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The Economics of International Trade – Import and Export Taxes & Tariffs

Today’s small-business person sees wonderful opportunities in the news.

You read of new trade agreements like the United States-Japan Free Trade Agreement and the United States-United Kingdom Free Trade Agreement under negotiation. You hear of government efforts to discourage so much importing from mainland China with punitive tariffs and threats of import quotas. It all adds up to tons of potential new sourcing changes by thousands of potential customers, and you wonder if you can get a piece of that.

There are opportunities out there, but if you aren’t already experienced in international trade, you may not know what to prepare for.  As you search for potential vendors or customers abroad, you’re right to ask yourself whether they’re located in a protectionist country or not and whether or not the United States is protectionist toward them.

That might sound easy since the press likes to give the impression there are friendly and enemy or welcoming and unwelcoming countries. But the fact is it’s much more subtle than that. There are grades of protectionism.

Do you want to start importing to obtain competitively valued products to resell here or exporting to expand the market for your goods worldwide? Either way, you require an understanding of all the different types of government controls.

Export Taxes

The U.S. is lucky when it comes to export taxes. At the Constitutional Convention in 1787, the delegates struck a bargain to insert a perpetual ban on export taxes into the Constitution. As a result, the U.S. doesn’t — and can’t — charge export taxes or fees of any kind on export shipments. That was most recently tested in the 1980s when Congress imposed a harbor maintenance fee on both imports and exports. After a few years in the courts, the final ruling was clear: The government can’t issue any taxes of any kind on exports.

That means U.S. exporters don’t have to worry about factoring in a tax bite of any kind when shipping their goods abroad. Most states apply a sales tax on domestic sales, artificially increasing the bottom line cost of their products to their customers. Even these states cannot apply such taxes when you export the goods outside the U.S.

Unfortunately, our luck isn’t shared by many other countries in this respect. Most nations assess some kind of taxes on exports, so if you’re importing from a foreign vendor, you have to assume there will be a government hit, ranging anywhere from 4% or 5% of the goods’ value — up to the low 20s.  As an importer, you’re right to expect the vendor to build that export tax into its price. But you have to be careful. With the wrong terms of sale, a shifty vendor can instruct the carrier to charge you for those taxes along with the freight costs. To be safe, always purchase internationally on free carrier or better terms. Avoid buying on ex works terms unless you have logistics and legal support to review everything first.

While there isn’t a universal standard on these export taxes, the most common approach is the value-added tax (VAT). These ad valorem (percentage-based) taxes are usually assessed on the full sale price of the goods, which can seem outrageous at first. A 20% VAT on a $50,000 export shipment would mean a $10,000 tax, but that’s deceptive. In a VAT regime, the exporting company usually gets credit for the tax it paid on its purchased materials to offset most of the tax it pays on its sale. As a foreign importer, you can enjoy no such benefit if you’re the one who pays the export tax.

That’s why it is imperative you make sure your vendor is fully responsible for any export taxes. If your supplier hasn’t built such costs into the sale price, they may not work as hard to keep them low.


Import Duties & Fees

The destination end of the trip is the one with which most people are familiar. All goods imported from a foreign country must clear the country’s Customs service with documentation filed by a Customs broker on the importer’s behalf.

This process is similar to the familiar concept of hiring a tax professional to file one’s income taxes. But in most countries, the import tax bite is much more complex.

Import duties are based on the product’s country of manufacture, its classification in the Harmonized Code, and an array of characteristics ranging from specific material content to function. Depending on the product and whether the destination country has domestic competitors to protect from foreign competition, duty rates range from 0% to 30% or 40% of the goods’ value.  That’s where your Customs broker is of critical importance — in studying your product, the regulations, and past Customs rulings to determine the applicable duty rates for your specific imported product.

Some countries tend to have lower average duty rates, some higher. But in truth, most countries have such a wide range you can’t fairly define them as “low-duty” or “high-duty.” It depends on the product in question. Different countries are protective of different industries.

Countries assess import duties in various ways. The most common is to collect a percentage of the importer’s purchase price. Alternatives include a small amount per item or dozen items or a set amount per kilogram or liter. Sometimes, a country charges a mixture on the same merchandise — for example, on imports of plastic hair combs valued over $4.50 per gross, the U.S. charges a combination of 4.6% of the imported goods’ value plus 28.8 cents per gross. If the manufacturer had used hard rubber instead of plastic, it would be a simple 5.2%.

