Chapter 5: Trade Rules

1. Chapter 5: Trade Rules Keith Head Sauder School of Business

2. The “take-away” for this chapter • 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.

3. Clearing Customs • Procedures: • Classification • Valuation • Origin-nation • Barriers • Standard duties • “Special Import Measures” • Prohibitions

4. 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)

5. 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 item For example: 9506.11.10

6. 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

7. 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%

8. Tariffs in Rich countries are mainly low, with exceptions

9. “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

10. 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

11. 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

12. 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%

13. 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 markups, you estimate the EXW price charged in the “home” market is $105. • Pn=105. • Dumping margin = (105-100)/100 = 5%.

14. 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 $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%. 

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, falling profits, laid off workers, etc. • Injury determination often negative, then duty deposits should be refunded (with interest).

16. 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

17. The expanding use of ADD

18. Who’s dumping on whom?

19. 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.

20. Thanks to the GATT/WTO?

21. The WTO Rules Members Should except for

22. 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

23. Cases of Disguised Protection? • Reformulated gas in the US • Japanese sho-chu • “Split-run” magazines in Canada • Dolphin-safe tuna • Turtle-safe shrimp

24. Turtle excluder device

25. Proliferation of regional agreements

26. 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.