Importers are often concerned about U.S. tariffs; after all, they’re a hot topic in all current media. But what does it entail, and how does it impact your imports? Is it the bogeyman waiting to eat up your profits before your goods have even touched the shores? Let’s find out.
Before jumping in, rest assured that most countries have tariffs – or duties – in place. As an importer, you are not being ‘punished’ by something unique to the U.S. A tariff is a government customs duty levied on imported goods and services. Historically, tariffs were primarily used to collect revenue. Today they are also used to protect domestic industries or as clout in trade disputes and negotiations.
The U.S. Constitution empowers Congress to set tariffs, a power that Congress has partly assigned to the President. The U.S. is also a member of the World Trade Organization (WTO) and a party to several trade agreements (can link to other articles), including specific tariff-related assurances. The President and Congress thus create U.S. tariff policy within the context of a rules-based global trading system. This system was established after WWII as GATT and later integrated into the more extensive set of WTO agreements. The aim of bilateral and multilateral agreements was, and continues to be, reducing trade barriers and preventing trade wars. They establish rules for using tariffs and nontariff barriers to trade. Core rules are nondiscrimination, binding commitments, transparency, and safety valves.
According to the Secretary of the Treasury’s rules and regulations, the U.S. Customs and Border Protection (CBP) controls tariff collection at U.S. ports of entry. When an imported item enters a U.S. port, the merchandise is classified, and taxes are evaluated using the U.S. Harmonized Tariff Schedule (USHTS). The USHTS is a compilation of tariff rates based on a globally standardized nomenclature.
Today, importers self-classify and declare the value or quantity of their goods. CBP reviews the paperwork, performs occasional audits, and then collects any applicable tariffs or penalties and any administrative fees. Finally, CBP deposits any revenue from tariffs or other dues into the General Fund of the U.S.
For the past 70 years, U.S. tariffs never comprised much more than 2% of total federal revenue. For example, in 2019, CBP collected $71.9 billion in tariffs, accounting for 2.07% of total federal revenue. Instead, the U.S. has used its tariff policy to encourage global trade liberalization and pursue broader foreign policy goals.
In 2018, the simple average of U.S. tariffs on all products was 3.3%, the second-lowest among the top five global economies by GDP. About 70% of all products enter the country duty-free. U.S. tariff rate reductions have not always inspired others to follow. During the most recent (Doha) round of WTO trade negotiations, the U.S. unsuccessfully tried to persuade advanced emerging economies, such as India, Brazil, and China, to pledge to lower their mandatory tariff rates, but they declined. This dispute was one of the reasons that the Doha negotiations failed to produce an agreement.
An H.S. code stands for Harmonized System, and an HTS is a Harmonized Tariff Schedule. Developed by the World Customs Organization (WCO), the regulations define and classify globally traded goods. Generally, to import or export products internationally, the exchanged goods must be assigned an HTS code that corresponds with the country of import’s HTS. The difference is in the number of digits in the code. Six digits are the universal standard (H.S. Code), and one with 7-10 digits is the HTS Code. Usually, after the first sixth digit, the code is unique as determined by the importing country. The codes are necessary to decide on a traded item’s tariff and collect global trade statistics used in almost 200 countries.
The U.S. HTS is published and maintained by the U.S. International Trade Commission (USITC). It provides technical data on its structure and alterations. However, only the CBP is authorized to interpret the HTS, declare legally binding rulings or advice on the tariff classification of imports and their handling upon entry into the U.S., and control customs regulations.
Industrial tariffs are customs duties on imports of non-agricultural (industrial) merchandise, imposed either on a specific basis (e.g., $1 per 100 pounds) or on an ad valorem basis (percentage of the value). Industrial goods include machinery, transportation and auto equipment, information technology products, chemicals, petroleum, minerals and metals, clothing and textiles, fish and fish products, footwear and leather, wood products, and consumer goods.
Around 94 percent of U.S. imports by value are non-agricultural merchandise. The current U.S. trade-weighted average import tariff rate on these goods is 2 percent. One-half of all industrial goods imports enter duty-free.
There is a great deal of information on tariffs and codes on the CBC, USITC, and ITA websites. It is also worth checking The Tax Foundation website – the leading U.S. independent tax policy nonprofit, especially to keep track of the turbulent Presidential policies on trade and tariffs. Also useful is the WCO’s site that includes the Nomenclature and Classification of Goods.
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