Case Terms:

In this case study the most important insights are tariffs and trade. Basically, tariff is called
customs duty. A tariff refers to a tax imposed by a government of a country or of a supranational
union on imports or exports of goods. Besides being a source of revenue for the government,
import duties can also be a form of regulation of foreign trade and policy that taxes foreign
products to encourage or safeguard domestic industry. Tariffs may be levied either to raise
revenue or to protect domestic industries, but a tariff designed primarily to raise revenue also
may exercise a strong protective influence, while a tariff levied primarily for protection may
yield revenue.

There are two types of tariffs. They are:

 Specific tariff
 Ad valorem tariff

Specific tariff:

A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff
can vary according to the type of goods imported. For example, a country could levy a $15 tariff
on each pair of shoes imported, but levy a $300 tariff on each computer imported.

Ad valorem tariff: An ad valorem tariff is levied as a

fraction of the value of imported goods. – For example, 25% tariff on the value of imported
trucks.

There are also three types of tariffs. They are:

  Most Favored Nation (MFN)
 Bound Tariff (BND)
 Effectively Applied (AHS).

Most-Favored Nation Tariffs :In current usage, MFN tariffs are what countries promise to
impose on imports from other members of the WTO, unless the country is part of a preferential
trade agreement (such as a free trade area or customs union). This means that, in practice, MFN
rates are the highest (most restrictive) that WTO members charge one another.Some countries
impose higher tariffs on countries that are not part of the WTO. In some rare cases, WTO
members/GATT contracting parties have invoked the "Non-Application Clause" of WTO/GATT
agreements and chosen not to extend MFN treatment to certain other countries.

Bond Tariffs:Bound tariffs are specific commitments made by individual WTO member
governments. The bound tariff is the maximum MFN tariff level for a given commodity line. If
the country did not reduced applied tariffs below their bound levels, other countries could
request compensation in the form of higher tariffs of their own.

Effectively Applied Tariff:When analyzing the effects of preferential tariffs on trade flows you
will need to be careful with assumptions about which tariff rate is actually applied to a particular
import. The importing country will apply the MFN tariff if the product fails to meet the country's
rules that determine the product's country of origin. For example, some former European
colonies find it easier to satisfy the rules of origin under the Cotonou Agreement rather than the
Everything But Arms (EBA) program, even where preferential tariffs are lower under the EBA.
Tariff Protection:Protective tariffs are tariffs that are enacted with the aim of protecting a
domestic industry. They aim to make imported goods cost more than equivalent goods produced
domestically, thereby causing sales of domestically produced goods to rise; supporting local
industry.

Tariff Escalation : Tariff escalation refers to a situation where tariffs rise along processing
chains. This practice can afford significant protection to processed products in importing
countries, depending on the share of value-added in final output.