What is a tariff?

Throughout history governments have imposed tariffs for multiple reasons: to raise government revenue, to protect domestic producers from foreign competition and to use as leverage in international relations.

Tariffs tend to raise prices for consumers and make industries less competitive in the long run, however. The reduction of tariffs under the auspices of the World Trade Organization and through bilateral and multilateral free-trade agreements is widely credited with raising global living standards over the past half century.

Tariffs are sometimes called duties. All tariffs are duties but not all duties are tariffs. Whereas tariffs are instruments of economic policy, duties also include taxes applied to imports to match consumption taxes imposed on domestic producers (like the GST) or to cover the cost of customs inspection and infrastructure at the port of entry.

Types of tariffs 

There are multiple types of tariffs in Canada. These tariffs include specific, ad valorem, and compound tariffs. 

• Specific tariff: A specific tariff is a flat tax on a certain quantity of products. Whether it be per item, per kilo or per tonne, the fee does not change as the amount increases. For example, imported beer may have a $1 specific tariff per can or bottle regardless of the volume of goods imported. 

• Ad valorem tariff: This is a percentage duty placed on the value of products that are being shipped. For example, 15% could be charged on products with a value of over $500 which would add $75 to the total cost. If a purchase amounts to $400, the tax percentage stays the same but is charged on the new value which means an additional $60 would be charged. The value of imported/exported products and tax percentage are correlated meaning that if the value of the products change so does the percentage of the tax. 

• Compound tariff: A compound tariff is a mix of the specific and ad valorem tariffs: the product will be subject to a flat tax plus a certain percentage charged on the value of the product. This charge could also be set so that the importer pays whatever the higher fee is. For example, the cost of mushrooms may be $0.088 per kilogram plus 20%. However, in other cases the importer would pay either 8.8¢/kg or the 20% depending on which costs more. 

Example: “U.S. President William McKinley placed a tariff on imported goods so that American businesses had a cost advantage in the domestic marketplace.” 

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