Understanding Tariff Rates

Understanding Tariff Rates

International trade is the backbone of economic development. It exposes new and innovative technologies or products of one country to another, thus encouraging continual growth, improvement, and development of other countries. But every country has different laws. The way business and trade are conducted in one country may not be allowed in another. International trade law is too complex for the market to regulate on a per-country basis, and so governments play a large role in the import and export of goods. More so, countries must be able to use international trade to create a sustainable economy by managing and distributing the high cash flow associated with the industry. Understanding tariff rates is the key to learning of the government’s involvement in international trade.

How Does International Trade Occur?

As with any economy, trade involves a buyer and a seller. With international trade, these buyers and sellers are positioned in different geographic locations causing for cross-country trading. The benefit of international over domestic trade is one of price and convenience. Certain products and services are cheaper in one country, and thus other countries may benefit from purchasing said goods and services from this country. Logistics obviously plays a huge role in this process.

In the shipping process, the seller is usually the shipper (or exporter) and the buyer is the consignee (or importer). The export/import process is the only way for international trade can occur, and so in a way, transportation and logistics are at the center of the cash flow associated with all international trade.

Who Regulates Transportation?

While every country has tens of thousands of transportation vendors, international trade must be regulated by the country’s government for a variety of reasons – the primary being to ensure imported products are legal and safe. But the government requires funding to staff the personnel necessary for enforcing such regulations. This is done through the use of tariff rates.

Understanding Tariff Rates

As stated before, understanding tariff rates is the key to understanding the governments role in international trade. Tariff rates are government markups on transported cargo. The government needs to regulate what goods come in and out of the country, and regulatory staffing needs to be funded by tariff rates. However, understanding tariff rates and what they are isn’t enough – there are different types of tariff rates and purposes behind specific markups that should be closely examined.

Purpose of Tariff Rates

Although understanding tariff rates can get a bit tricky, they exist in their entirety for a couple of reasons. First, it is one way for the government to fund the staff and resources necessary to regulate international trade. Secondly, it helps to promote local-production or international trade in certain industries. For example, if the U.S. jacks up the tariff rates associated with shoes, U.S. companies will be more inclined to produce them locally since the cost of importing them may outweigh local manufacturing costs. However, if the U.S. makes shoe import tariff rates very low, U.S. companies will be more likely to purchase the goods internationally instead of producing them locally. It helps the government to steer the direction of the economy to or away from the production of certain goods for economic, environmental, and safety reasons.

Types of Tariff Rates

When it comes to understanding tariff rates, there are 3 primary types: Ad Valorem, Specific Tariff, and Preferential Duties. These tariff rates are different ways that the government marks up goods. The purpose for the different types has to do with what country the goods were imported from (in the case of Preferential Duties), and the type of goods imported (for Ad Valorem and Specific Tariff). Here’s a little bit about each type.

Ad Valorem Tariff

The term “Ad Valorem” is derived from a Latin phrase which translates as, “according to value”. Ad Valorem Tariffs are import duties charged as fixed percentages of the cost of one unit. Since ad valorem tariff rates are charged as percentages of the commercial value of the cargo, shippers must be accurate in their reports on commercial invoices. Here’s an example of an Ad Valorem Tariff:

The United States currently has a 2.5% Ad Valorem tariff to all imported automobiles. If you as a buyer were to purchase $100,000 worth of automobiles and have them imported, you would pay an additional $2,500 to the government per the Ad Valorem tariff rate. It doesn’t matter if you imported one $100,000 car or 20 $5,000 cars since the Ad Valorem tariff is charged as a fixed percentage of the commercial value of the cargo as stated on the commercial invoice for the import.

Specific Tariff

Specific Tariffs, as you may have expected, are tariff rates charged as a fixed dollar amount per unit of imported goods. The government may assign a $1.15 Specific Tariff to a certain product. Thus, if you import a container of 1,000 of those products, you would pay a $1,150 tariff. In this instance, the amount you pay to the government is not based on the commercial value of the cargo but rather the type of product being imported, which is indicated by your HTS code. In short, HTS codes are a long string of numbers that indicate (very specifically) the product being imported. Each of the products associated with an HTS code have a certain tariff rate associated with them.

One example of Specific Tariffs on U.S. imports are wristwatches. All wristwatches are assigned a $0.51 Specific Tariff. If you import 10,000 wristwatches, you will then owe an additional $5,100 in tariffs to the government. Now, in the case of wristwatches, we would actually refer to the tariff associated with this product as a Mixed Tariff, since there are Ad Valorem tariffs on the wristwatches’ band and box. Understanding tariff rates isn’t too difficult so long as you understand how each of these two tariffs work.

Preferential Duties

Preferential duties are less of a certain “type” of tariff rate and more of a way in which tariff rates are treated. A preferential duty is a lowered or eliminated tariff rate on a shipment based on the country from which the goods are being imported. For example, all goods imported to the United States from Latin America and the Philippines are virtually duty-free. So, a container full of 10,000 wristwatches from China would cost you $5,100 in additional tariffs whereas a container full of 10,000 wristwatches from the Philippines would cost you nothing in tariffs.

Is understanding tariff rates starting to get a bit confusing yet? The primary purpose behind preferential duties is to promote the economic development of certain 3rd world countries that we are close allies with. It also serves as a way to strengthen our relationship with certain countries and make trade easier.


Understanding tariff rates can be difficult. Depending on the product, you may subjected to paying Ad Valorem or Specific Tariff rates. Shippers then have to be incredibly aware of the commercial value or volume of goods they are importing, as managing these factors may be the difference between a low or obscenely expensive tariff rate on your imports. If you thought understanding tariff rates couldn’t get more difficult, Ad Valorem and Specific Tariffs can both exist in a single product, thus creating mixed tariffs as in the case of wristwatches – wristwatches have a Specific Tariff, but the bands and boxes have an Ad Valorem Tariff. Hope you remember how to do long-division and multiplication.

If you are having trouble understanding tariff rates and want to speak with someone about how to lower and manage them, give one of our team members a call. We have a lot of experience with tariff rates as they relate to commercial invoices and HTS Codes and we would be happy to help you!


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