The import duty rate is the most complex of importing costs. It’s based on the enormous and complicated harmonized tariff schedule, a universal approach that nonetheless relies on different books in every country. That’s the primary reason to use a Customs broker rather than processing import shipments yourself. Customs brokers can help you navigate the complex array of codes, section and chapter notes, rules of interpretation, and published rulings that determine the code and its accompanying duty rates.

In addition to the import duty, many countries have other government agencies that assess their own additional taxes on imports. Perhaps the best example in the U.S. is the IRS excise tax assessed on imports of alcoholic beverages. Irish and Scotch whiskeys are duty-free, but this excise tax usually adds another $13.50 per proof gallon to the cost of importing. This one requires a particularly complicated bit of math because a proof gallon is imagined as relating your specific beverage, whatever its proof, to the alcohol it takes to get a gallon of alcohol at 100 proof. Imagine you import an 80-proof spirit in 750-milliliter bottles. First, you convert that from 80-proof to 40% (80-proof alcohol contains 40% alcohol by volume), then convert the 750 milliliters to just under 1/5 gallon (a 750-milliliter bottle is colloquially known as “a fifth” because it is around 1/5 gallon), then double it. Your excise tax of $13.50 per proof gallon works out to $2.14 per bottle.  An order of multiple spirits may include different bottle sizes and different proofs.

While the U.S. doesn’t charge a VAT on imports, most of its trading partners do. Expect outbound shipments headed to Europe, Asia, or Latin America to find an import VAT on top of the duty collection, with your customer paying 10% to 25% of the delivered price. In Canada, there’s a national goods-and-services tax plus a different provincial sales tax in some provinces, or a combined harmonized sales tax in others. The exporter shouldn’t be responsible for paying such destination charges, but the exporter should undoubtedly know what’s in store for their customer.

Finally, Customs may assess any number of fees on an import shipment, from filing fees to inspection fees, bond fees, and service fees.  The U.S. assesses a harbor maintenance fee of 0.125% of the goods’ value on any ocean shipment entering a U.S. port, and most imports of all transportation modes pay an additional 0.3464% charge called the merchandise processing fee.

Depending on the product, imports into the U.S. may encounter no taxes, duties, or fees at all. Or they could be subject to a stack of as many as five or six, potentially calculated in several very different ways.

The U.S. is not unusual in this regard. I recall once being very pleasantly surprised when looking into the destination charges on a shipment bound for Brazil when I was first told the duty rate was only 5%.  The surprise turned unpleasant when I learned that another seven distinct charges combined to total a government collection of almost 50% of the goods’ value for my unfortunate customer.  It’s not pleasant to be the bearer of such bad tidings. But it’s far better to catch it at the beginning than to discover such obligations after the shipment is on its way and the parties involved have failed to budget for it.


Import & Export Quotas

In addition to the obvious financial costs of a Customs or tax bill, there are other roadblocks governments can place in the way of international trade, the import quota being the most significant.

With an import quota, a country places a limit on the number of a particular class of product you can import, thereby protecting the domestic manufacturing of that product type. Long associated with the food and textile industries, these limits are usually established on an annual basis, with available slots awarded on the first of the quarter or the first of the year. If a country only allows the importation of 100,000 cotton baby onesies, 100,000 kilograms of beef, or 100,000 liters of evaporated milk each year, then the acquisition of a slot in that quota becomes a marketable commodity in itself.

Such slots are sometimes awarded at a price, by lottery, or both. For the businessperson entering into such a trade lane, the presence of a quota presents a unique challenge. Even if your product is the best in the market, your market has a cap. Once you acquire a 1,000-unit share of the quota, you may be almost certain of a sale, but you are equally certain your sale opportunity is limited to that 1,000. The active management of such quotas becomes a part of the business model in itself, and the process varies widely from country to country.

The U.S. imposed import quotas on many types of raw steel and aluminum in 2018 — with a twist. In some cases, the exporting country has to manage the number of exports it allows to the U.S. rather than having the U.S. manage the amount it allows in. This approach spreads the economic opportunities worldwide. If one country has already shipped all the widgets allowed in from there, perhaps a vendor in another country still has room left in their allotment to fill the need.

