When goods cross international borders, they are subject to customs duties and tariffs. These are essentially taxes imposed by a sovereign government on imported goods, primarily designed to raise revenue or protect domestic industries from foreign competition.
The foundation of all customs duties is the Harmonized System (HS) code. This is an internationally standardized system of names and numbers to classify traded products. Every item, from a leather shoe to a microchip, has a specific 6-to-10 digit HS code that dictates its tariff rate.
Ad Valorem vs Specific Duties
The most common type of duty is 'Ad Valorem', which means 'according to value'. It is calculated as a percentage of the total customs value of the goods. If the ad valorem rate for a smartphone is 5% and the declared customs value is $800, the duty is $40.
Alternatively, 'Specific Duties' are based on the quantity, weight, or volume of the goods, regardless of their price. For example, a country might charge $0.50 per kilogram of imported sugar. Sometimes, a compound duty is used, applying both an ad valorem percentage and a specific flat rate simultaneously.
Calculating the Customs Value (CIF vs FOB)
How the underlying value is calculated depends heavily on the country. Most of the world (including the EU) calculates duties on the CIF value: Cost, Insurance, and Freight. This means the 5% duty is applied to the cost of the goods PLUS the cost of shipping and insuring them to the destination.
The United States, however, typically uses the FOB (Free on Board) value for duty assessment. This means duties are calculated only on the cost of the goods as they were purchased at the foreign port, excluding the international shipping costs. This distinction can drastically alter the final landed cost calculation for importers.