Tuesday’s first of a two-part primer on tariffs outlined their basic function, uses, and history. Today’s concludes with five common types of tariffs.
If you missed this column on Tuesday, a tariff is essentially a tax on trade, placed by the receiving country, on imported goods. The exporter, typically a company or manufacturer, pays the tax.
Tariffs have been around for centuries. Headlines aside, whether they’re good or bad depends on one’s perspective. While consumers enjoy access to more and cheaper products and sellers enjoy bigger markets for their goods, certain key domestic industries (with associated jobs) struggle to compete globally — in a world whose survival increasingly demands it — when playing fields are not level.
For such a simple idea, tariffs are complicated and emotionally charged. They’re also levied differently, both in terms of purpose and calculation.
Prohibitive and protective tariffs. These two are both common and controversial. A prohibitive tariff is one set so high that it’s meant to keep the good from being imported at all; it is sometimes used as a punitive measure. A protective tariff is less extreme, used to increase the price of imported goods to ease competition. Both serve to protect domestic industries. Both tend to elicit retaliatory tariffs.
Ad valorem. Ad valorem tariffs are based solely on the goods’ net worth, set as a percentage. A hypothetical example would be a 10 percent tariff levied on the importation of bananas from Honduras. If one banana is priced at $1, then the tariff would be 10 cents.
Specific tariffs. Specific tariffs are based on the quantity of the goods, rather than estimated value. Quantity can refer to a specific number of goods (e.g., 100 bananas), volume (e.g., per gallon), or a weight (e.g., per pound). A compound tariff combines the ad valorem and specific tariff. For example, fashion items such as shoes may be assessed with a compound tariff of $1/pair plus 25 percent.
Revenue tariffs. As the name implies, the goal of a revenue tariff is simply to increase the government’s revenue by taxing a specific product. Revenue tariffs are commonly placed on oil.
Note that these categories aren’t necessarily mutually exclusive; a protective tariff, for example, may be assessed on a specific or ad valorem basis.
Nor are tariffs a black and white issue. Consult 10 sources on trade policies and you’ll likely get 20 conclusions. Perhaps most answers lie in the gray areas.
Sholeh Patrick, J.D. is a columnist for the Hagadone News Network and former managing editor of an international trade law journal.