Module 1 international trade regime

Asian Trade Centre Foundation
Understanding the
International Trade Regime
Dr. Deborah Elms
International Trade, Importing & Exporting, and
Managing Your Supply Chain
August 6, 2018
Singapore
elms@asiantradecentre.org
1

Why Do Governments Open
Markets to Trade?
• Basic argument: benefits flow to both sides when
markets are opened
• No country has all the resources it needs at home
– History of autarky is not good
• Cheaper, higher quality products
• Economic development
• Economic efficiency—use scarce resources better
• Exports create jobs
• Increasingly rules are important—for services,
investment, e-commerce, standards—to avoid
incompatible regulations
2

Free Trade Rests on Idea of
Comparative Advantage
• States produce what they can “relatively” better
than neighbors (ex. French wine and British wool)
– More efficient allocation of scarce resources
• Trade with neighbors
• More efficient outcomes in both markets
• In long run, in aggregate, everyone better off
– Highest quality, cheapest prices
• Note: comparative advantage is NOT absolute
advantage
– Even inefficient states are better at something
• States are now better at creating comparative
advantage
3

At System Level:
Solving Problems of Free Riding
• Autarky for states not feasible solution
• Best outcome—have neighbors with open economic
system but you keep your market closed
– No competition from imports, but
– Huge market for exports
• GATT/WTO: address problem together
– Multilateral approach to trade
• Main issue at the time—getting rid of tariff barriers
as these were primary obstacle to trade
• Over time, transition from tariffs to other problems
4

Six Principles of GATT/WTO
• Non-discrimination of members
– National treatment: Must treat all foreign firms in
market like domestic firms
• Exceptions in services
– Most-favored nation (MFN): Must extend deal
given to one GATT member to all members
• Exceptions for preferential trade agreements
• Transparency
• Reciprocity
• Binding and enforceable commitments
• General exceptions (safety valves)
5

Basic Structure of WTO Agreements
6
Umbrella Agreement Establishing WTO
Goods Services
Intellectual
Property
Basic Principles GATT GATS TRIPS
Additional Details Other goods
agreements and
annexes
Services annexes
Market Access
Commitments
Countries’
Schedules of
Commitments
Countries’ Schedules
of Commitments (and
MFN exemptions)
Dispute Settlement Dispute Settlement Mechanism
Transparency Trade Policy Reviews

WTO Rules
• All WTO rules are negotiated by members
– Secretariat is very small and has no power
• Plenty of areas not covered at all or with only limited
rules—if no WTO rule, member can do whatever
member wants
• WTO does allow members to use domestic rules,
regulations and so forth
• Since Uruguay Round, WTO operates with “single
undertaking”—nothing agreed till everything agreed
• Rules only guarantee opportunity, not success
• Complicated system now with 164 WTO members
7

Traditionally, Action in Goods
• Goods can be seen and measured
– Most imports and exports were goods in the early
years of GATT (not services)
• Much easier to address problems in goods
• Goods rules most developed
• First barriers to trade were primarily tariffs
– Can be seen as tax on imports
– Can be source of substantial government revenue
• Focus on successive cuts in tariffs
– Goal—elimination of tariffs (go to “zero”) over time
– Could be immediate, or phased in reductions
8

Purpose of Tariff Reductions
• Tariffs are barrier to trade
– High tariffs can effectively prevent trade entirely
• Example: 100% tariff on product means consumers likely
to shun foreign product in favor of locally produced item
that is 100% cheaper
– Low tariffs act as nuisance to business
• Costs associated with filling out paperwork
• Lowering tariffs gives better business
environment
• Can result in lower costs to consumers
• Each WTO member (and each FTA) has a unique
tariff schedule
9

Staged Tariff Elimination/
Reduction Schedule
Year Date Preferential
Rate
Stages of Elimination
0 Enforcement: 1
January 2008
12% 1st Stage
1 1 January 2009 9% 2nd Stage
2 1 January 2010 6% 3rd Stage
3 1 January 2011 3% 4th Stage
4 1 January 2012 0%
Assume a base rate at 15% and subject to staged elimination
10

