Understand the Difference Between Duty and Tariff

When it comes to buying and selling goods between countries, you might hear the terms “duty” and “tariff.” They both involve extra costs, but they work a bit differently. A duty is a specific tax you pay on items you import into your country. It’s like a fee for bringing goods from one place to another. A tariff, on the other hand, is a broader term that includes various types of taxes on imports and exports. It can also refer to rules or rates set by governments to control trade. 

Understanding the difference between duty and tariff can help you better navigate international trade and manage costs effectively.

What are Duties?

Duties are taxes that governments charge on goods brought into their country from abroad. These taxes, called import or customs duties, make products more expensive. They are paid when goods enter the country and help the government control what comes in and out.

Purpose of Duties

Duties serve two main purposes. First, they help the government earn money by taxing goods that come into the country. Second, they make local products cheaper and more attractive compared to foreign goods, which have to pay these taxes. This helps protect the country’s economy, jobs, and environment by controlling what gets imported and making sure local businesses have a fair chance to compete.

When are Duties Collected?

Duties are collected when your goods enter a country and go through customs checks. Customs officials inspect the items to make sure they match the descriptions you provided and check for any trademark or trade practice issues. They also confirm where the goods come from. In some cases, if there’s a trade agreement with certain countries, the goods might not have to pay any duties.

Main Types of Duties

Here are the main types of duties you might encounter in the US:

Basic Customs Duty (BCD)

This is a tax added to goods that are imported into the country. It’s calculated using a system called the Harmonized Tariff Schedule (HTS). Importers and distributors pay this tax, and they often pass the cost on to customers.

Countervailing Duty (CVD)

This is an extra tax on imported goods from countries that give their exporters special help or discounts. The CVD is meant to make up for these subsidies so that the playing field is fair for local businesses.

Anti-Dumping Duty (ADD)

This tax is applied when foreign companies sell products in the US at very low prices, lower than what they sell for in their own country. The US government imposes this duty to protect local businesses from unfair competition.

Who Pays the Customs Duty?

When goods arrive in the US from another country, customs duty must be paid. This happens when the goods first come into the country. The person who owns or buys the goods needs to fill out special forms at the port where the goods enter and pay the duty.

If you have hired a customs broker, they will handle this for you. A customs broker is a person or company who takes care of all the paperwork and pays the customs duty on your behalf, but only if you have given them permission to do so.

How is Duty Calculated?

To figure out how much duty you need to pay, follow these simple steps:

Find the Duty Rate: Check the percentage rate for duty on your goods. This rate can be different depending on where you’re sending your items.

Look Up the Rate: You can find the duty rate on the destination country’s government website. You can search for this using a special code called a Harmonized System (HS) code or by looking up your product description. For instance, if you’re shipping garden umbrellas from the UK to the US, the duty rate might be 6.5%.

Calculate the Duty: Add up the total value of your goods, plus insurance, shipping costs, and any other expenses. Multiply this total amount by the duty rate to find out how much duty you need to pay.

In simple terms, the duty is calculated by applying the duty rate to the total cost of your shipment, including any extra charges.

What is a Tariff?

A tariff is a tax that a government places on products coming into the country from another place. This tax is meant to make imported products more expensive. By doing this, the government hopes people will buy more products made in their own country instead.

Why Tariffs Are Used

Governments use tariffs for several reasons, but a big one is to encourage people to buy products made locally. For example, if the government adds a tariff to imported steel, it makes the steel more expensive. This can make people choose to buy steel from local companies instead.

Example of Tariffs

In 2018, the U.S. President decided to put a 25% tariff on steel and a 10% tariff on aluminum from other countries. The goal was to create more jobs in the U.S. steel and aluminum industries and help these industries grow. While it did help create some jobs, it didn’t lead to better trade deals or significantly improve national security as intended.

In short, tariffs are used to make imported goods more expensive to protect and promote local industries.

Why Are Tariffs and Trade Barriers Used?

Tariffs and trade barriers are tools used by governments for various reasons. Here’s why they might be used:

Protecting Local Jobs and Companies: When a lot of goods are imported from other countries, local businesses can face stiff competition. This might force them to cut jobs or move their operations elsewhere. To prevent this, governments might use tariffs to make imported goods more expensive, which helps local businesses stay competitive and keep jobs.

