I mean, I know kind of how they work. But no totally. My understanding is this:
Sometimes it is cheaper for a country to import goods from another country rather then buy them off a local (domestic) producer. To counter this, the government puts a tariff on the imported good.
How exactly does the tariff work?
Does the importer pay the tariff to the government?
Could someone please clarify using this example:
Lets say importing ‘x’ amount of goods costs $45,000. To purchase the same amount of goods from a local producer would cost $60,000. The government has decided to protect local industry, by imposing a tariff on the imported good.
Does this mean that the person importing the good will now have to pay $45,000 to the foreign exporter, and (for example) and an additional $16,000 ‘tarrif’ to the government. Hence, it would be cheaper to buy the local good.
Is this correct?
In your example, yes, that’s how they work. There could be other types of tarrifs. Your example is one intended to discourage use by raising the price. Some may just be to raise money.
A tariff is a tax on an imported good. The effect of a tariff crudely speaking is a combination of a tax on the consumption of that good and a subsidy for its domestic production. Of course it is consumers rather than importers who end up paying most of the tariff although the importer may physically hand over the money.
Tariffs are administered at the border by customs.
In your example the tariff would have to be >15000 for the domestic industry to exist at all.
Well, that depends in part on the elasticity.
posted by MadHatter
Your example is correct, but the method of calculation is a bit different.
The tarrif is applied as a percentage of the FOB/FOT (free-on-board/free-on-transport) value of the goods, converted to the local currency at the time the bill of lading is stuck. You do not pay duty on freight, insurance and domestic cost components that make up the total landed cost. If the supplier quotes the goods on a delivered basis or CIF (cost+insurance+freight), the freight and other charges are deducted to estimate the FOB/FOT cost.
The amount of duty paid does not vary based on the price of the local material (% duty is determined by statute) It does vary between shipments of the same goods based on their cost and the prevailing exchange rate. The price of local material tends to be adjusted to match world parity prices plus the %duty.
If countries can be proved to selling material below their domestic cost of production, GATT allows dumping duties to be applied.
Tarrifs can be applied to goods crossing state as well as national borders. I presume they could be applied when crossing district or city limits if local legislation allowed.