Import Export Management ? Subject: IMPORT EXPORT MANAGEMENT Credits: 4 SYLLABUS Import-Export Management: Overview Import Export Management Introduction; Concept Key Feature; Foreign Trade - Institutional Framework and Basics; Trade Policy; Foreign Trade; Simplification of Document; Reduction in Document to Five for Custom Purpose; Exporting; Importing Counter Trade; the Promise and Pitfall of Exporting; Improving Export Performance; Counter Trade. International Marketing: Environmental and Tariff Barrier International Marketing: Definition, Components of International Marketing Management; Trade Barrier Definition: Components of Trade Barrier, Objectives of Trade Barrier. Non Tariff Barrier Non Tariff Barriers; Government Participation in Trade; Quota; Advalorem Duty; Specific Duties and their Differences Export and Import Financing, Procedure, and Primary Consideration Export and Import Financing Procedures; 14 Steps for Conducting Export Transaction; Export Assistance; Export-Import Primary Consideration Import Export Documentation Import and Export Documentation: Introduction, Freight Forwarder’s Powers of Attorney, Bill of Lading, Certificates of Origin, Letter of Credit. Processing of Export Order Processing of Export Order; Nature and Format of Export Order; Examination and Confirmation of Export Order; Manufacturing or Procuring Goods; Central Excise Clearance; Pre Shipment Inspection; Appointment of Clearing and Forwarding Agents; Transportation of Goods to Port of Shipment; Port Formalities and Customs Clearance; Dispatch of Documents by Forwarding Agent to the Exporter; Certificate of Origin and Shipment Advice; Presentation of Documents to Bank; Claiming Export Incentives; Excise Rebate; Duty Drawback. Marine Insurance Marine Insurance Introduction and Meaning; Principle of Marine Insurance; Features & Types of Marine Insurance; Insurance Claim Procedure for Filling Marine Insurance; Documents for Claim; ISO-9000 Export Assistance of India Export Assistance of India: Introduction, Importance of Export Assistance, Export Promotion Measure in India, Expansion of Production Base for Exports; Relaxation in Industrial Licensing Policy / MRTP / FERA / Foreign Collaborations; Liberal Import of Capital Goods; Export Processing Zones (EPZ); Export Oriented Units (EOU); Special Economic Zones (SEZs); Electronic Hardware Technology Parks (EHlTP) and Software Technology Park Units (STP); Assured Supply of Raw-Material Imports; Eligibility for Export / Trading / Star Trading / Super Star Trading Houses; Export Houses Status for Export of Services; Rendering Exports Price Competitive; Fiscal Incentives; Financial Incentives; Strengthening Export Marketing Effort Export Promotion Organization Export Promotion Organization; its Objectives; Importance of Institutional Infrastructure; Govt. Policy Making and Consultations; Indian Trade Promotion Organization (ITPO); Indian Institute of Foreign Trade (IIFT); Indian Institute of Packaging (lIP); Indian Counsel of Arbitration (ICA); Federation of Indian Export Organization (FIEO); Marine Products Exports Development Authority (MPEDA); Export Processing Zones (EPZ); 100% Export Oriented Units (EOUs); Facilities for Units in EOUs, EPZs, EHTPs & STPs; M. Visvesvaraya Industrial Research & Development Center (MVIRDC); Chamber of Commerce (COC). Export Import Policy of India Export Import Policy of India; its Meaning; General Objectives; Highlight and Implication of Export-Import Policy 1997-2000 and Export-Import Policy 2002-2007. Risk Management and Business Continuity Meaning of Risk Management; its Principle; Process; Identification; Assessment; Potential Risk Treatment; Risk Avoidance; Risk Reduction; Risk Retention; Risk Transfer; Creating a Risk Management Plan; Implementation; Review and Evaluation of the Plan; Area of Risk Management; Enterprise Risk Management; Risk Management and Business Continuity; UCP600: Opportunity or Challenges. Suggested Readings: 1. Export Import Policy, Publisher: Ministry of Commerce, Government of India, New Delhi. 2. Electronic Commerce by N. Janardhan, Publisher: Indian Institute of Foreign Trade, New Delhi. 3. Nabhi's Exporters Manual and Documentation, Publisher: Nabhi Publication, New Delhi. 4. Nabhi's New Import Export Policy, Publisher: Nabhi Publication, New Delhi. 5. Export-What, Where, How by Ram Paras, Publisher: Anupam, Delhi. 4 IMPORT EXPORT MANAGEMENT – AN OVERVIEW Structure 1.0 Introduction 1.0.1 Concept of Import Export Management 1.0.2 Key Feature 1.0.3 Foreign Trade - Institutional Framework and Basics 1.0.4 Trade Policy 1.0.5 Foreign Trade 1.1 Simplification of Document 1.1.1 Reduction in Document to five for Custom Purpose 1.2 Exporting, Importing and Counter Trade 1.2.1 The Promise and Pitfall of Exporting 1.2.2 Improving Export Performance 1.2.3 Counter Trade 1. 3 Questions 1.0 Introduction Whether a business student is studying marketing, finance, accounting, strategy, human relations, or operations management, the differences between countries in which a firm does business will affect decisions that must be made. A fundamental shift is occurring in the world economy. The world is getting closer in terms of cross border trade and investment, by distance, time zones, languages and by national differences in government regulation, culture and business systems and toward a world in which national economies are merging into one huge interdependent global economic system. Globalization is affecting firms that previously operated in a nice, easy, protected national market. It also illustrates the increasing importance of thinking globally. However the world we live is not perfect. It is characterized by considerable amount of uncertainty regarding the demand, market price, quality and availability of own products and those of suppliers. There are transaction costs for purchasing or selling goods or securities. Information is costly to obtain and is not equally distributed. There are spreads between the borrowings and lending rates for investments and financings of equal risks. Similarly each organization is faced with its own limits on the production capacity and technologies, it can employ there are fixed as well as variable costs associated with production goods. In other words, the markets in which real firm operated are not perfectly competitive. 