Tariff Bindings
• Tariffs “bound” in GATT/WTO
• Applied rates (rate actually used at borders)
usually much lower than bound rate
• Gap between the two— known as “water”
• Once tariffs are bound, cannot go above rate
– Except in a few circumstances
– Reason for reluctance to bind at low levels
• Tariff peaks can be very high
• In general, developed states have lower tariffs
– But, new members to WTO have low bound rates
• Note: consumers can benefit from lower tariffs
11

Examples of Tariffs from TPP:
Bound Rates
Total
Non-Ag
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Simple Average Final WTO Bound Tariff (2010)
Total
Ag
Non-Ag
12

Examples of Tariffs from TPP:
Applied Rates
Total
Non-Ag
0.0
5.0
10.0
15.0
20.0
25.0
Simple Average WTO MFN Applied Tariff (2009)
Total
Ag
Non-Ag
13

WTO Average Bound Tariff Rates 2014
14

WTO Average Applied Tariffs 2014
15

Administering Tariffs
• Tariff rates found in “schedules” for every
country and every product
• Goods (and therefore tariffs) defined by
Harmonized System (HS) Codes
• Tariffs are collected by customs officials
• Can constitute a large source of government
revenue, but also cost to export industries
• Tariffs protect selected industries and
sectors
16

Tariff Peaks Show Sensitive Sectors
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Animal products
Dairy products
Fruit, vegetables, plants
Coffee, tea
Cereals & preparations
Oilseeds, fats & oils
Sugars and confectionery
Beverages & tobacco
Cotton
Other agricultural
TPP Agriculture Tariffs: 2012 MFN*
*Minus Canada dairy at 228% and Malaysia dairy at 128%
17

Tariff Classification Systems
• WTO members use Harmonized Commodity
Description and Coding System (HS)
• Divided into 21 sections
– Further broken down into
• 98 chapters (2 digit level)
• More than 5000 subheadings (6 digit level)
– Many countries use as many as 12 digits at the
domestic level
• Chapters 1-24 cover agriculture
– Note WTO defines fish (3) as not agriculture
• Chapter 25-98 are non-agriculture
18

HS Classification Example
•Preparations of vegetables, fruit, nuts, etc.
20 (Chapter 2 digit)
•Fruit juices and vegetable juices, not fortified with
vitamins and minerals
20.09 (Heading 4 digit)
•Orange juice (other than frozen)
20.09.19 (Sub-Heading 6 digit)
Some FTAs operate at “domestic heading” level of 8 or 10
digits—note that each country has own unique classifications
beyond 6 digits (although ASEAN members use same
schedules)
19

Different Types of Tariffs
Duty type Example
Ad valorem 5%
Specific $5 per Kg.
Compound 10% + $2 per Kg
Mixed 10% or $2 per Kg,
w.i.t.h.
“Technical” 8.3% + charge
20

Goal in Negotiations: Cut Tariffs
• Negotiators use tariff schedule for countries
• Go line by line through schedule to decide what
to cut, by how much, and when
– FTAs must include “substantially all” trade
• Offensive and defensive interests
• Overall tariffs may be low, but may have high
tariff peaks
– These protect specific industries and are often hard
to remove
• Note that tariff cuts interact with rules of origin
21

Example: Portion of Japan’s Uruguay
Round Schedule
22

FTA Example: Australia TPP Schedule
23

Sample TPP Tariff Reductions
24
0
10
20
30
40
Base Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11
Pickled Tomatoes
Australia Brunei Canada
Chile Japan Malaysia
Mexico New Zealand Peru
Singapore Vietnam United States
US to JP, NZ, VN US to AU
0
10
20
30
40
Base Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11
Pickled Onions
Australia Brunei Canada Chile
Japan Malaysia Mexico New Zealand
Peru Singapore Vietnam United States
US to Japan

