Will tariffs increase on imported goods from certain countries? Canada reconsiders the general preferential tariff 

publication 

January 2013

International Trade Bulletin

Canada has had a policy of extending special tariff reductions to developing countries. These special rates are called the General Preferential Tariff ("GPT"). The GPT is reviewed every ten years. The current version set to expire in 2014.

The Canadian government has indicated it intends to take a hard look at whether the listed countries continue to be "developing" economies. Submissions on this and on other issues have been requested by February 15, 2013.

A review of the list of countries eligible for the GPT turns up some surprising names. The industrial powerhouses of China, Brazil and India remain on the list. First world city states in Singapore and Hong Kong are also on the list, as well as the Asian "Tigers" including South Korea, Thailand, Malaysia and Indonesia. A full listing of countries eligible for the GPT may be found here.

the GPT's scope

Canada's GPT currently covers approximately 175 developing countries, including almost all non-OECD countries. The list ranges from some of the poorest countries in the world (that also benefit from preferences under the Least Developed Country Tariff) up to three of the ten biggest economies in the world: China, India and Brazil.

The GPT covers over 80% of tariff items, including most manufactured goods. The main exclusions from the GPT are clothing, footwear and some agricultural products. Strict rules of origin are applied to determine if a good comes from a country for GPT purposes. To be eligible for GPT, over 60% of the value of a product must contain inputs from other GPT beneficiaries or from Canada. In 2011, imports that qualified under the GPT accounted for $15.2 billion1 of Canada's total $446 billion in imported goods.2

history

Canada's GPT has been in force since 1974. The GPT, and similar preferential tariffs around the world, have their origins in a 1968 resolution of the United Nations Conference on Trade and Development (UNCTAD). This resolution recommended that developed countries implement a preferential tariff in favour of developing countries:

(a) to increase their export earnings;

(b) to promote their industrialization; and

(c) to accelerate their rates of economic growth.3

Many developed countries, including the United States, the EU, Japan and Australia currently provide some form of preferential tariff to certain developing countries.

The GPT was legislated to be reviewed every 10 years. The GPT was renewed in 1984, 1994 and 2004. The Canadian Government is now engaged in a consultation process and is seeking comments and proposed changes from interested parties in anticipation of the June 30, 2014 expiration.

why the 2014 review might be more extensive than previous reviews

Economic circumstances around the world have changed significantly in the 38 years since the GPT came into effect. While it may have been a worthy and magnanimous gesture to offer preferential tariff treatment to a broad array of developing countries in 1974, circumstances in the world are much different today. It may now be fair to ask which countries have need of continued Canadian generosity.

Some of the developing countries identified in 1974 have now grown to be global economic powerhouses with, at least arguably, little need of assistance from preferential Canadian tariffs to "promote their industrialization" or to "accelerate their rates of economic growth".

Canadian producers may wish to participate in some of these large and growing foreign markets, preferably with minimum tariff barriers. It may seem unfair to Canadian producers that goods imported into Canada receive preferential tariff treatment in Canada, whereas Canadian goods exported to these developing countries receive less favourable tariff treatment.

Canada is clearly interested in free trade agreements with developing countries. Many of Canada's free trade agreements in force or with negotiations concluded4 are with countries that also benefit from the GPT, including: Mexico, Israel, Chile and Costa Rica. Canada is currently negotiating other free trade agreements with countries that currently benefit from Canada's GPT. It might be argued that if a country no longer qualifies for the GPT, it may be more inclined to enter into free trade discussions with Canada that would provide preferential tariff treatment on a reciprocal basis that would also enhance market access for Canadian producers.

proposed changes

 The Government has indicated that it intends to withdraw GPT coverage from countries that either:

(a) are classified by the World Bank as high or upper-middle income economies for the last two years; or  

(b) have a 1% or larger share of world exports for two consecutive years, according to WTO statistics.

Based on this methodology, as many as 72 of the current 175 beneficiary countries might no longer be covered under the GPT. Of the 103 countries that would still be covered by the GPT, approximately half (47) would also be covered by the Least Developed Country Tariff.

The Government is seeking input as to whether the list of beneficiary countries should be revisited annually, perhaps based on the above criteria.

The Government is also considering modifications to three other aspects of the GPT. First, whether the current scope of products is appropriate. Second, whether the GPT rules of origin are suitable given the purpose of the GPT. Third, is the GPT safeguard mechanism. The safeguard mechanism allows for the withdrawal of GPT benefits where imports from a particularly country injure or threaten to injure the domestic industry. The Government is considering whether this mechanism should be formally incorporated into law, for the sake of increased transparency and predictability. Given the Government's rejection of other safeguard recommendations over the past decade, formalization of GPT safeguard measures would seem to be little more than an academic exercise.

McMillan LLP can provide assistance in making submissions to the Government on the future coverage of the GPT. As noted above, any submissions are due on or before February 15, 2013

by Geoffrey C. Kubrick and Jonathan P. O'Hara

1 Canada Gazette, Vol. 146, No. 51 — December 22, 2012, Part I 

2 Statistics Canada, Canadian International Merchandise Trade Database, accessed 9 January 2013

3 Resolution 21 (ii) taken at the UNCTAD II Conference in New Delhi in 1968

4 Canadian Department of Foreign Affairs and International Trade, Negotiations and Agreement, accessed January 9, 2013


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 2013