Chapter 5: Trade Rules: Chapter 5: Trade Rules Ran Jing Sauder School of Business


The “take-away” for this chapter: The “take-away” for this chapter Clearing customs procedures Special import measures (SIMs) World Trade Organization (WTO) Bilateral and regional agreements


Clearing Customs: Clearing Customs Procedures: Classification Valuation Origin-nation Barriers Standard duties “Special Import Measures” (SIMs) Prohibitions


HS Code Structure(eg.http://www.foreign-trade.com/reference/hscode.htm): HS Code Structure (eg.http://www.foreign-trade.com/reference/hscode.htm) 03 02 .12 .00 .40 03 02 .12 .40 IMPORTS EXPORTS ≈ 19,000 Codes ≈ 6,200 Codes 9


Classification of goods: “Harmonized” System: Classification of goods: “Harmonized” System First 6 digits are same for all countries 9506.11: Skis 9506.21: Sailboards 9506.99: Other outdoor sport equipment Last 4 digits specific to each importer 9506.11.1000: downhill skis in Ca, duty: 0% 9506.11.9010: cross-country skis in Ca, duty: 7.5% 9506.11.1000: cross-country skis in US, duty: 0% 9506.11.4010: other skis in US, duty: 2.6% First 8 digits (HS6+2)  tariff item http://www.usitc.gov/tata/hts/bychapter/index.htm for US tariff schedule http://www.cbsa-asfc.gc.ca/trade-commerce/tariff-tarif/menu-eng.html for Canada tariff schedule


Valuation: Valuation In principle, “transaction” values between “unrelated” buyers and sellers Exclude costs of transport from the point of direct shipment (PoDS) to the importing country. Note: With ad valorem (%) duties, importers save from under-valuation. (but: tax issues, dumping)


Origin-nation: Origin-nation Most-Favored Nation (MFN)—principle Many Exceptions: General Preferential (GPT), Least Developed Countries (LDCT). Free Trade Agreements, Customs Unions To receive lower duty status, need Certificate of origin Proof of direct shipment


Origin-nation: Example: Origin-nation: Example Sailboards (9506.21.0000) originating from WTO member or other MFN origin: 9.5% General Preferential Tariff country (e.g. Algeria, Brazil): 6% Least Developed Country (e.g. Mali): 0% FTA (U.S., Mexico, Costa Rica, Chile): 0% General rate (Libya, North Korea): 35%


Tariffs in rich countries are mainly low, with exceptions: Tariffs in rich countries are mainly low, with exceptions


“Special Import Measures”: “Special Import Measures” Anti-dumping duties (ADD) Countervailing duties(CVD) Safeguards


Dumping: Dumping Dumping is defined as charging an export price (Px) that is below the normal value (Pn) Who is involved? Domestic producers that believe that foreign firms are dumping goods can request an investigation by its national authorities. The targets of antidumping petitions can be specific producers or all producers in a particular country.


Establish dumping: Establish dumping Two key factors to impose antidumping duties Pricing exports “unfairly” low Causing injury to suppliers in importing country.


Unfair export prices: Unfair export prices Export price (Px): It is the price charged abroad excluding transport costs and taxes (FOB price). Normal value (Pn): `the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.'


How to find the comparable price: Home-market price: This is the price charged by the exporter in its own country. Third-country export price: This is the price the exporter sells to third countries. Constructed-cost: The normal price is constructed as the sum of production cost plus normal profit. How to find the comparable price


Implementation of ADD: Implementation of ADD Import-competing firms complain to their government that imports are being “dumped” Customs-related agency determines the normal price, compares with export price.


Dumping cases are handled by domestic agencies: Dumping cases are handled by domestic agencies


Implementation of ADD, cont’d.: Implementation of ADD, cont’d. If preliminary finding supports dumping claim, then “suspension of liquidation,” accused firms must pay deposits equal to dumping margin. Dumping margin is (Pn – Px)/Px. Dumping margin is usually firm-specific. In softwood lumber, Weyerhauser pays 12.39% but Canfor pays 5.96% “All other firms” rate of 8.43%


The Injury Determination: The Injury Determination After “dumping” (or LTFV= “less than fair value” in US) determination, importing government determines whether its dumped imports caused material injury to domestic industry. Injury can be measured by loss of market share, falling profits, laid off workers, etc. Injury determination often negative, then duties refunded with interest.


How to respond to an Anti-dumping case?: How to respond to an Anti-dumping case? Exit market. Agree on a “price undertaking” in exchange for withdrawal of case. Argue case before import tribunal. Points to emphasize: Home sales are not “comparable” to export sales Dumped imports not cause of domestic injury Foreign direct investment


The expanding use of ADD: The expanding use of ADD


Who’s dumping on whom?: Who’s dumping on whom?


Case: Chinese waterproof footwear: Case: Chinese waterproof footwear [Since] a submission had not been received from the government of China. As such, the Canadian Customs and Revenue Agency (CCRA) could not determine whether the footwear industry in China is operating under the conditions of an open market economy. Accordingly, the CCRA contacted 31 producers in five potential surrogate countries in an attempt to obtain information which could be used to establish normal values. Unfortunately, none of the producers who responded produce waterproof footwear similar to the products being imported from China. In the absence of sufficient information from the government of China and the producers in the surrogate countries, the normal values were estimated on the basis of the best available information, which, in this case, was the information supplied in the complaint. (from CCRA website)


Countervailing duties (CVD): Countervailing duties (CVD) Producers receiving “unfair” assistance from government Subsidies: are financial contributions by a government or any public body that confer a benefit. Examples: loans, loan guarantees, certain credits, government provision of goods or services other than basic infrastructure. Subsidies are prohibited if Contingent on exporting, OR, Specific to an industry AND injury-causing


Safeguards: Safeguards Temporary It does not require to establish “unfair” trade practice like dumping. It requires evidence of injury (The threshold is higher than that of dumping). It requires compensation in other industries.


What does the WTO do?: What does the WTO do? Sponsors rounds of multilateral tariff reduction (from post-war 40% to current 4%). Kennedy (60s), Tokyo (70s), Uruguay (86-94), … Tariff reductions phased in after round concludes. Establishes rules that member countries must obey. Settles disputes over implementation of rules.


Thanks to the GATT/WTO?: Thanks to the GATT/WTO?


The WTO Rules: The WTO Rules Members Should except for


Prohibitions: Prohibitions Beef scares (hormones, BSE), “Frankenfoods” WTO allows import restrictions for health, safety, public morals, and preservation of natural resources. Least restrictive method on trade Based on scientific risk analysis


Cases of disguised protection?: Cases of disguised protection? Reformulated gas Japanese sho-chu Turtle-safe shrimp


Turtle excluder device: Turtle excluder device


Kame-chan: Kame-chan


Proliferation of regional agreements: Proliferation of regional agreements


Canada’s Free Trade Agreements: Canada’s Free Trade Agreements 1988/89: United States 1993/94: Mexico (NAFTA) 1996: Israel 1996/97: Chile 2001: Costa Rica In negotiation: Central America 4, EFTA, FTAA, Singapore, Korea.