TORONTO, Ont.–The high costs of complying with Rules of Origin (ROO) requirements mean that small and medium-sized firms (SMEs) often find it cheaper and more efficient to pay customs duties instead of producing the paperwork that would allow them access to preferential, often zero tariffs under trade agreements, according to a new report from the C.D. Howe Institute.
In “Making Free Trade Deals Work for Small Business: A Proposal for Reform of Rules of Origin,” author Dan Ciuriak outlines a ‘presumption of origin’ proposal that would improve SME access to free trade agreement (FTA) preferences by modifying a specific feature of how ROOs are applied. This, says the author, would help improve the performance of SMEs under Canada’s existing FTAs, and indeed should be incorporated in FTAs currently under negotiation, such as the TPP.
Most of Canada’s traders are SMEs, but they face greater barriers to taking advantage of FTAs than do larger domestic competitors. Hence it is important for Canada to remove barriers to SMEs, making the best use of the new opportunities that its hard-won trade agreements provide.
“ROOs are a standard and necessary component of FTAs, they are the gatekeepers to the tariff preferences that FTAs offer, but they impose costs on trading firms that seek to use that gate,” remarks Ciuriak. “By complying with those requirements, trading firms gain access to the preferential tariffs available under the FTA. If they don’t, firms must pay the full applicable tariff under Most Favored Nation (MFN) rules,” he adds.
This has two undesirable consequences. First, it creates a bias against SMEs in competing for market share in the overall FTA zone, because the cost of compliance with the rules has to be distributed over typically smaller shipments for these firms. Second, it deters some firms from taking the plunge into international markets altogether, thereby reducing the dynamic gains made from trade in Canada’s FTAs.
The solution to these consequences concerns the exemptions to ROOs rules, where typically, the rules are waived for shipments with a face value of $1,000 or less. The key element is to change the exemption to one based on the face value of the MFN duty payable on the shipment.
“The reforms proposed in the report involve only a small wording change to existing rules, rather than starting from scratch on new ones,” says the author. “It would constitute a surgical strike that would measurably improve the functioning of NAFTA and the political prospects of agreements such as CETA and the TPP without materially compromising the enforcement of the FTA rules.”
The report notes how this would generate a number of major benefits, such as:
Increased small enterprise participation in trade
An approach to enforcement consistent with the trend by customs agencies to move to risk-based enforcement
Greater leveraging of the e-commerce chapters in FTAs to drive trade expansion through entry of new firms in international trade
A fairer competitive framework for domestic competition in a world of proliferating FTAs; and
Increased economic gains from FTAs.
“Canada should adopt this reform as part of its ‘template’ for negotiating future FTAs, including as an eleventh-hour modification to the TPP to improve that deal’s outcomes for SMEs,” concludes Ciuriak.