Advalorem Tariffs:

An ad valorem tariff is basically a customs duty whose size is based on the value of the goods being brought into the country. For example, a tariff is calculated as 10% of the value of merchandise being imported. An ad valorem tariff is levied as a fixed percentage of the value of the commodity imported. "Ad valorem" is Latin for "on value" or "in proportion to the value." The US currently levies a 2.5% ad valorem tariff on imported automobiles. Thus if $100,000 worth of autos are imported, the US government collects $2,500 in tariff revenue. In this case, $2500 is collected whether two $50,000 BMWs are imported or ten $10,000 Hyundais.

Ad valorem tariffs are levied as a percentage of the value of an import product. For instance, if the value of an import consignment is $10 million, 50 percent ad valorem tariff will raise the price to $15 million. Ad valorem tariffs have an inbuilt mechanism of reflecting changes in international prices of goods: if world prices increase post ad valorem tariff price also goes up and vice versa. For instance, if the value of the import consignment rises to $15 million, the 50 percent ad valorem tariff will raise the price to $22.5 million. Specific tariffs on the other hand are imposed according to the weight or volume of an import consignment. Specific tariffs are generally used, though not confined to, for agricultural products. Such tariffs do not automatically respond to change in international prices and therefore have to be adjusted from time to time. The distinction between ad valorem and specific tariffs is important, because the former makes for a more predictable import regime than the latter, which has to be varied as per change in international prices. Countries sometimes may levy both specific and ad valorem tariffs - called compound tariffs on imports.