How to calculate customs duty?

Trading internationally can be expensive in more ways than one.

Not only do consumers and businesses need to contend with international shipping charges and potentially costly currency conversions, but they must also navigate different import taxes, such as customs duties.

In this guide, you’ll learn what import duty is and an accurate method for calculating fees.

You’ll also understand the intricacies of the different charges associated with customs duty.

What is customs duty?

Customs duty (or import duty) is a tax that importers must pay on certain goods to bring them across a country's borders.

The customs duty charge is usually based on a percentage of the item's overall price.

The reason customs duty exists is to protect local industries by increasing the price of imported goods to encourage people to spend money in local markets instead. This logic shields domestic companies from direct foreign competitors and helps keep money inside the country's economy.

Types of import tariffs include anti-dumping taxes imposed on foreign goods that are well below the market value of identical products within the country.

International trade tariffs raise the price of imported goods to encourage citizens of a country to buy locally.

There are also export duties – charged in the country products are exported from – and excise duties, which are indirect taxes affixed to the sale of an individual product such as energy, tobacco, or alcohol.

For example, if a beverage provider exports its drinks to another country, an import duty would be applied in the destination country to protect domestic providers and give the local economy an advantage.

How to calculate import duty?

Now we'll take a look at how to calculate import duty using the simplest method: Ad valorem duty (more on that soon).

For this example, we'll be looking specifically at U.S. import duty taxes and using commercial cargo valued at $6,000.

• Step 1: First, we need to determine the import rate for a specific product. In this case, the product will be $6,000 worth of lightbulbs from South Korea. A user can find specific product rates by searching their HSN code online
• Step 2: Next, we check if there are any trade agreements between the U.S. and South Korea. Let's say there is a 10% import duty rate
• Step 3: Finally, we multiply the duty rate by the value of the cargo. The formula will look something like 10% x $6,000 = $600. The import duty for this shipment of products would be $600

5 ways to calculate customs duty rates

There are five main ways to calculate customs duty rates.

Let’s check an explanation of each one of them.

1. Ad valorem duty

This is the most common type of import duty. "Ad valorem" literally means "according to value" in Latin.

This duty is directly proportional to the value of the goods – the higher the value, the higher the duty. It ignores the physical size, weight, and quantity of imported products.

For example, let's say you're importing a shipment of high-end bicycles with a customs value of $10,000.

If the ad valorem duty rate for bicycles in the importing country is 5%, you would need to pay $500 ($10,000 x 0.05 = $500).

2. Specific duty

In contrast to ad valorem duty, specific customs duty is a fixed amount levied per unit of imported goods.

This unit can be based on weight (e.g., per kilogram), volume (e.g., per liter), quantity (e.g., per item), or other measures.

The value of the goods doesn't affect the specific duty – it's all about the quantity.

Imagine you're importing a shipment of high-quality coffee beans. The importing country imposes a specific duty of $2 per kilogram on imported coffee beans.

If your shipment weighs 1,000 kilograms, you would pay a specific duty of $2,000 ($2/kg x 1,000 kg = $2,000), regardless of whether the coffee beans are worth $5,000 or $50,000.

3. Mixed duties

Mixed duties offer a flexible approach to setting import tariffs by combining both ad valorem (percentage-based) and specific (fixed amount per unit) components.

This method establishes a clear range for the potential duty owed on a product. 

Importers calculate both the ad valorem and specific duty amounts and then pay whichever figure is higher or lower, depending on how the mixed duty is structured.

This ensures a predetermined minimum or maximum tariff rate is applied.

4. Compound duties

A compound duty combines both a specific rate of duty and an ad valorem rate of duty.

This means the total duty payable is calculated by adding the specific duty and the ad valorem duty.

For example, a compound duty of 0.5 cents per unit plus 8 percent ad valorem on a shipment of 10,000 units valued at $10,000 would be calculated as follows:

• Specific duty: 0.5 cents/unit x 10,000 units = $50
• Ad valorem duty: 8% x $10,000 = $800
• Total compound customs duty: $50 + $800 = $850

5. Tariff rate quotas

Tariff rate quotas (TRQs) are trade policy tools that allow a specific quantity of a particular good to be imported at a lower duty rate (within-quota tariff) for a defined period. 

However, any quantities imported beyond this quota are subject to a higher duty rate (over-quota tariff). This system helps manage the influx of specific goods while still allowing for some level of trade.

Imagine a country that wants to protect its domestic wheat producers but also needs to import some wheat to meet domestic demand.

