Written by Brad Lehigh, GTM Governance, Canada
When the text of the Trans-Pacific Partnership was released to the public on November 5th 2015, industry experts scrambled to begin analyzing the massive agreement and the implications it would have on duty rates. Complete schedules were released which allowed companies to see the preferential duty rates of their goods under TPP, should they qualify. This was completed by identifying the particular staging category that applied to their products, and then applying the given methodology in order to determine the duty rate for any time period after TPP comes into force. Complex rounding-down rules were found in the ‘National Treatment and Market Access’ chapter and each country’s schedule also needed to be considered, which added another step into the process of determining the proposed duty rate.
While interested parties were left to their own devices for nearly three months, the legally scrubbed version of the TPP text was released in late January. This version of the text provided much more enhanced Tariff Elimination Schedules for each country that showed actual duty rates for all goods covering the span of the agreement, rather than just a method of calculating said duty. No longer would staging categories and rounding rules need to be applied, as anyone could simply look up the preferential duty rate for any good being imported into any country that is a signatory of the TPP, for any year after the agreement potentially comes into force. However, before importers take any future duty rate found in these schedules as final, there are a few other factors to consider.
Historical analysis of Canada’s Free Trade Agreements show they will implement lower duty rates than what was agreed to
In the new and improved Canada Tariff Elimination Schedule, you can find a dizzying array of future duty rates for all products being imported into Canada. Whether a good has a 5.4% duty rate upon implementation or a 14.4% duty rate in year 5, there is reason to be skeptical that these rates are final.
Looking at the Canada Customs Tariff, it may be surprising to realize that outside of chapter 87, all duty rates end in either a “.0” or a “.5”. The reason for this is that Canada usually applies this rule to staged duty rates once a free trade agreement comes into force:
“If a reduction results in a rate of customs duty that includes a fraction of one per cent other than 0.5, the resulting percentage shall be rounded down to the nearest percentage that divides evenly by 0.5.”
This rule results in all duty rates getting rounded down even further than what was agreed to at the negotiating table. So while the tariff elimination schedule may say the duty rate of a good will be 14.4%, it is a possibility that it would actually be only 14% once the new preferential duty rates become a reality.
This not only makes it difficult to forecast future customs duties, but could also make sourcing and supply chain decisions difficult, particularly because there is no way of knowing whether Canada will apply this rounding rule to the TPP agreement.
A change in base duty rate could nullify certain TPP benefits
When the Trans-Pacific Partnership was negotiated, it was done so using the 2010 Customs Tariff. While there are rules in the TPP text that prevent members from raising duty rates after the agreement was finalized, there is no provision that prevents these nations from lowering the duty rate. If a good with a duty rate of 10% was agreed to be eliminated in four equal stages, this would mean it would receive a preferential tariff rate of 7.5% for the first year once the agreement came into force. If Canada decided to lower the Most Favoured Nation (MFN) duty rate to 5% instead of 10%, then it would result in a situation where the regular duty rate would be more beneficial than the preferential duty rate offered under the TPP agreement, especially when you consider the time and effort of actually qualifying goods using the Product-Specific Rules of Origin that would allow an importer to use the TPP duty rate.
When TPP comes into force, it will be important for companies to ensure they are not automatically going through an origin qualification process if there is no actual cost-savings benefit to doing so.
TPP is the most complex multilateral Free Trade Agreement in history
It still remains to be seen whether the TPP will ever be ratified for Canada, or any other signatory, with a complicated Tariff Rate Quota (TRQ) system, an intricate process for origin qualification and over 20 side letters to the agreement for Canada alone; TPP will offer enormous benefits to Canadian importers and manufacturers.
Livingston is monitoring this agreement closely and our consultants are available for consultation should you wish to assess your products for potential future benefits.