5 1.0.1 The Concept of Import Export Management Export Import Management is a comprehensive textbook specially designed for students of management pursuing a course in international business. The book recognizes the growing significance of export import trade and the need of the corporate world to understand the nuances of export import management in order to compete successfully in the international market. Beginning with the basics of foreign trade and export import documentation, it delves deep into topics such as the methods and instruments of payment, pricing, incoterms (international commercial terms), export import strategies, and practices. It also explores topics such as financing exporters, risk management and its coverage, customs clearance, cargo, shipping, IT, and export incentive schemes. The book contains separate chapters which provide analyses of markets in the Middle East, the ASEAN countries, Australia and New Zealand, and China and Japan. These provide an insight into the business, political, economic, and legal environment of the host region/country which would enable a potential exporter to understand the challenges and opportunities in the market. These chapters provide practical information for exporters and importers. Practitioners of the trade will find the module a useful handy reference. 1.0.2 Key Feature • Contains export documents at appropriate places to exemplify documentation Includes a large number of data tables providing export import data • Contains specific chapters on regional/country markets that provide an insight into the business, political, economic and legal environment of the host region/country • Provides end chapter questions to test the reader’s understanding as also interesting exercises to put learning into practice 1.0.3 FOREIGN TRADE- Institutional Framework and Basics Creation of appropriate institutional framework and supportive environment facilitates The growth of external trade. In a developing country like India, the real barometer of Sustained economic development is the growth index of exports. Sustained growth in exports can only be accelerated by conducive framework. The primary objective and emphasis of the Framework is towards accelerated development with the required regulation to support the Framework structure. The role of regulation is to protect the interests of consumers, obtain Conditions of competition and foster the institutional framework. The present regulatory Framework in India is highly supportive. The attitude of the government, a very important Aspect for faster pace is poised in that direction to make the framework achieve the sustained. 6 ____________________________________________________________________________ 1.0.4 TRADE POLICY Trade policy is one of the many economic instruments for achieving economic growth. The basic twin objectives of the trade policy have been to promote exports and restrict Imports to the level of foreign exchange available in the country. The inherent problems of the country have been non-availability/acute shortage of crucial inputs like industrial raw Materials, supporting relevant technology and required capital goods. The problems can be Removed by imports. But, continuous imports are neither possible nor desirable. The gap Between exports and imports is financed through borrowing and foreign aid. However, Imports must be financed by exports, in the long run. The basic objective of the trade policy Revolves round the instruments and techniques of export promotion and import management. 1.0.5 FOREIGN TRADE Foreign trade is recognized as the most significant determinants of economic development of a country, all over the world. For providing, regulating and creating necessary environment or its orderly growth, several Acts have been put in place. The foreign trade of a country consists of inward and outward movement of goods and services, which results into outflow and inflow of foreign exchange. The foreign trade of India is governed by the Foreign Trade (Development & Regulation) Act, 1992 and the rules and orders issued there under. Payments for import and export transactions are governed by Foreign Exchange Management Act, 1999. Customs Act, 1962 governs the physical movement of goods and services through various modes of transportation. To make India a quality producer and exporter of goods and services, apart from projecting such image, an important Act—Exports (Quality control & inspection) Act, 1963 has been in vogue. Developmental pace of foreign trade is dependent on the Export-Import Policy adopted by the country too. Even the Exim Policy 2002-2007 lays its stress to simplify procedures, sharply, to further reduce transaction costs. Today’s international trade is not only highly competitive but also dynamic. Necessary responsive framework to make exports compete globally, is essential. In order to harness these gains from trade, the transaction costs, in turn dependent on the framework support, involved need to be low for trading within the country and for international trade. International trade is a vital part of development strategy and it can be an effective instrument of economic growth, employment generation and poverty alleviation. Market conditions change, almost daily, requiring quick response and more importantly, anticipation of the future requirements is the need of the hour. To gear with the changing requirements, it is essential that the framework has to remain in pace and change in anticipation, accordingly, and then only international trade can pick up the speed envisaged. 