This article first appeared in Canadian Business.
The government’s latest position on Budget 2013’s tariff changes is that the modifications are necessary to ensure that China does not receive special treatment. As the prime minister put it, “we do not think it is appropriate to have special tariff reductions only for companies from countries like China.” This is problematic and not simply because these changes affect 72 countries, of which China is only one. The truth of the matter is that the existing treatment of imports from China is not particularly favourable but there is a much better way to ensure that imports from China receive Canada’s least favourable tariff treatment.
The Customs Tariff is exceedingly complex, with up to 16 different tariff treatments (rates) for each product, based on the country of origin of that product. Countries can be assigned multiple tariff treatments and, for a given product, are assessed the lowest of the multiple rates that apply.
To simplify matters, we can lump countries into four different buckets, from (on average) the most favourable treatment to least favourable treatment. Those four groups are as follows:
Group Spec: Countries that receive reduced (special) tariffs from trade deals or are included in the Commonwealth Caribbean Countries Tariff (CCCT).
Group LDCT: Countries not in Group Spec, but which are eligible for the Least Developed Country Tariff (LDCT) due to their relative poverty.
Group GPT: Countries not in Group Spec or LDCT, but which are eligible for the General Preferential Tariff (GPT) thanks to their middle-income status. This is the group China currently belongs to.
Group MFN: Countries not in the first three groups and therefore subject to the highest rate, the Most-Favoured Nation (MFN) rate.
The GPT group is by far the largest, with nearly half of the countries and territories recognized by the Customs Tariff falling into this group:
Of those 227 territories and countries, only 44 countries receive less favourable tariff treatment than the existing treatment given to China.
The 44 in the existing MFN group are mostly European countries (including the 27 countries that make up the E.U.), Japan and Taiwan. Canada is currently negotiating trade deals with the majority of these countries, which will see them leave the MFN group.
If we want to ensure imports from China receive the least favourable tariff treatment Canada allows, there is a simple solution. First complete trade negotiations with the E.U. and Japan, which leaves only 16 countries, most of which are minor European nations such as San Marino and Montenegro. The MFN and GPT groups can then be merged by lowering the tariffs on those 16 countries down to GPT rates.
This plan would see the Customs Code cleaned up, imports from China receive the least favourable tariff treatment, and tariffs for Canadian consumers go down, rather than up by $333 million per year. What’s not to love?