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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.