Chapter 5: Trade Rules

1
Chapter 5 Trade Rules

• Keith Head
• Sauder School of Business

2
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.

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 (HS62) ? 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 exporters
  home market during the ordinary course of trade.
• Comparable? dont mix wholesale w/ retail prices
• Ordinary ? dont 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.
• Px100.
• 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 142-17105.
• Dumping margin (105-100)/100 5.

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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
  142-17-1590.
• Dumping margin (90-100)/100 -10.
• No duties! ?
• But, you then calculate that the Munchkin makers
  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,
  price suppression, 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
Evolution of the number of countries with
antidumping laws
Source Vandenbussche and Zanardi (2008)
18
Rise, fall, spread of ADD
19
Whos dumping on whom?
20
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.

21
Trade has grown much faster than incomes, while
tariffs have declined. Credit to GATT?
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The WTO Rules
Members Should
except for
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
23
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

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Cases of Disguised Protection?

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

25
Turtle excluder device
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Proliferation of regional agreements
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Canadas 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