Protecting Consumers: Sometimes, the government might place tariffs on certain goods if they think those products are harmful to people’s health. For example, they might restrict the import of certain foods that could be unsafe for consumers.

Helping New Industries: New or growing industries in developing countries might need extra support to become strong. Tariffs can make imported goods more expensive, which helps local products compete better in the market. This can also help struggling industries by giving them more time to become competitive and reduce unemployment.

Ensuring National Security: Some industries are very important for a country’s security. The government might use tariffs to protect these industries from foreign competition, ensuring they remain strong and secure.

Retaliation: If a country feels that a trading partner is not following fair trade practices or is trying to dominate the market unfairly, it might use tariffs as a way to retaliate. This can also happen if the trading partner doesn’t follow certain rules or policies set by the government.

In short, tariffs and trade barriers help protect local jobs, consumers, and industries, ensure national security, and can be used as a response to unfair trade practices.

Who Collects Tariffs?

A tariff is a type of tax that makes imported goods more expensive for consumers. When goods come into a country, the tariff must be paid to the government. In the United States, the Customs and Border Protection (CBP) is responsible for collecting these tariffs. They work on behalf of the Commerce Department to ensure that the correct amount of tariff is paid on imported goods.

What Are the Different Types of Tariffs?

There are two main types of tariffs that the government imposes on imported goods:

Ad Valorem Tariff: This type of tariff is calculated as a percentage of the value of the imported item. For example, if a product is worth $100 and the ad valorem tariff rate is 10%, you would pay $10 in tariff.

Specific Tariff: This tariff is a fixed amount charged per unit of the imported goods. It could be based on the number of items or the weight of the shipment. For instance, if the specific tariff is $5 per kilogram and you import 10 kilograms, you would pay $50 in tariff.

Also Read: Understanding India`s Bill of Entry – Meaning, Payment, and Filing

Differences Between Duties and Tariffs

Here’s the difference between duties and tariffs: 

Definition

• Duties: Taxes imposed on goods as they are imported into a country. Duties are often aimed at regulating imports and raising government revenue.
• Tariffs: Taxes specifically levied on imported goods to make them more expensive compared to domestic products and to control trade volumes.

Purpose

• Duties: Primarily designed to raise government revenue and can be used for a variety of goods.
• Tariffs: Mainly used to protect domestic industries from foreign competition by making imported goods more expensive.

Scope

• Duties: Can apply to both imported and exported goods, though typically applied to imports.
• Tariffs: Specifically applied to imported goods only.

Calculation Basis

• Duties: Often calculated based on the value of the goods (ad valorem) or a fixed fee per unit (specific duty).
• Tariffs: Usually calculated as a percentage of the value of the goods or a fixed amount per unit.

Impact on Prices

• Duties: Increase the overall cost of the goods including any duties paid.
• Tariffs: Directly increase the price of imported goods, making them less competitive compared to domestic products.

Revenue Generation

• Duties: Contribute to government revenue by taxing a wide range of goods.
• Tariffs: Generate revenue but are primarily aimed at modifying trade behavior and protecting local industries.

Trade Policy

• Duties: Part of broader fiscal policy and can affect various aspects of trade and commerce.
• Tariffs: Specifically a tool of trade policy to influence international trade and protect local industries.

Legal Framework

• Duties: Governed by national regulations and may have different rules for different types of goods.
• Tariffs: Often outlined in trade agreements and international trade laws, affecting how and when they are applied.

Application

• Duties: Can apply to a range of goods including both imports and exports.
• Tariffs: Exclusively apply to imported goods and are used to regulate trade flows.

Flexibility

• Duties: Can be adjusted based on various factors including economic needs and trade agreements.
• Tariffs: Often set by government policy to achieve specific trade goals or respond to international trade issues.

Conclusion

Understanding the differences between duties and tariffs is essential for navigating international trade. While both are forms of taxes on imported goods, their purposes and applications vary significantly. Duties are primarily used to generate government revenue and can apply to a broad range of goods, including imports and exports. Tariffs, on the other hand, are specifically designed to protect domestic industries by making imported goods more expensive, thereby controlling trade volumes. By grasping these distinctions, businesses can better manage costs and make informed decisions in the global market. Whether dealing with duties or tariffs, staying informed about these trade policies is key to successful international commerce.

Also Read: Different Types of Customs Duty in India Complete List