7 1.1 SIMPLIFICATION IN DOCUMENTATION (Developments in August, 2005) DGFT Related Documentation at a Single Place Importers and exporters have to fill multiple application forms at various stages of their business activity to meet procedural requirements of different Departments/Ministries under different Acts. The objective of Government has been to simplify procedures and reduce documentation requirements so as to reduce the transaction costs of the exporters and thereby increase their competitiveness in international markets. With this in mind, a Committee to look into procedural simplification and reduction of transaction costs has been set up under the Chairmanship of Director General of Foreign Trade. As a first step towards this exercise, the DGFT has devised a single common application form called ‘Aayaat Niryaat Form’. This 50-page set of forms, as against the 120-page set currently in existence, provides availability of information on DGFT related Documentation at a single place. It has a web interface for on-line filing by exporters and retrieval of documents by the licensing authorities. This is a major leap towards paperless trading, in the series of initiatives in the direction of moving towards reduced paper transactions through procedural simplifications. A single common application form called “Aayaat Niryat Form” is being introduced, reducing the documentation requirements by more than 60%. 1.1.1 REDUCTION OF DOCUMENTS TO FIVE FOR CUSTOMS PURPOSES Government has decided to do away with a number of declarations that exporters, presently, have to file under various promotion schemes, including duty drawback and duty entitlement pass book. The decision has been taken by the finance ministry in line with the recommendations of the sub-committee headed by the Chief Commissioner of Customs, Delhi. The panel has been formed to study the problems faced by traders under the present exports documentation procedure, following complaints from industry about cumbersome requirements that have often resulted in unnecessary delay and additional transaction costs.The sub-committee has comprised representatives from the Customs department, the Directorate General of Foreign Trade, the Reserve Bank of India, Fieo and the Delhi Exporters Association. After a scrutiny of requirements under the electronic data interface (EDI) system, the sub-committee has concluded that there are just five documents required for customs purposes. These include commercial invoice, packing list, self-declaration form, ARE-1 (application for removal of excisable goods for export) and the declarations pertaining to various export promotion schemes. While the identified documents cannot be dispensed with, the sub-committee has stated that a number of documents being filed by exporters for various export promotion schemes have outlived their utility and do not serve any useful purpose. It has recommended that such declarations should be done away with. The revenue department, after going through the sub- committee’s recommendations, has also decided not to ask for any declaration on the duty drawback scheme and the duty-free replenishment certificate scheme. The department has 8 agreed to issue a suitable draft notice and standing order for guiding industry and staff, in this context. 1.2 EXPORTING, IMPORTING, AND COUNTERTRADE The previous chapter presented exporting as just one of a range of strategic options for profiting from international markets. This chapter looks more at how to export. Exporting is not just an activity of large multinationals to obtain scale and location economies, but is also an activity for small firms. Almost all large multinationals today started their expansion overseas via exporting. Exporting can be a very challenging activity for many firms -- unfortunately, it usually takes more effort than just placing goods in a box and slapping on foreign shipping label as we will see, although sometimes, it is almost that easy. 1.2.1 The Promise and Pitfalls of Exporting The potential benefits from exporting can be great. Regardless of the country in which a firm has its base. The rest of the world is a much larger market than the domestic market. While larger firms may be proactive in seeking out new export opportunities, many smaller firms are reactive and only pursue international opportunities when the customer calls or knocks on the door. Many new exporters have run into significant problems when first trying to do business abroad, souring them on following up on subsequent opportunities. Common pitfalls include poor market analysis, poor understanding of competitive conditions, lack of customization for local markets, poor distribution arrangements, bad promotional campaigns, as well as a general underestimation of the differences and expertise required for foreign market penetration. If basic business issues were not enough, the tremendous paperwork and formalities that must be dealt with can be overwhelming to small firms. 