For the many import quotas the U.S. imposes, Customs and Border Protection publishes a weekly update on quota status.  If your business hopes to import any of the hundreds of quota-controlled commodities — including steel pipe, aluminum bars, raw sugar, processed peanut butter, butter, American cheese, dried garlic, and fresh beef — you must check the list before you negotiate your orders.

Some such quotas never fill up, but many close on the day they open. The website allows the download of each prior week’s update. By studying not just the current one but also the past couple of years of history, you can judge whether your product’s potential refusal at the border is a likely risk.

If the U.S. has such a program, you can be sure many other countries do as well. If you’re a business looking for foreign markets, check with your freight forwarders and ask whether their targeted destination countries have quota programs and whether they provide assistance in managing such hurdles. Your customers would most likely manage it themselves. But if you’re wondering why you can’t get any customers when you know you’re offering a fantastic product at a competitive price, a restrictive import quota program that targets your products might be the reason.

Also remember that such programs are incredibly date-specific. Arrive too late, and the window may have passed, depending on how the country in question manages their program.  Since the European Union (EU) is a collection of dozens of countries, it has some quotas to protect the Italians, others to protect the French, and still others to protect the Spanish. Once you know your product’s harmonized code, you can check its quota status across the EU at a single site, but always discuss it with your freight forwarder to be safe.

As with most products in the Customs world, the country of origin is what matters most, not the country of exportation. Know the country in which the product was manufactured — not merely where it was finished, painted, or repackaged, but where it was really made — to be confident you know the real country of origin from Customs’ perspective.

In fact, that’s one of the most common areas for trade-related crimes: if we have a quota or punitive duty on Chinese products, unscrupulous businesses in India or another third country might buy the products from China, change the origin label, and pass them off as their own hoping to help clients dodge the quota. That’s called illegal transshipment, and it constitutes fraud, which is prosecuted to the full extent of the law.  Always know where a product was really made (not just finished or repackaged) and be sure to declare the truth to Customs and your customers.


Punitive Tariffs: Antidumping Duties & Sections 232 & 301

The import process is usually reasonably straightforward:  A Customs broker or agent represents the importer, studying the vendor’s invoice packet, determining how much duty they owe plus whatever taxes and fees the importing country usually charges and filing forms with Customs.

But sometimes, other agencies of the government add something special, assessing punitive import duties on top of the regular duties and fees to punish the origin country, usually for some crime or unfair trade practice.

Antidumping duties are the most common, and these require an explanation of the practice of “dumping.”

In an improper effort to increase their exports and perhaps even drive foreign competition out of business, some countries decide to subsidize a class of commodities with tax credits or similar tools. That would allow their exporters to charge below-market prices and grab a larger share of foreign markets.

Western nations — the U.S., Canada, and Western Europe in particular — are especially conscious of this danger and investigate reports of such practices diligently. The World Trade Organization (WTO) specifically bans dumping, so countries that can prove they’ve been victims of it can respond appropriately.

Imagine a vendor in China who gets a 50% subsidy from Beijing so they can charge American companies just $50 for a product worth $100. The U.S. responds by imposing a 100% antidumping duty on the product to restore that $50 price to the $100 it should have cost. The importer then pays not only the usual 5% or 10% duty plus the usual 0.50% Customs fees but also another duty amounting to the full value of the shipment on top of that.

Since the extent of the crime is the only limit on these penalties, they can have a significant impact on the bottom-line cost of the good to the importer: 100%, 150%, and even 200% antidumping duties are not particularly uncommon.

As such, it’s essential for an importer to know the potential tax bite when goods come in. And it’s just as important for an exporter to appreciate how much Customs will assess on the goods he sells when they arrive at their destination.

But it’s a cautionary tale: Beware of government offers to help you sell your products at a loss because you don’t want to be the exporter who ends up causing another government to impose a whole new antidumping duty on the marketplace.

Two somewhat similar punitive measures have gained prominence in the past three years because of their use by President Donald Trump’s administration:

  • Section 232. A provision of the Trade Expansion Act of 1962, Section 232 gives the president certain powers to unilaterally take action on imports. The U.S. has implemented Section 232 measures — additional tariffs on some aluminum (usually 10%) and some steel (usually 25%) — to protect domestic raw materials production on the grounds that a lack of strong steel and aluminum industries poses a severe detriment to national defense.
  • Section 301. A provision in the Trade Act of 1974, Section 301 also gives the president certain powers to unilaterally take action on imports. In this case, the U.S. has implemented additional tariffs — primarily 25% and some 7.5% — on most products from China as retaliation against various specific Chinese violations of WTO policy, such as abuses of American companies doing business there, including endemic abuse of intellectual property rights and child and slave labor incidents.

