- Customs Duty is a tariff or tax imposed on goods when transported across international borders. The purpose of Customs Duty is to protect each country's economy, residents, jobs, environment, etc., by controlling the flow of goods, especially restrictive and prohibited goods, into and out of the country.
- Now the question is why is there no customs duty imposed on IT services/software products imported into the United States of America. All countries protect their industries and economies by imposing customs duty. For eg, India imposes a customs duty of more than 100% to import passenger cars manufactured abroad. So if the cost of a passenger car manufactured in USA is $25,000, it's cost in india is $50,000. The idea is to encourage the citizens/businesses of India to buy vehicles manufactured in India to avoid the customs duty.
- In the absence of these customs duties, the IT product or service companies based out of United States are impacted adversely and lose business to countries like India, China, Brazil where these services are available at one tenth the cost. Here is the detailed analysis based on an example. Lets assume that an insurance giant in USA would like to implement a major IT project. Upon analysis it is found that the effort required to implement this project is 1000 man weeks or 40,000 man hours. The insurance company doesn't have sufficient resources to execute the project therefore it decides to procure the services of consulting companies to execute this project. Upon receiving the request for proposal, various consulting companies respond. Here is the profile of some of the companies who responded to execute this project along with the quoted fee -
- Company A - 100% US based work force. The average cost of each resource per hour for executing this project is $80. This company quotes a price of $3,200,000.
- Company B - 50% US based work force and 50% offshore work force. The average cost of each US resource per hour for executing this project is $80 and the average cost of each offshore (India/China/Brazil) resource for executing this project is $10. This company quotes a price of $1,800,000 (20,000X80+20,000X10)
- Company C - 25% US based work force and 75% offshore work force. The average cost of each US resource per hour for executing this project is $80 and the average cost of each offshore (India/China/Brazil) resource for executing this project is $10. This company quotes a price of $1,100,000 (10,000X80+30,000X10)
- Company D - 10% US based work force and 90% offshore work force. The average cost of each US resource per hour for executing this project is $80 and the average cost of each offshore (India/China/Brazil) resource for executing this project is $10. This company quotes a price of $680,000 (4,000X80+36,000X10)
- As you can see that now insurance company can save $2,520,000 by selecting company D over Company A and has no financial advantage to award the work to Company A. Company A will find it impossible to complete with Company B, C and D without cutting down its US based work force and offshoring the work. There by, resulting in loss of job opportunities for US based work force. This is what is happening today and resulting in job losses in the united states.
- To protect US economy US Customs and Border Protection must impose import duties based on the amount of services being imported. Lets see how the game changes if the CBP imposes duty tax of 200%, 400% and 600% on Company B, Company C and Company D.
- Company A - 100% US based work force. The average cost of each resource per hour for executing this project is $80. This company quotes a price of $3,200,000. Potential customs duty revenue to the government - $0.
- Company B - 50% US based work force and 50% offshore work force. The average cost of each US resource per hour for executing this project is $80 and the average cost of each offshore (India/China/Brazil) resource for executing this project is $30 ($10 cost, $20 custom duty). This company quotes a price of $2,200,000 (20,000X80+20,000X30). Potential customs duty revenue to the government - $400,000.
- Company C - 25% US based work force and 75% offshore work force. The average cost of each US resource per hour for executing this project is $80 and the average cost of each offshore (India/China/Brazil) resource for executing this project is $50 ($10 cost, $40 custom duty). This company quotes a price of $2,300,000 (10,000X80+30,000X50). Potential customs duty revenue to the government - $1,200,000.
- Company D - 10% US based work force and 90% offshore work force. The average cost of each US resource per hour for executing this project is $80 and the average cost of each offshore (India/China/Brazil) resource for executing this project is $70 ($10 cost, $60 custom duty). This company quotes a price of $2,840,000 (4,000X80+36,000X70). Revenue to the government - $2,160,000.
- As you can see now Company A can compete with Company B,C D by reducing its costs from $80 to $66 per hour there by bringing its price quote to $2,600,000 (40,000X65) and giving more job opportunities to residents of the United States. Note how customs duty resulted in a level playing field by rewarding those supporting domestic industry and penalizing those supporting offshore industries.
