Could Imported Apparel Start Costing 17% More? Canada Revising its Special Duties for Developing Countries

Could Imported Apparel Start Costing 17% More? Canada Revising its Special Duties for Developing Countries

Canada continues to reduce duties on goods from developing and least developed countries in order to assist in those countries’ economic development. Those duty reductions are set to expire in December 2024.[1] The potential expiry, renewal and revision of those programs is providing both real opportunities and significant threats to Canada’s apparel industry. Currently, apparel from least developed countries are imported duty-free, by contrast, apparel from developed, and even developing countries are subject to a 17% duty on average.

Finance Canada has launched public consultations on the renewal and amendment of the two tariff programs at issue.[2] These programs are the General Preferential Tariff (“GPT”), applicable to developing countries (though the tariff program generally excludes apparel and footwear), and the Least Developed Country Tariff (“LDCT”), which applies to least developed countries (which does apply to apparel and footwear).

Impact in the Apparel Industry

Between 2019 and 2021, Canada imported goods worth $2.9 billion under the LDCT, with apparel accounting for $2.4 billion, or 83%, of LDCT imports.[3] Without the LDCT, these imports would have been subject to an average tariff of 17%. In essence, the LDCT tariff saved apparel importers approximately $408 million over the last three years.

The Bangladesh Example

The LDCT currently applies to imports from 49 least developed countries, including Bangladesh, which is currently considered a “least developed country”. In 2021 alone, Canada imported $1.9 billion worth of consumer goods from Bangladesh,[4] the bulk of which consists of apparel and textile products.[5]

However, a number of least developed countries are scheduled to “graduate” from a “least developed” designation to a “developing country” in the coming years,[6] including Bangladesh in 2026. Thus, when Bangladesh graduates to a developing country, its exports to Canada will no longer benefit from the duty-free treatment under the LDCT program. Because the GPT program does not currently apply to apparel and footwear, starting in 2026, imports from Bangladesh will incur an average of 17% duty at the border, up from zero.[7]

Left unaddressed, Bangladesh’s scheduled graduation is going to have a major impact on many Canadian importers, retailers and consumers, with the potential for supply chain disruption and a significant impact on prices in the Canadian market.

Proposals up for Consultation

Finance Canada officials have put forward four proposals on which they are seeking input. Each of those proposals could have significant repercussions on the import of apparel goods from developing and least developed countries. We discuss each of these proposals in turn.

First, Finance Canada proposes creating a new tariff preference program, the GPT+. This program could reduce or eliminate duties on a broader range of goods than the GPT, potentially including apparel and footwear. This would be a welcome development for the apparel industry and for developing countries. Finance Canada proposes to tie eligibility for these benefits to social responsibility metrics, like the countries’ environmental and labour track record. The Canadian government is seeking input on product coverage and potential duty reductions under this program.

Second, Finance Canada is proposing a transition period for countries graduating from the LDCT program, with the possibility of an automatic three-year transition period to be triggered upon a country’s graduation from a least developed to a developing country. Currently, there is no transition mechanism or period. If successfully implemented, this could have beneficial impacts on industry. For example, upon the graduation of Bangladesh in 2026, the LDCT would continue to apply to imports from Bangladesh for another three years, thereby providing businesses the opportunity to evaluate supplier options and adjust accordingly, while providing opportunities for the country’s exports.

Third, officials have proposed a formal five-year review mechanism to manage GPT eligibility, and could allow countries to graduate from, or be re-instated into, the GPT. Coupled with the potential of the GPT+ program covering apparel, this could provide significant benefits to the apparel industry given the increased choice of global suppliers.

Fourth, Finance Canada has proposed to make technical simplifications to the LDCT program to facilitate its use, including by amending rules of origin for apparel goods. Increased uptake of the LDC program could lead to benefits for industry and consumers.

Apparel companies should participate fully in the ongoing consultation to let their views be known. In particular, duty reductions for apparel-producing developing countries could offer security of supply through reliable suppliers often left aside by Canada due to high tariffs. The GPT+ has the potential to be mutually beneficial by providing preferential tariffs while advancing Canada’s trade goals, though it is unclear how burdensome the implementation of the program may prove. Attempts to create new monitoring programs or metrics for developing countries could lead to burdensome red-tape and unpredictable outcomes unless properly implemented. It is also unclear how any such new program would intersect, or create redundancies, with Canada’s existing prohibitions on forced labour,[8] and whether Canada could consider various workers’ rights (such as association and collective bargaining) as part of the eligibility criteria for GPT+ countries.[9]

McMillan LLP’s International Trade Group continues to support clients with respect to all aspects of international trade. We help clients navigate trade and international business opportunities, and overcoming obstacles while providing exemplary client service.

[1] General Preferential Tariff and Least Developed Country Tariff Rules of Origin Regulations, SOR/2013-165; Customs Tariff, SC 1997, c 36, s. 40.
[2] Government of Canada, Department of Finance, Public Consultation on the Renewal of Canada’s Tariff Preference Programs for Developing Countries (August 2022).
[3] Government of Canada, Department of Finance, Consultation Paper – Consultation on the Renewal of Canada’s Tariff Preference Programs for Developing Countries (August 2022).
[4] Statistics Canada, Canadian international merchandise trade by country and by product section, customs-based, annual (x 1,000), accessed September 8, 2022 (Narrowed by Trade: Import and Trading Partner: Bangladesh). Consumer goods consists of: food, clothing, paper, pharmaceutical, furniture and cleaning products.
[5] Government of Canada, Canada-Bangladesh relations, Trade Relations, accessed September 8, 2022.
[6] In Canada, LDCT eligibility is based on the United Nations’ designations.
[7] For a list of the current applicable tariff treatments, see the Schedule to the Customs Tariff, List of Countries and Applicable Tariff Treatments, last revised March 2, 2022.
[8] Customs Tariff, SC 1997, c 36, s. 136(1) where Tariff Item No. 9897.00.00 covers “Goods mined, manufactured or produced wholly or in part by forced labour.”
[9] See, for instance, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, 10 June 2022. See also the eligibility criteria considered for the United States’ tariff preference programs: US Generalized System of Preferences Guidebook (November 2020), p. 18.

by Jonathan O’Hara, William Pellerin, Tayler Farrell

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2022