1.2.2 Improving Export Performance National differences in the governmental and business infrastructure available for supporting exporting vary considerably. German and Japanese firms have relatively easy access to information and assistance. While US firms are not left totally to their own devices, the amount of direct and indirect assistance to them is much less developed. One of the biggest impediments to exporting is ignorance of foreign market opportunities. The best way of overcoming ignorance is to collect more information. In the USA, there are a number of institutions, most importantly the US Department of Commerce, which can assist firms in the information gathering and matchmaking process. Business and trade associations can also provide valuable assistance to firms.One way for first- time exporters to identify opportunities and help avoid pitfalls is to hire an Export Management Company. A good EMC will have a network of contacts in potential markets, will have multilingual employees, will have knowledge of different business mores, and will be fully conversant with the ins and outs of the exporting process and with local business regulations. 9 One drawback of relying on EMCs is that the company fails to develop its own exporting capabilities. The probability of exporting successfully can be improved by utilizing an EMC or export consultants, focusing on only one or a few markets at first and get them working effectively, starting out on a small scale, having realistic expectations about the time and commitment required, developing good relations with local distributors, and hiring local personnel. The example of 3M helps illustrate one firm’s approach. 1.2.3 Counter trade Counter trade is a term that covers a whole range of barter like agreements. It is primarily used when the firm is exporting to countries whose currency is not freely convertible, and who may lack the foreign exchange reserves required to purchase the imports. By some estimates, counter trade accounted for 20% of world trade by volume in 1998There are five distinct types of countertrade -- barter, counter purchase, offset, switch trading, and buy back. 1.3 Questions Q1. How we can improve our Export Performance? Q2. What do you mean by counter trade? 10 ________________________________________________________ INTERNATIONAL MARKETING ENVIRONMENT AND TARIFF BARRIERS Structure 2.0 Definition 2.1 Components. 2.2 TRADE BARRIERS 2.2.1 Definition 2.2.2 Objectives 2.2.3 Tariff Barriers 2.3 QUESTION BANK 2.0 DEFINITION OF INTERNATIONAL MARKETING ENVIRONMENT International environment consists of internal and external factors that may influence nature and scope of business organizations operating at the global: level. It is can described as: - 1. Favorable or unfavorable 2. Liberal or conservative 3. Progressive or regressive International environment is a very important determinant of the business strategy. The factors, which constitute international business environment, can be classified as: Endogenous Factors: - The endogenous factors consist of internal factors which a business unit can control and influence. For example, amount of labour and capital, technology to be used and marketing mix. Exogenous Factors: - The exogenous factors consist of external factors which a business unit cannot control and influence. The exogenous factors are constraints under which a firm operates. For example, structure of industry, market demand, supply conditions and government policies. Exogenous factors keep on changing and business organisations have to adjust in order to survive. The business unit, which cannot adjust to the changing environment, becomes extinct in long run. The analysis of internal environment factors indicates the strengths and weaknesses of the business firm while the analysis of external factors indicates the opportunities provided and threats posed by the environment to the business. 11 2.1 COMPONENTS OF INTERNATIONAL MARKETING ENVIRONMENT The various factors constituting the international marketing environment are: Social and Cultural Environment: The biggest environment is the social environment because business is carried on by the people (businessmen), for the people (consumers), and through the people (executives and workers). Social and cultural factors in various countries of the globe which affect the international business environment are: Attitude of the consumers and management; Changes in the population pattern. Influence of religion and tradition. Spread of education and its quality. Role of social and cultural institutions. General standard of living. Technological Environment: Nothing ever is permanent except change. Technological improvement brings about new techniques of production, new products, automation and modernization. Technology changes rapidly and the firm, which cannot adjust to such a changing technological environment, may not survive. The technological environment consists of: State of indigenous technology Intermediate or appropriate technology Transfer of technology Technological collaborations Policy and legal framework 'for research and development Fiscal incentive for research and development These technological changes enabled international business' to take the shape of multinational and transnational business. Economic Environment: - International business is mainly affected by the economic policies adopted by the governments of various countries. The global economic environment has become favorable due to the establishment of the WTO and emergence of the global market. The changes in the international economic environment have been revolutionary after 1990. The following factors determine international economic environment:- 12 • Types of economic system adopted by the country • Continuous growth in quality and quantity of industrial output • Liberal and progressive policies of government • Rising levels of income and employment • Just and