In simple words, a tariff is a duty or a tax imposed by one nation on the imported goods of another nation. Every country has a tariff schedule which specifies the duty collected on every particular product. For instance, if you want to buy a car from Japan, the price will include duty which adds by the government on imported vehicles. Tariff provide additional revenue for the government at the expense of consumers and foreign producers.
Tariff is the common barrier to international trade. For example, to discourage the purchase of China mobile phones, The U.S government can impose a duty of 50% which will make the price of those mobile phones so high and the domestic alternatives will be much more affordable.
Types of Tariff
Following are the three basic types of tariffs with illustration and examples.
When duty is imposed on weight, size, volume or quantity of a commodity it is known as specific tariff. For example, Rupees 1 tariff per kg. of rice. This tariff may vary according to the type of good imported. For instance, a country can impose duty of Rupees 100 on each pair of shoes imported, but it can levy duty of Rupees 150 on each school bag imported. Specific tariffs are quite easy to administrator as they don’t involve the evaluation of imported goods to find out their value. However, specific tariffs cannot be imposed on particular products such as painting because the painting cannot be taxed on the basis of its weight and size.
Ad Valorem Tariffs
The phrase ad valorem is a Latin word which means “according to value”. In this type of duty, the tax is levied on the value of a commodity by a certain percentage. It does not consider the size, weight or volume of a good. An example of ad valorem tariff would be 25% duty on the value of imported automobiles. This 25% tax will increase the price of automobiles being imported from abroad that will protect the domestic producers. Usually, this type of tax is mostly imposed on majority of products.
This type of tariff is the combination of specific and ad valorem duty. On certain goods partial specific and partial ad valorem duties are imposed. For instance, 15% tax is imposed on the value of products and Rupees 2 is imposed on the number of each product. In this way, both duties are levied together.
Objectives of Tariff
- To increase the income of the government.
- To give support and protection to the local industries.
- To gain business benefits.
- To conserve foreign exchange reserves.
- To discourage competition.
- The foreign country may capture the domestic market by offering their goods at very low prices. In this situation anti-dumping duties are imposed in order to protect national economy from such dumping.
- When heavy duties are imposed on imported goods, so their prices become high. Thus, consumers prefer to use the domestic products instead of foreign products.
- To reduce the dependence on other’s countries products and to make the country strong and self-sufficient.