Glossary of Tariff Terms – Cheat Sheet.

1. Tariff

• A tariff is a tax or duty imposed by a government on imported or exported goods. Tariffs can serve multiple purposes, such as protecting domestic industries from foreign competition, raising government revenue, or encouraging consumers to buy domestic products over foreign ones. For example, a government might impose a tariff of 20% on imported steel to make domestically-produced steel more competitive in the market.

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2. Customs Duties

• Customs duties are the same as tariffs. They are taxes levied on goods as they cross international borders. Customs duties help regulate the flow of goods between countries and are often used by governments to achieve economic and political objectives, such as protecting local industries or generating revenue for public spending.

3. Ad Valorem Tariff

• An ad valorem tariff is a tariff based on the value of the imported goods, expressed as a percentage. For instance, if a country imposes an ad valorem tariff of 10% on imported cars, and the value of the car is $20,000, the tariff would be $2,000. This type of tariff is more flexible and adjusts with fluctuations in the price of goods.

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4. Specific Tariff

• A specific tariff is a fixed amount charged on a specific quantity of the imported goods, such as $50 per ton of imported wheat. This type of tariff does not depend on the value of the goods but rather on their volume or weight. For example, a specific tariff could be imposed as a fixed amount of $200 per vehicle, regardless of whether the car is worth $10,000 or $50,000.

5. Revenue Tariff

• A revenue tariff is primarily used to generate income for the government rather than to protect domestic industries. Countries that impose revenue tariffs might do so on a wide range of imports in order to raise funds. For example, developing nations might rely on revenue tariffs to support their government budgets while also importing essential goods like technology or machinery.

6. Protective Tariff

• A protective tariff aims to shield local industries from foreign competition by making imported goods more expensive. By imposing higher tariffs on imports, the government can make domestic products more competitive, encouraging consumers to buy locally-produced goods instead. A protective tariff might be used to support emerging industries in a country, such as renewable energy or infant technology industries.

7. Most-Favored-Nation (MFN)

• Most-Favored-Nation is a status granted in international trade agreements. When a country is granted MFN status, it means that it will receive the best possible tariff treatment from another country in trade relations. For example, if a country agrees to impose a 5% tariff on goods from one country under an MFN agreement, it must offer the same rate to other countries with MFN status. MFN ensures that trade barriers are applied equally, fostering equality in trade negotiations.

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8. Quota

• A quota is a limit placed on the amount or value of a particular product that can be imported or exported during a specific period. Quotas are used to control the volume of imports and protect domestic markets from being flooded with foreign goods. For instance, a country may set a quota on the import of textiles to limit competition with local textile industries.

9. Anti-Dumping Duty

• An anti-dumping duty is a tariff imposed on foreign imports that are believed to be priced below fair market value, often due to government subsidies in the country of origin. Dumping occurs when a foreign company sells products at a price lower than its cost or below the price in its home market, which can harm domestic industries. An anti-dumping duty seeks to counteract this and maintain fair competition.

10. Countervailing Duty

• A countervailing duty is a tariff imposed to neutralize the negative effects of foreign subsidies. If a country’s government provides subsidies to its industries, making their exports cheaper, the importing country might impose a countervailing duty to level the playing field. This helps prevent unfair competition caused by foreign governments providing financial support to their exporters.

11. Free Trade Agreement (FTA)

• A Free Trade Agreement (FTA) is a treaty between two or more countries that aims to reduce or eliminate tariffs and other trade barriers between them. FTAs encourage trade by making goods and services cheaper and more accessible across borders. Examples of FTAs include the North American Free Trade Agreement (NAFTA) (now replaced by the United States-Mexico-Canada Agreement, USMCA) and the European Union’s Common Market.

12. Trade Barrier

• A trade barrier is any government-imposed restriction on international trade. Tariffs are one type of trade barrier, but there are other barriers such as import quotas, subsidies, licensing requirements, and non-tariff barriers like safety standards or customs procedures. The purpose of trade barriers is often to protect domestic industries or promote domestic economic interests.

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13. Tariff Escalation

• Tariff escalation refers to the practice where tariffs increase as goods move up the value chain. In many cases, raw materials or intermediate goods are taxed at lower rates, while processed or finished goods are taxed at higher rates. This practice discourages countries from exporting raw materials and encourages them to process goods domestically. For example, an agricultural product like cocoa might be taxed less when exported as raw beans, but once it’s turned into chocolate, it could face higher tariffs.

14. Most-Favored-Nation Status

• This term, which is part of trade agreements, ensures that countries are treated equally in terms of tariff rates. Most-Favored-Nation status is a policy where a country agrees to extend the same favorable trade treatment to one country that it extends to others in a similar situation. This principle encourages fair treatment and prevents discrimination in international trade relationships.

15. Tariff Retaliation

• Tariff retaliation occurs when one country imposes tariffs on another in response to that country’s previous tariff impositions. Retaliatory tariffs are often used in trade disputes to exert pressure on the other nation to change its policies. For example, if Country A imposes tariffs on Country B’s goods, Country B may retaliate by imposing tariffs on Country A’s products. This back-and-forth can escalate into a trade war, where both countries continually increase tariffs on each other’s products.