equitable Type distribution of wealth in the economy • Check over monopolies Political Environment: - Change in the government policies or government itself, many times bring about practical difficulties in carrying on business operations. Sometimes, the government takes over some key units in the interest of the nation. Political environment in the country is created by the following factors: - Political system accepted by the country, viz., capitalism or socialism Existence of political parties, i.e., dual party or multi party system Parties in power, i.e., ideologies and policies of the government Legislative and judiciary systems External affairs and relationship International Environment: - International marketing environment is also affected by the international environment. The factors which make up the international environment are: - International socio-economic and political changes Contribution of foreign capital Import and export trade Functioning of multinationals and transnational International trade cycles International relations and agreements War and peace conditions Legal Environment: - In every economy, whether socialistic or capitalistic, private sector is subject to government control. Government controls the functioning of private sector through its various policies and legislation. The factors which determine regulatory environment are :- Industrial planning and policies Tax structure and subsidies Import controls, tariff and duties Licensing system Policy regarding Foreign Direct Investment (FDI) Policy decisions on joint ventures and foreign collaborations Ecological Environment: - Ecological degradation and its protection have become a major issue in most of the developed and developing countries of the world. In order to protect our 13 precious environment, series of acts and regulations have .been made by the government. These acts and regulations also affect the international marketing: environment. 2.2.1 DEFINITION OF TRADE BARRIERS Trade barriers are the artificial restrictions imposed by the governments on free flow of goods and services between countries. Tariffs, quotas, taxes, duties, foreign exchange restrictions, trade agreements. and trading blocs are the techniques used for restricting free movement of goods from one country to the other. Trade barriers can be broadly classified into two categories -Tariff barriers or fiscal controls. -Non-tariff barriers or quantitative restrictions 2.2.2 OBJECTIVES OF TRADE BARRIERS Trade barriers are imposed with different objectives under different situations as under : 1. To Protect Home Industries from Foreign Competition: - In many of the developing countries, majority of basic and heavy industries are still in the initial stage of their development. The cost of production in such industries is very high and quality is poor in comparison to the international market. Therefore such industries need protection from foreign competitors. 2. To Promote New Industries and Research and Development: Developing countries, like India, are conducting research in various areas of technological development. In order to motivate the efforts of scientists and enable them to work with greater initiative such potential areas of development need protection from foreign giants. 3. To Conserve Foreign Exchange Reserves: - The immediate solvency of any country depends upon its foreign exchange reserves. Excessive imports may lead to erosion of valuable foreign currency from the country. Therefore, the government has to use quotas and tariffs as instruments for controlling imports and conserve foreign exchange. 4. To Maintain Favourable Balance Of Payments: - Balance of payments is defined as the difference between inflow and outflow of foreign currency in the economy. A country, having favourable balance of payments, commands goodwill and reputation in the international market. Trade barriers help in reducing imports and thereby improve balance of payments situation. 5. To Protect National Economy from Dumping: - Dumping is the situation whereby a big MNC tries to sell its products at a price which is much below its cost of production. As a result, the domestic manufacturers may not be able to compete and will have to withdraw from the market. To prevent this, the government may use tariffs to increase the price of dumped goods. 6. To Curb Conspicuous Consumption :- Goods, like diamonds and gold, have inelastic demand. Generally, people buy such goods when their prices are high in order to show 14 off their wealth. Such consumptions are known as conspicuous consumptions. These consumptions cannot be curtailed by charging high duties and hence, quotas should be fixed for their curtailment. 7. To Make Economy Self-reliant:- Initially, infant industries need protection from the government. Gradually, these protected industries develop competitive strength. At that juncture, the domestic market can be thrown open to foreign competitors to enable domestic companies to improve further. This gradually makes the country self-reliant. 8. To Mobilise Public Revenue: - In every economy, whether capitalist or socialist, the government plays a key role in the economic development. The government undertakes various developmental activities, which require enormous finance. Customs duties charged on import and export of goods can serve as a significant source of finance for such purposes. 9. To Counteract Trade Barriers Imposed By Other Countries :- Sometimes, in order to counteract trade barriers imposed by other countries, a country may be forced to impose trade restrictions. 