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TARIFF

Tariff
Is the tax imposed on the import or
export of goods
In general parlance, however, it refers
to import duties charged at the time
goods are imported.
Tariffs have three primary functions:
to serve as a source of revenue;
to protect domestic industry; and
to remedy trade distortions. Tariffs
can be ad valorem or specific or
mixed.

Ad valorem tariff
The tariff levied on imports, defined in terms of a
fixed percentage of the goods value.
For instance, if India imposes an ad valorem tariff of 40%
on butter, it means that the tariff will be 40% of the
value of the butter being imported.

Specific tariff
Tariff that is levied at a specific rate per physical
unit of a particular item.
For instance, a tariff of $ 10 on every kilogram of butter
imported.

Compound tariff
A combination of ad valorem and specific
tariffs
Example: 10% plus $ 5 per kilogram

Tariff rate quotas


A combination of an import tariff and an
import quota whereby imports below a
specified quantity enter at a low (or
zero) tariff, and imports above that
quantity enter at a higher tariff.
For India, the EU and US have committed a
tariff rate quota of 20,000 tones and 9,000
tones respectively, which means that
imports above this quantity will be charged
higher import duty.

Tariff binding:
This requires the setting of a maximum tariff rate
on an imported product. While the applied tariff
rate charged by an importing country could vary,
an importing country cannot exceed the bound rate
without re-negotiating its WTO commitments.
Tariff binding comprises two sets of issues:
First is the issue of tariff binding coverage, implying the
number of tariff lines to be bound.
The second relates to the rate at which unbound tariff lines
should be bound.
Developed countries have been keen that developing
countries and Least Developed Countries (LDCs) increase
their tariff binding coverage to 100% or near 100%.
Increasing tariff binding coverage implies binding more
tariff lines, thereby giving up the flexibility of being able to
increase tariff rates on a particular product beyond a
certain point.

Tariff classifications
National tariffs are organized in the form of tables that consist of tariff
classification numbers assigned to goods, and a corresponding tariff
rate.
The way in which an item is classified for tariff purposes will have an
important and palpable effect on the duties charged.

When classifications are applied in an arbitrary fashion, they can in


effect nullify rate reductions.

The GATT contains no rules regarding tariff classifications. In the past,


countries had their own individual systems. However, as trade
expanded, countries began to recognize the need for more uniform
classifications, which resulted in the drafting, in 1988, of the
Harmonized Commodity Description and Coding System, or the HS
system.
Today, most countries use a harmonized system of six-digit tariff
numbers.

Tariff line

A single item in a countrys tariff schedule.

Harmonised system (HS)

This is intended to serve as a universally accepted classification


system for goods so that countries can run customs programmes and
collect trade data on exports and imports.

It was designed to replace the varied tracking methods used by


countries and create a common classification system by which to track
trade and apply tariffs.

The system uses a six-digit number to identify basic commodities. Each


country is allowed to add additional digits for statistical purposes. In
Canada , two additional digits are used for exports and four additional
digits for imports. The US uses a 10-digit system for both exports and
imports.
The system was developed by the World Customs Organization (WCO).
HS is a commodity classification system in which articles are grouped
largely according to the nature of the materials they are made of.
The system contains heads and sub-heads covering all articles of trade.
Goods are organized into chapters, arranged in sections that, along
with the interpretive rules and legal notes to the chapters and sections,
form the legal text of the harmonized system.

Tariff escalation
If a country wants to protect its processing or
manufacturing industry, it can set low tariffs on imported
materials used by the industry (cutting industry costs) and
set higher tariffs on finished products to protect goods
produced by the industry.
When importing countries escalate their tariffs in this way,
they make it more difficult for countries producing raw
materials to process and manufacture value-added products
for export.
Tariff escalation exists in both developed and developing
countries. A country may choose to impose no tariff on the
import of raw materials, but increase tariffs on semiprocessed and final goods.
For instance, the tariff average in developed countries for
rubber increases from 0.0% for raw rubber to 3.3% for semiprocessed products to 5.1% for finished products.

Most Favoured Nation (MFN) rate


The rate of duty for a product originating from
an MFN supplier.
A product originating from non-MFN suppliers
may be subject to a different rate of duty from
the MFN rate, depending on whether the
suppliers are from a territory outside of the
WTO (the rate may be higher), covered by a
GSP or GSTP (Generalized System of Trade
Preferences) scheme (the rate is often lower)
or a customs union or free trade area (a final
rate of zero for covered products).

GSP (Generalized System of


Preferences)
A system whereby developed countries grant
preferential treatment to eligible products
imported from developing countries, so that the
exports of developing countries are able to
compete in the markets of developed countries.
The purpose of the GSP is to enable developing countries
exports to be competitive in developed country markets.
It involves reduced MFN tariffs or duty-free entry of
eligible products exported by beneficiary countries to the
markets of donor countries.
European Union (EU) member countries have allowed equal
preferential treatment in duties in the range of 2.5% on
imports of clothing from both Pakistan and India under the
new Generalised System of Preferences (GSP) scheme,
effective from January 1, 2006 .

Bound tariffs

In the WTO, when countries agree to open their markets to


goods and services, they bind their commitments.
For goods, these bindings amount to ceilings on customs tariff
rates. Sometimes countries tax imports at rates that are lower
than the bound rates.
This rate is legally binding under the WTO and applies on a Most
Favoured Nation (MFN) basis.
If a WTO member raises a tariff above the bound rate, affected
countries have the right to retaliate against an equivalent value
of the offending countrys exports, or receive compensation,
usually in the form of reduced tariffs on other products they
export to the offending country.
India has bound 72% of its tariff lines, with all agricultural products
bound and some 68% of tariff lines bound with respect to industrial
goods. India bound products such as textiles and clothing, which
were previously unbound.

Applied tariffs

The current tariff rates being charged on the import of


products.
Applied tariffs may be below or equal to bound tariffs, but may
not exceed them.
For instance, the applied tariff in Pakistan for coffee was 20%, while
the bound tariff rate was 100%.