of the GATT. But also, GATT provides exceptions to this fundamental principle.