2.2.3 TYPES OF TARIFF TRADE BARRIERS Tariffs are extensively used trade barriers. Tariffs' are in the form of customs duties and taxes imposed on internationally traded commodities when they cross the national boundaries. The aim of tariffs is to. Increase prices of imported goods and thereby reduce their demand and discourage their consumption. TARIFFS:- Tariff derived from a French word meaning rate, price, or list of charges is a customs duty or tax on products that move across borders. Tariff can be classified in several ways. The classification scheme used here is based on direction, purpose, length, rate, and distribution point. These classifications necessarily mutually exclusive. Direction: Import and Export Tariffs Tariffs are often imposed on the basis of the direction of product movement, which is, on imports or exports, with the latter being the less common one. When export tariffs are levied, they usually apply to an exporting country's scarce resources or raw materials (rather than finished manufactured products). Companies exporting from Russia must pay an average export tariff of about 20 percent on a number of goods sold in cash transactions and an average export tariff of about 30 percent for goods sold in noncash (barter) transactions. Purpose: Protective and Revenue Tariffs Tariffs can be classified as protective tariffs and revenue tariffs. The distinction is based on purpose. The purpose of a protective tariff is to protect home industry, agriculture, and labor against foreign competitors by trying to keep foreign goods out of the country. The South American markets, for instance, have high import duties that hinder the import of fully built cars. Brazil has a 50 percent import tax on imported "flyaway" planes. The purpose of a revenue tariff, in contrast, is to generate tax revenues for the government. Compared to a protective tariff, a revenue tariff is relatively low. When Japanese and other foreign cars are imported into the United States, there is a 3 percent duty. On the other hand, American cars exported to Japan are subject to a variety of import taxes. Even the cost of 15 shipping is taxed, since Japan considers that the shipping cost adds value to a car. As a result, a U.S. car sold in Japan can easily cost twice as much as its price in the United States. The U.S. tax is a revenue tariff, whereas the Japanese tax is more of a protective tariff. Length: 'Tariff Surcharge versus Countervailing Duty’ Protective tariffs can be further classified according to length of time. A tariff surcharge is a temporary action, whereas a countervailing duty is a permanent Surcharge. When Harley Davidson claimed that it needed time to adjust to Japanese imports, President Reagan felt that it was in the national interest to provide import relief. To protect the local industry, a tariff surcharge was used. The tariff on heavy motorcycles jumped from 4.4 percent to 45 percent for one year and then declined to 35 percent, 20 percent, 15 percent, and finally 10 percent in subsequent years. Countervailing duties are imposed on certain imports when products are subsidized by foreign governments. These duties are thus assessed to offset a special advantage or discount allowed by an exporter's government. Usually, a government provides an export subsidy by rebating certain taxes if goods are exported. Rates: Specific, Ad Valorem, and Combined How are tax rates applied? To understand the computation, three kinds of tax rates must be distinguished: specific, ad valorem, and combined. Specific duties are a fixed or specified amount of money per unit of weight, gauge, of other measure of quantity. Based on a standard physical unit of a product, they are specific rates of so many dollars or cents for a given unit of measure (e.g., $l/gallon, 25~/square yard, $2/ton, etc.) Product costs or prices are irrelevant in this case. Because the duties are constant for low- and high-priced products of the same kind, this method is discriminatory and effective for protection against cheap products because of their lower unit value. That is, there is a reverse relationship between product value and duty percentage. As product price goes up, a duty when expressed as a percentage of this price will fall. On the other hand, for a cheap product whose value is low, the duty percentage will rise accordingly. Ad valorem duties are duties "according to value." They are stated as a fixed percentage of the invoice value and are applied as a percentage to the dutiable value of the imported goods. Japan's ad valorem tariffs on beef llnd processed cheese are 25 percent and 35 percent, respectively. This is the opposite of specific duties since the percentage is fixed but the total duty is not. Based on this method, there is a direct relationship between the total duties collected and the prices of products. That is, the absolute amount of total duties collected will increase or decrease with the prices of imported products. The strength of this method is that it provides a continuous and relative protection against all price levels of a particular product. Such protection becomes even more critical when inflation increases prices of imports. -If specific duties were used, their effect lessens with time because inflation reduces the proportionate effect. Another advantage is that ad valorem duties provide an easy comparison of rates across countries and across products. Combined rates (or compound duty) are a combination of the specific and ad valorem duties on a single product. They are duties based on both the specific rate and the ad valorem rate that are applied to an imported product. For example, the tar if may be l0¢ per pound plus 5 percent ad valorem. Under this system, both rates are used together, though in some countries only the rate producing more revenue may apply.