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

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Chapter 5 trade rules

Chapter 5: Trade Rules

Keith Head

Sauder School of Business

The take away for this chapter
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.

Clearing customs
Clearing Customs

  • Procedures:

    • Classification

    • Valuation

    • Origin-nation

  • Barriers

    • Standard duties

    • “Special Import Measures”

    • Prohibitions


  • 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
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

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
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%

Special import measures sims
“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
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
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
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
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%.

Dumping example ii
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%. 

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 duty deposits should be 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

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.

The wto rules
The WTO Rules

Members Should

except for


  • 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
Cases of Disguised Protection?

  • Reformulated gas in the US

  • Japanese sho-chu

  • “Split-run” magazines in Canada

  • Dolphin-safe tuna

  • Turtle-safe shrimp

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.