In some rare cases, the same product could be hit by most of these different situations — regular duties and fees and punitive measures like antidumping duties and quotas. And that’s what your broker or forwarder is for: to help the importer and exporter navigate these choppy waters.


Nontariff Barriers

Taxes and fees have never been the only roadblocks governments place in the way of importation. Just as governments can raise or lower their duty rates and impose or withdraw punitive tariffs, they also have a host of bureaucratic processes that can either make importing relatively easy or so miserable the importer will think long and hard about repeating the process on a future order.

When an international shipment starts on its way, the vendor and export forwarder contribute their respective international documents and send them on to the importer’s Customs broker.  That broker then creates Customs forms and presents them to their government for approval.

The import broker’s charges are usually reasonable and relatively predictable, but that’s where the clarity ends. In addition to the import broker’s preparation fee, which averages between $100 and $200 for the order (though it can be much higher or somewhat lower depending on the order’s complexity and value), there are more issues imposed by the government that surround the import clearance, some of which can vary from shipment to shipment or even from Customs inspector to Customs inspector:

  • Customs Bonds. Most governments require the importer to be bonded to protect the government’s expectation of collecting not just the import duties and fees but any future penalty or additional fees they might assess retroactively. Such bonds can be cheap or quite expensive, depending on the country.
  • Intensive Exams. Most governments now allow paperless (electronic) filing of these import documents so Customs can preclear shipments before arrival. But Customs can always designate an import shipment for an intensive exam, which can mean a costly additional delivery to an approved Customs examination station. This process can include one or two additional truck moves plus the warehouse fees for unloading a container and holding the goods on a protected dock for several days until Customs is through examining it, then reloading and redelivering it. For full container shipments, that can easily cost another few thousand dollars in exam-handling charges, even if they find nothing wrong.
  • Quantity or Packing Mismatches. What might a government find lacking in a shipment? Almost all import regulations are written precisely enough to allow for penalties on any shipment. The question is whether the regulator chooses to draw a hard line. For example, a bill of lading (the transportation document covering a single international shipment) might show 400 boxes on five pallets. The packing list might only show 4,000 pieces in 400 boxes. If they want to, Customs authorities can mark even this discrepancy as a violation and require reissuance of documents or payment of a fine. A mismatch in quantities, however innocent, could be an indicator of an attempt at smuggling, so some inspectors are tougher than others.
  • Classification and Audits. An agent might find a mismatch between the marking on the products and the contents declared on the documents. The examination is the opportunity to discover whether the goods were classified with the correct harmonized code or (worse) if there are goods that weren’t documented at all. Misclassifications or the accusation of smuggling could trigger not just a refiling on the shipment at hand but an audit of the importer’s entire history with Customs going back a year or more, depending on the country.
  • Origin Marking. There are issues some countries enforce hard and others don’t care about at all. Origin marking is such an issue. Every country cares what origin statement is defined on the invoice paperwork, but many don’t care at all whether the goods themselves are marked with it. The U.S. is on record as the most strict of countries where origin is concerned. It regulates not only the accuracy of the statement itself but sometimes its font size, proximity to other statements on the product or package, specific wording, permanence, and even the frequency of appearance can contribute to violations of the complex origin-marking laws managed by Customs and the FTC. Even if they don’t suspect fraud, a requirement to remark an entire shipment can add thousands of dollars in costs to the importation (so always be sure your products are in full compliance before the goods set sail).
  • Original Document Rules. There are countries — thankfully, not the U.S., but many others, particularly in Latin America — in which they penalize the importer for errors in the color of the paper, the color of the signatures, and whether or not the right office in the origin country certified or issued these documents before shipment. Such consular involvement adds complexity, cost, and time to the export process as well as the risk of fines for the importer.
  • Preshipment Approvals. Many countries require preshipment approval of the products or documentation. Argentina requires that an early version of the invoice be approved before sailing. The U.S. requires that another preshipment security check be performed before sailing. For many classes of products, most countries have regulatory bureaus — such as the U.S. Food and Drug Administration in the U.S., Mexico’s Norma Oficial Mexicana, or Official Mexican Standard (NOM), and the Middle East’s Saudi Standards, Metrology, and Quality Organization (SASO) — that need to approve the manufacturer and certify the products themselves, often managed by global middlemen like Intertek and Bureau Veritas. If a shipment is exported before such measures are in place, it’s doomed before it even arrives.
  • Intellectual Property (IP) Protection. Countries that respect trademark, copyright, and patents can impose complex processes to protect against abuse (so if you import licensed products, be sure you have documentary proof of your right to do so before they ship the goods). Importing without a copy of the license agreement can delay clearance for months while the importer attempts to obtain the rights from the worst possible negotiating position. If you’re the exporter, consider this: Foreign countries that don’t respect your IP rights can still charge the IP owner for costly filing fees, even if they have no intention of truly protecting you from counterfeiting or other abuse. That’s among the most common disputes in WTO negotiations, as the U.S. rushes to the defense of American IP holders and some  foreign countries allow abuses with impunity.
  • Suitability of Packaging. The explosion of destructive pests over the past half-century caused the world community to impose strict regulations — known as the International Standards for Phytosanitary Measures, No. 15 (ISPM 15) — on the selection and treatment of packaging materials, such as banning the use of vegetable packing like peanut shells and straw and requiring that pallets, crates, and dunnage be fumigated or heat treated.  The right packing ensures safe shipping and easy import clearance. The wrong packing can cause a shipment to be returned to sender for fear of the spread of forest-destroying bugs like the Asian longhorned beetle and the emerald ash borer. This one mistake can cost anywhere from $500 to $1,000 in fumigation fees to $10,000 in round-trip ocean shipping. And that’s before the question of whether the importing government assesses fines for the violation. While the U.S. usually waives them, the regulations allow the government to assess ISPM 15 fines up to 100% of the entire shipment’s value.