They might establish a TRQ for wheat, allowing 10,000 tons of wheat to be imported at a lower import duty rate of 5%. 

Any wheat imports exceeding this 10,000-ton quota would face a higher over-quota tariff, perhaps 20%. This incentivizes importers to stay within the quota while still allowing for some imports at a lower rate.

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Read more: What is export finance and how can it help small- and medium-sized businesses?

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Key types of customs duty

Below are some of the key types of customs duties that can be found in most countries across the world:

Type 1. Basic customs duty

Basic customs duty is the baseline charge for imported goods. 

When any product is traded internationally, a customs duty will apply, which is usually an additional charge equivalent to a percentage of the good's overall price based on its calculation.

Only Fairtrade or GSP products receive lower tariffs or none. These are also known as “preferential tariffs.”

Type 2. Countervailing duty

Countervailing duty is a tariff on goods that have received countervailing (offsetting) subsidies in either the original or exporting country.

An example of this type of subsidy would be when a foreign government provides financial aid to a company. 

In France, the government may provide financial aid to a steak company, but when those steaks are imported into the US, they are subject to countervailing duties because of that financial backing. 

💡 Countervailing duties and anti-dumping duties can be applied to a product at the same time.

Type 3. Protective duty

This duty tariff relates to the import of goods from foreign companies that are direct competitors to local brands.

This is done to protect local businesses from being outsold by foreign brands. 

An example of protective import duty would be a German chili sauce brand having taxes imposed on it to protect a local US brand from an outside competitor.

Type 4. Anti-dumping duty

Anti-dumping duties are taxes that affect goods to compensate for the difference between the export price and their normal value. They're often imposed on suspiciously cost-effective products. 

For example, if a brand of foreign bubble gum is almost 50% lower in price than those in a domestic market, an anti-dumping duty tax may be imposed.

Type 5. Safeguard duty

Safeguard duty is the closest to an “emergency” form of tariff that a domestic economy can have. It’s imposed on goods and products available at wildly lower prices that are predicted to have a damaging effect on the domestic economy. 

Goods from developing countries are usually exempt from this duty, and safeguard duty is only payable after a certain amount of products have been imported.

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Who pays for export and import duties in international trade? Learn about Incoterms: The 11 rules explained

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Frequently Asked Questions (FAQ)

How do I pay customs duty?

Generally, you have a few options for paying customs duty:

• Paying directly to customs: When your goods arrive at the port of entry, you will receive a notice from the customs authority outlining the duties owed. You can then pay this amount directly to the authority, typically through a bank transfer, cashier's check, or online payment portal
• Paying through a customs broker: Many businesses choose to work with a licensed broker to handle the import process, including duty payment. The broker will calculate the duties owed, file the necessary paperwork, and pay the duties on your behalf. You'll reimburse the broker for the duty amount plus their service fees
• Paying through a carrier: Some shipping carriers offer customs duty prepayment services. With this option, you pay the estimated duties to the carrier when you ship the goods. The carrier handles the duty payment upon arrival

The specific payment methods available may vary depending on the country and the value of the goods being imported. You should always check with the relevant authority or your customs broker for guidance on the appropriate payment method.

How do I know if I have to pay customs in the U.S.?

Whether or not you'll pay customs duty in the U.S. depends on important factors, including:

• Country of origin: The country where the goods were manufactured or produced is crucial. The U.S. has different trade agreements with various countries, impacting applicable duty rates
• Harmonized System (HS) code: Every product is categorized under a specific HS code, which determines its duty rate
• Value of goods: The total value of imported goods, including the price paid, shipping costs, and insurance, influences the duty amount
• Purpose of import: Whether the goods are for personal use or commercial purposes can affect duty exemptions or applicable rates

To accurately determine if you need to pay import duty and how much, you can use the U.S. Customs and Border Protection (CBP) website or contact a customs broker.

What factors can affect customs duty?

Several important factors can affect the customs duties affixed to a particular set of imported goods. These elements include the availability of local competition, the scale of local competition, the average prices associated with a product, and how far below the average market value of goods the imported products are.

There are also political factors that can contribute to customs duties, including any trade agreements between importing and exporting countries or whether heavy economic sanctions exist.

Such factors must be a key consideration for exporters. Import duties can create additional challenges for those already navigating the common issues with working capital that can arise in international trade – including delayed payment terms.

Not only should exporters consider potential fees into any trade agreements but also ensure they have the working capital to facilitate these agreements without risking bad debt.