Tariffs are taxes that countries impose on imported
products. Tariffs have two major
purposes, protectionism and social change.
Most countries participate in the World Trade
Organization. This worldwide independent
body acts as mediator between countries to resolve trade disputes and is
dedicated to the reduction and removal of all tariffs between member
nations. In spite of these efforts,
there is a long way to go.
The basic truth in international business is that countries
have competitive advantages over other countries. These advantages can be in access to raw
materials, cheap labor, technological expertise, etc. As a result of these advantages, often the
cost of products produced in those countries can be significantly lower. Governments use tariffs to ‘level the playing
field’ so that products produced internally can compete with lower cost
imports.
Governments also use tariffs as leverage to encourage social
change. Most countries are not at all
receptive to other governments telling them what to do. On the other hand, however, they are usually
very interested in improving their economies.
They can be persuaded to implement changes in human rights practices,
corruption, pollution, etc. in exchange for reduced tariffs and greater access
to markets for their exports.
Because countries use tariffs as a tool, they can change
frequently as government priorities change.
For the importer, this requires constant vigilance. Policy changes can profoundly impact
profitability and change the competitive balance in the marketplace.
Navigating the complex tariff schedules can be a daunting
task. If you fail to identify the
product correctly, you can face penalties and fines, perhaps even loss of
import privileges. Inaccurately identifying
the country of origin can have serious consequences. Even the tiniest differences in the
description of the product can cause huge differences in the duties charged.
Let’s say you are an Italian shoe manufacturer and would
like to import running shoes to the United States. In this case the tariff rate is based upon
the value of the shoes. If our shoes are
worth more than $6.50 but not over $12.00 then we can use the harmonized tariff
schedule and look up code 6402.91.8005 – “Tennis shoes, basketball shoes, gym
shoes, training shoes and the like”.
There is no special tariff rate for Italy nor the European Union, so we
know we will be charged the default rate of $0.90 / pair + 20% of the value of
the shoes.
If those same shoes came from Colombia, the rate would be $0.54
/ pair + 12% of the value of the shoes. And if they were made in Morocco they can be
imported duty-free. To further
complicate matters, if the value of the shoes exceed $12.00 they must be
imported on code 6402.91.9005 and the tariffs are slightly lower.
This creates the following bizarre scenario. If the shoes are valued at $12.00 the tariff
per pair is $3.30 bringing the cost per pair to $15.30. If the manufacturer should implement a 2%
price increase to $12.24, the tariff per pair is only $2.45, so the cost per
pair becomes $14.69!
We advise our clients to get a binding opinion from the US
Customs and Border Protection agency before importing a product into the
US. This opinion will provide some
clarity in terms of tariffs and eliminate surprises at the border that could
adversely affect the bottom line. To our
surprise, we found that the changing rules sometimes confuse the very agency
tasked with enforcing them.
Our client is an importer of tahini, a sesame seed based
product. They identified a particular
strain of the seed, grown in Ethiopia, which has the taste they sought. They contracted with a factory in Israel to
manufacture the product and began importing tahini duty-free under the free
trade agreement between Israel and the United States. This arrangement allowed them to contain
their costs during while introducing their product to the US market.
In July of 2014, we began negotiations with a factory in
Ethiopia to manufacture the product closer to the source, thus eliminating the
cost of transporting the seeds to Israel.
When we sought guidance from Customs and Border Protection, our first
response was that the import, classified under 2008.19.9090 would not qualify
for any trade preference and as such would be charged the default tariff of
17.9% (much too high to make it economically feasible). However, the rules on this were at best
confusing.
In the past, importing tahini from Ethiopia could be
imported duty-free since it was covered under the General System of Preferences
(GSP). Unfortunately, the GSP was
allowed to expire on July 31, 2013. Products from Ethiopia also qualify for
special duty-free treatment under the African Growth and Opportunity Act
(AGOA). Tahini was not among the
products that were included in AGOA.
Careful research uncovered an obscure paragraph in the rules which
stated:
“Imports of GSP-eligible imports
for beneficiary countries of the African Growth and Opportunity Act (AGOA) will
continue to be eligible for duty-free entry, notwithstanding the lapse in GSP
authorization, pursuant to the provisions in the statute governing the AGOA
program”
We presented this to the agency and received a binding
opinion that no tariff would be charged.
Careful research and diligence is the only way to guarantee
that your imports will be treated fairly and the proper tariffs applied.
