Chapter 5: Trade Rules

Keith HeadSauder School of

Business

Ch. 5 “take-away”

• Just clearing customs and paying standard duties can be confusing and costly.

• Special import measures (SIMs) can be triggered as a result of “unfair” trade practices or sudden surges in imports.

• The world trading system has rules. The World Trade Organization (WTO) is the “referee” supervising international trade.

• Bilateral and regional agreements have proliferated in recent years.

Clearing Customs• Procedures:

– Classification– Valuation– Origin-nation

• Barriers– Standard duties– “Special Import Measures”– Prohibitions

Valuation

• Rules call for “transaction” values between “unrelated” buyers and sellers (in practice: prices on invoices)

• 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, be careful: income tax issues (ch. 12), anti-dumping duties (later this lecture)

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: x-country skis in Ca, duty: 7.5%– 9506.11.1000 (x-country skis in US, duty: 0%)– 9506.11.4010 (other skis in US, duty: 2.6%)

• First 8 digits (HS6+2) tariff itemFor example: 9506.11.10

Origin-nation

• Most-Favored Nation (MFN) “principle”• Many Exceptions:

– General Preferential, Least Developed Countries

– Free Trade Agreements, Customs Unions

• To receive lower duty status, need– Certificate of origin – Proof of direct shipment

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

“Special Import Measures” (SIMs)

• Antidumping duties– Pricing exports “unfairly” low– Causing injury to suppliers in importing country.

• Countervailing duties– Producers receiving “unfair” assistance from

government– Contingent on exporting, OR,– Specific to an industry AND injury-causing.

• Safeguards– Temporary relief– Injury, compensation requirements

Antidumping Duties (ADD)• Dumping is defined as charging an

export price (Px) that is below the normal value (Pn)

• The normal value is normally equal to the price charged for comparable sales in the exporter’s home market during the ordinary course of trade.– Comparable don’t mix wholesale w/ retail

prices– “Ordinary” don’t include prices below

average cost of production

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.

• If “ordinary” & “comparable” home sales are not available, the normal price is calculated as– price charged to other (3rd country) markets– cost of production + “normal” profit

Implementation of ADD (continued)

• 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 paid

12.39% but Canfor paid 5.96%– “All other firms” rate of 8.43%

Dumping example I

• A Canadian gadget maker sees gadgets imported from Munchkinland selling for $165 in Canadian stores, $34 less than the $199 price of Canadian gadgets.

• After deducting retail markups, transport costs, and duties (total: $65), you calculate an EXW price of $100 for exports to Canada.

• Px=100.• The same gadget sells in Munchkin stores for $142.

Deducting an estimated $17 of retail markup, you estimate the EXW price charged in the home market is Pn = 142-17=105.

• Dumping margin = (105-100)/100 = 5%.

Dumping example II

• Suppose as before Px = 100.• However, it is pointed out that you omitted $15 of

internal transport costs.• You now calculate a home market price of Pn =

142-17-15=$90. • Dumping margin = (90-100)/100= -10%. No duties! • But, you then calculate that the Munchkin maker’s

average costs plus an 8% profit are $115. You propose that this be the normal price (not $90).

• Dumping margin = (115-100)/100= 15%.

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, “price suppression,” falling profits, laid off workers, etc.

• Injury determination often negative, then duty deposits should be refunded (with interest).

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

The expanding use of ADD:

Evolution of the number of countries with antidumping laws

Source: Vandenbussche and Zanardi (2008)

Rise, fall, & spread of ADD

Who’s dumping on whom?

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.

Trade has grown much faster than incomes, while tariffs have declined.

Credit to GATT?

The WTO Rules

Treat imports from all WTO members equally (MFN principle)

Free Trade Areas,Customs Unions

Treat imported goods no worse than like domestic goods (National treatment)

Health Protection, Conservation

Use tariffs, not quotas or bans (no Quantitative Restrictions)

Health etc., “Safeguards”

Set tariffs at or below “bindings”

Antidumping duties,Countervailing duties

Members Should except for

Prohibitions

• Beef scares (hormones, BSE), “Frankenfoods”, tuna, shrimp

• WTO allows import restrictions for health, safety, public morals, and preservation of natural resources.

• But rules must be followed:– Scientific risk analysis– Least restrictive method to pursue goal– No protection in disguise

Cases of Disguised Protection?

• Reformulated gas in the US• Japanese sho-chu• “Split-run” magazines in Canada• Dolphin-safe tuna• Turtle-safe shrimp

Turtle excluder device

Proliferation of regional agreements

Canada’s Free Trade Agreements

• 1988/89: United States• 1993/94: Mexico (NAFTA)• 1996: Israel• 1996/97: Chile• 2001: Costa Rica• 2009: EFTA (Switzerland, Norway, Iceland)• In negotiation: Dominican Rep., Panama,

CARICOM, Cen. Am. 4, Singapore, Korea, European Union