WTO Tariff Database
• WTO has searchable database for tariff
information at http://tao.wto.org
• HS Codes handled by World Customs
Organization (WCO)
– HS Codes updated every five years
– Note that schedules in existing trade agreements
not always (rarely) updated to match latest HS
codes
• Details on finding HS codes available at
https://eurostat.prod.3ceonline.com
– Note that HS codes only the same to the 6 digit level
25

Rules of Origin (ROO)
• Rules of Origin (ROOs) apply mostly to Free
Trade Agreements (FTAs) like TPP
• FTAs grant preferences to partner firms—
special rates not available to just anyone
• In FTAs you want only partners to get benefits
(no back doors)
• Important that non-partners are excluded
• Different from label on product (“from X”)
• Key is to craft Rules of Origin (ROOs) that only
partners can use
26

ROOs Determine Nationality
 Each FTA partner can have its own policies toward
non-FTA members
• ROOs determine the nationality of inputs to
products
• Country of origin, in general, is last country where
substantial transformation took place or products
that are “wholly” original
• Possible to make qualifying more or less restrictive,
ie, easier or harder
• ROOs interact with tariff levels
27

Originating Goods for FTAs
• Goods must meet criteria to be “from” the country of
origin
– Only these goods eligible for preferential treatment
under FTA
• Not all goods from partner countries are eligible—only
those meeting strict criteria are allowed to claim
benefits
• Each FTA has different rules covering which goods
are/are not eligible
• All other goods are “non-originating” goods
– These products cannot receive the lower tariff rates available
to member firms that qualify for benefits
28

Using FTAs
• If the ROOs are too complicated for business, firms
will not use FTA
– Too cumbersome
– Too much information given away
– Unclear how to claim preferences
– Uncertain over which countries have FTAs
• Business always has option of using MFN applied
rates with WTO partner countries
– If tariff rates low enough, business often choose MFN
rates anyway
– Reduce business risks
29

Two Main Principles for ROOs
• 1. Wholly obtained goods (no part of the good
originates outside of the partner country)
• 2. Last substantial transformation of product
was conducted inside partner country
• Several ways to calculate substantial
transformation:
– Change in Tariff Classification (CTC) or (CTH)
– Manufacturing operations and specific rules
– Added-value criteria
– Combination of different alternative methods for
calculating origin
30

Wholly Obtained Goods
• Goods made of materials which do not leave the
territory of the partner country and are used in the
manufacture of the good in that country, like
– Vegetables, fruits, or animals that were born and
raised in the territory
– Products from animals, including hunting or
fishing, from the partner country
– Mineral goods extracted from the soil or seabed
– Waste and scrap from production in the country
31

Substantial Transformation
• Change in Tariff Classification (CTC or CTH)
– Did the non-originating raw materials undergo
substantial transformation such that there is a
change in tariff classification or tariff heading at the
2-digit, 4-digit or 6-digit HS level?
• Process rule
– What is the manufacturing process and where
(in geographical space) did it take place?
• (Mostly for chemical, petro-chemical products)
• Value-added rule
– How much local value (in terms of monetary value)
was contributed by the partner country?
32

What Doesn’t Count
• Products don’t automatically get FTA benefits
• Minimal processing is not enough to get origin
status
• Must do more to a product than just
– Storing or preserving products
– Packaging, bulk breaking, marking and labeling
– Simply assembly or disassembly, cutting and mixing
– Combining two or more sets of articles as a set for
commercial sale
– Any combination of the above
• These are “non-substantial transformation”
33

Internal Taxes
• As an important note: States are allowed to
impose internal taxes on goods after
importation and on domestically-produced
goods
• National treatment (NT) must apply to internal
taxes
• Value-added taxes or sales taxes are examples
of internal taxes that are allowed
• Internal duties can be maintained (including
excise taxes on things like alcohol)
34

The information, data and graphics provided by the Asian Trade Centre Foundation is
for knowledge purposes. While we endeavor to provide the best quality information,
we make no warranties with respect to the use of the information which is voluntary.
The information provided in this document does not constitute investment or legal
advice. It should not be used, relied upon, or treated as a substitute for specific
professional investment or legal advice.
35

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