That’s just a sample of the many nontariff barriers governments put in place to reduce importing.  The list is almost endless, so businesses must research these issues before setting forth on the seven seas to enter the world of import and export commerce.


Final Word

Many people believe countries, regions, or even historical time frames move in and out of free-trade and protectionist phases, that the national mood shifts from election to election, regime to regime, or generation to generation.

However, a careful study of world trade today reveals it is more accurate to say all countries are protectionist about some things and are supporters of free trade with other things. A vigorous producer of industrial goods with a tiny agricultural sector might facilitate cheap imports of food and easy exports of machinery. A nation with limited natural resources but excellent production ability might make importation of raw materials cheap to facilitate greater exportation of its manufactured goods.

Just like the U.S., a review of almost every other country’s published import tariffs also shows that many goods are duty-free, many are low-duty, and many are high-duty.  A study of their nontariff barriers shows every country has the tools to ramp up importation or tamp it down, depending on how vigorously and punitively they enforce the regulations at their disposal.

The Trump administration in the U.S. is an excellent example of this.

  • On the one hand, the Trump administration withdrew from the vast 11-country Trans-Pacific Partnership Agreement and implemented new tariffs on steel and aluminum as well as on most Chinese goods.
  • But on the other hand, the same administration retooled existing free-trade agreements with Canada, Mexico, and South Korea. It also launched new free-trade talks aimed at open markets with Great Britain, Japan, and Kenya to knock down barriers in both directions where these trade lanes are concerned.

There are carrots and sticks in international commerce. If you research the trade lanes and products you want to buy or sell, you can usually find out in advance where there are more sticks than carrots and steer clear of them. Work with your freight forwarder and Customs broker. Determine whether your particular products have low duty and tax impacts or high ones and whether the countries in question are welcoming or not where those products are concerned.

Will you need precertification from the importing country’s government? Will your products qualify for any special breaks? Will your vendor or customer need permission to do business with you, or is this product in this trade lane wide open and ready to trade?

The question of “protectionist or not” isn’t very simple anymore, but with a good product and the right advisors, you can steer clear of most obstacles, and win sales for your business worldwide.

Do you have a Customs broker or freight forwarder in place? Do you know what questions to ask of your broker or forwarder and your foreign partners?

John F. Di Leo
John F. Di Leo is a Chicagoland-based international trade compliance trainer, writer, and actor. He has been helping companies big and small to navigate the choppy waters of international transportation for decades.

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