Ad-Valorem Tariff - Assignment Example

Tariffs are the taxes that are levied on the imports of goods from a foreign country. For e-g when you import a good there are government duties, freight charges etc which increase the prices of these goods and hence discourage imports. There are two types of Tariffs: Ad-Valorem Tariff is a percentage levied on the imported good. Say, 4% on the imported value. Specific Tariff is a tariff levied on a good and does not vary with the price of good and it is usually a set amount. It happens when a flat rate tax levied on each unit of a product. Similarly Quotas are quantative restrictions on import of goods. Quotas tell us how much goods we can export from a country. For Example, USA people were allowed to import only a certain number of goods from a certain country in a certain period. For example, 5000 carpets from Pakistan during a year. You cannot import more than that. If you do you are fined heavily. The major reasons why countries resort to having tariffs and quotas than having free trade are: Tariffs and quotas are levied on imports coming in to the country in order to protect the local industry from stiff competition from abroad. As tariffs increase the price of imported goods becomes higher than domestic goods and quotas limit the number of goods. These actions encourage the consumption of local goods and help the local industries grow. Tariffs also raise revenue for the government which can later be used for the development projects by the government. Another reason for tariffs is to protect the infant industries (newly-setup industries) by saving them from stiff competition from abroad. Quotas limit the supply of imported goods and hence increase their prices. Thus, limiting the consumption of imported goods. Quotas also protect dumping of goods by foreign producer in the local market. Dumping occurs when foreign producer, which is already a well-established firm sells goods in a market below it's cost price to discourage competition and kill the competition in the market. Since, it's selling at a price below its cost and bear losses for a short to eliminate any competition in the market.As result local producers won't be able to compete with it and hence will have to shut down their operations. Like all other countries, England also engages in international trade. Until recently England was in favor of free trade. By free trade we mean that it wanted to have import duties free trade. It supported the argument of free trade because it believed that it might encourage international specialization which will result in efficient use of the resources that all the countries have and as a result overall price level will come down. The major trade partners of England are its fellow European countries and other economies of the world from where it can get cheaper goods and services as compared to what they would cost if produced within England. It trades will almost all of the European countries but its major trading partner where bulk of its imports and exports come from are India, China, Germany, American and Netherlands. All these countries are noted for producing low-cost goods in their area of expertise. Like China and India are known for producing goods at low price because they have huge supply of Labor and as a result Labor in these countries is cheap. So, UK purchases goods those goods from India and China which can only be produced by Labor-Intensive methods like Clothes, Sports Equipments, Toys etc. Similarly, USA is known for its advanced technological goods. So, the imports from USA include Computers, Cell-phones, and other modern machinery. The tariff system of England is pretty flexible. On one hand it knows the importance of international trade and on another it charges varied custom duties and import tariffs to different countries. As a member of EU (European Union), it charges common external tariff or CET to other members of the Union. By CET we mean that both trading partner charge the same tariff on the import of goods from each other. For example, if Germany is charging to 2% CET on the imports of England, then in return England will also charge a tariff of 2% on German products. This tariff could neither be higher than 2% and nor could it be lower. As a member of EU, it is binding upon England that Customer and Excise Department will calculate the import tariffs and custom duties on all the imported goods that has crossed England's border, Then, it reports this figure to the EU which uses it in different areas of calculation and to prepare a report on all its findings. As already discussed that UK believes in the flexible system of import tariffs and duties, it must be noted here that it charges raw materials, manufactured goods and services at different rates. Raw Materials imports are charged either a very low percentage or are duty free. The reason behind this is to encourage production of goods in UK. Similarly, this will also provide employment opportunities to Labor if duty free raw materials are imported and processed in UK. However, the policy regarding the imports of manufactured goods is quite strict. When manufactured goods are imported, they are charged a whooping import duty of 5-7%. The reason behind charging high-duty on them is to discourage their import. This is because when manufactured goods are imported from abroad they are usually ready for sale and thus not provide employment opportunities to people which raw materials imports provide. Thus, this argument justifies the high duties on manufactured goods. Similarly, Food Products coming into the UK are also charged high duties and tariffs. Recently, the member EC and EFTA have agreed that most of the trade between themselves will be tariff and quota free. So, hearing this development one can predict that in the future major trading partners of UK will be its other fellow European nations and might be tariff free. 1 1. Anonymous, the data was retrieved from the site http://internationalbusiness.wikia.com/wiki/England_Major_imports-CNK on 23rd March 2009 Read More