Tariff rates explained: Key factors in determining tariffs on imported goods

Executive summary

Recent announcements from the United States have raised concerns about potential new and increased tariff obligations for companies. It is now more crucial than ever to understand how tariff rates are determined, influenced by factors such as the classification of the good and its country of origin. To navigate these changes, importers can consult with trade and tariff advisory experts to develop strategies for their enterprises, ensuring compliance and minimizing costs in a shifting trade landscape.

Announcements from the United States have created concerns of potential tariff obligations for companies who may not have previously had dutiable goods, and increased tariff rates for other goods. These concerns have created a need to understand how tariff rates are determined, and strategies to minimize the applicable rate. At a high level, tariff rates differ depending on the classification of the good and its origin. The tariff rate is multiplied by the imported good’s value and/or the number of units to determine the final tariff amount.

Classification

Tariff rates are assigned by category of good. Goods are classified into categories depending on the type of good and, in some cases, its intended usage. Each category receives a code based on the Harmonized Commodity Description and Coding System, more commonly referred to as the Harmonized System (HS). The World Customs Organization maintains the HS as a standard coding system across its over 179 member states. Countries may establish their own codes for domestic purposes.

The Customs Tariff contains the full list of codes and good descriptions used in Canada. Each chapter of the Customs Tariff has additional interpretive notes for the descriptions listed in the chapter. Chapter 99, in particular, contains the conditional relief tariffs items. These are categories of goods eligible for lowered tariff rates based on their intended use.

Figure 1 Example category from the Customs Tariff

Importers may aim for their goods to be classified into categories with lower tariff rates. Strategies in this area include:

• Requesting an advanced classification ruling from the Canada Border Services Agency (CBSA). This is particularly helpful for novel or differentiated goods.
• Engaging in tariff engineering where changes are made to the design and/or manufacturing process of a product to qualify for a lower treaty rate. For example, if the parts of a good qualify for a lower treaty rate than the finalized good, the final assembly may be moved to the destination country. This engineering can include consideration of origin as well.

Origin

Tariff rates differ depending on the country of origin of the goods. Many countries are party to a number of trade agreements including multilateral and bilateral agreements. Presently, Canada’s free trade agreements include:

• Canada-United States-Mexico Agreement (CUSMA)
• Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
• Canada-European Union Comprehensive Economic and Trade Agreement (CETA)

These agreements lower the barriers to trade in part by agreeing to lowered or eliminated tariffs on goods originating from a member state which are imported into another member state.

These agreements still allow countries to impose tariffs on a country-by-country basis. To be compliant with trade agreements, countries will normally establish a basis of injury to domestic industry or act in response to foreign action contrary to the trade agreement, such as tariffs. This can be seen with Canada’s surtaxes against China’s steel and aluminum products where Canada has accused China of engaging in non-market practices like state-directed overcapacity. These tariffs will normally be imposed on specific goods consistent with the perceived harm.

The country where a good originates is determined by the rules of origin. These rules may differ depending on trade agreements between the countries, but generally they consider where the good is grown, harvested, extracted, assembled, processed and/or produced. Tariff engineering, mentioned above, can involve shifting production of a good between countries to change the good’s origin and access lower treaty rates.

United States

Similar to Canada, the United States determines the tariff rates applicable to a good based on the category of the good and its origin. The Harmonized Tariff Schedule of the United States sets out the categories of goods recognized in the United States and is based on the Harmonized System. The recent election of President Donald Trump has created substantial uncertainty as it appears he aims to challenge certain tenets of the established trading system. He has shown a willingness to use tariffs for non-commercial matters such as border security, and indicated a new agency may partly replace the current U.S. Bureau of Customs and Border Protection. To navigate these changes, importers can consult with RSM’s trade and tariff advisory team to develop strategies for their enterprise.