Chapter 5: Trade Rules
Keith Head
Sauder School of
Business
Ch. 5 “take-away”
• Just clearing customs and paying standard
duties can be confusing and costly.
• Special import measures (SIMs) can be
triggered as a result of “unfair” trade
practices or sudden surges in imports.
• The world trading system has rules. The
World Trade Organization (WTO) is the
“referee” supervising international trade.
• Bilateral and regional agreements have
proliferated in recent years.
Clearing Customs
• Procedures:
– Classification
– Valuation
– Origin-nation
• Barriers
– Standard duties
– “Special Import Measures”
– Prohibitions
Valuation
• Rules call for “transaction” values between
“unrelated” buyers and sellers (in
practice: prices on invoices)
• Exclude costs of transport from the point
of direct shipment (PoDS) to the importing
country.
• Note: With ad valorem (%) duties,
importers save from under-valuation. But,
be careful: income tax issues (ch. 12),
anti-dumping duties (later this lecture)
Classification of goods:
“Harmonized” System
• First 6 digits are same for all countries
– 9506.11: Skis
– 9506.21: Sailboards
– 9506.99: Other outdoor sport equipment
• Last 4 digits specific to each importer
–
–
–
–
9506.11.1000: downhill skis in Ca, duty: 0%
9506.11.9010: x-country skis in Ca, duty: 7.5%
9506.11.1000 (x-country skis in US, duty: 0%)
9506.11.4010 (other skis in US, duty: 2.6%)
• First 8 digits (HS6+2)  tariff item
For example: 9506.11.10
Origin-nation
• Most-Favored Nation (MFN) “principle”
• Many Exceptions:
– General Preferential, Least Developed
Countries
– Free Trade Agreements, Customs Unions
• To receive lower duty status, need
– Certificate of origin
– Proof of direct shipment
Origin-nation: Example
Sailboards (9506.21.0000) originating
from
– WTO member or other MFN origin: 9.5%
– General Preferential Tariff country (e.g.
Algeria, Brazil): 6%
– Least Developed Country (e.g. Mali): 0%
– FTA (U.S., Mexico, Costa Rica, Chile): 0%
– General rate (Libya, North Korea): 35%
Tariffs in Rich countries are
mainly low, with exceptions
“Special Import Measures”
(SIMs)
• Antidumping duties
– Pricing exports “unfairly” low
– Causing injury to suppliers in importing
country.
• Countervailing duties
– Producers receiving “unfair” assistance from
government
– Contingent on exporting, OR,
– Specific to an industry AND injury-causing.
• Safeguards
– Temporary relief
– Injury, compensation requirements
Antidumping Duties (ADD)
• Dumping is defined as charging an
export price (Px) that is below the
normal value (Pn)
• The normal value is normally equal to
the price charged for comparable sales
in the exporter’s home market during
the ordinary course of trade.
– Comparable don’t mix wholesale w/ retail
prices
– “Ordinary”  don’t include prices below
average cost of production
Implementation of ADD
• Import-competing firms complain to their
government that imports are being
“dumped”
• Customs-related agency determines the
normal price, compares with export price.
• If “ordinary” & “comparable” home sales
are not available, the normal price is
calculated as
– price charged to other (3rd country) markets
– cost of production + “normal” profit
Implementation of ADD
(continued)
• If preliminary finding supports
dumping claim, then “suspension of
liquidation,” accused firms must pay
deposits equal to dumping margin.
• Dumping margin is (Pn – Px)/Px.
• Dumping margin is usually firmspecific.
– In softwood lumber, Weyerhauser paid
12.39% but Canfor paid 5.96%
– “All other firms” rate of 8.43%
Dumping example I
• A Canadian gadget maker sees gadgets imported
from Munchkinland selling for $165 in Canadian
stores, $34 less than the $199 price of Canadian
gadgets.
• After deducting retail markups, transport costs,
and duties (total: $65), you calculate an EXW price
of $100 for exports to Canada.
• Px=100.
• The same gadget sells in Munchkin stores for
$142. Deducting an estimated $17 of retail
markup, you estimate the EXW price charged in
the home market is Pn = 142-17=105.
• Dumping margin = (105-100)/100 = 5%.
Dumping example II
• Suppose as before Px = 100.
• However, it is pointed out that you omitted $15 of
internal transport costs.
• You now calculate a home market price of Pn =
142-17-15=$90.
• Dumping margin = (90-100)/100= -10%.
No duties! 
• But, you then calculate that the Munchkin maker’s
average costs plus an 8% profit are $115. You
propose that this be the normal price (not $90).
• Dumping margin = (115-100)/100= 15%. 
The Injury Determination
• After “dumping” (or LTFV= “less than fair
value” in US) determination, importing
government determines whether its
dumped imports caused material injury
to domestic industry.
• Injury can be measured by loss of
market share, “price suppression,” falling
profits, laid off workers, etc.
• Injury determination often negative, then
duty deposits should be refunded (with
interest).
How to respond to an Antidumping case?
• Exit market.
• Agree on a “price undertaking” in
exchange for withdrawal of case.
• Argue case before import tribunal.
Points to emphasize:
– Home sales are not “comparable” to
export sales
– Dumped imports not cause of domestic
injury
The expanding use of ADD:
Evolution of the number of countries with antidumping laws
Source: Vandenbussche and Zanardi (2008)
Rise, fall, & spread of ADD
Who’s dumping on whom?
What does the WTO do?
• Sponsors rounds of multilateral tariff
reduction (from post-war 40% to
current 4%).
– Kennedy (60s), Tokyo (70s), Uruguay (8694), …
– Tariff reductions phased in after round
concludes.
• Establishes rules that member countries
must obey.
• Settles disputes over implementation of
rules.
Trade has grown much faster than
incomes, while tariffs have declined.
Credit to GATT?
The WTO Rules
Members Should
Treat imports from all WTO
members equally (MFN
principle)
Treat imported goods no worse
than like domestic goods
(National treatment)
Use tariffs, not quotas or bans
(no Quantitative Restrictions)
Set tariffs at or below
“bindings”
except for
Free Trade Areas,
Customs Unions
Health Protection,
Conservation
Health etc.,
“Safeguards”
Antidumping duties,
Countervailing duties
Prohibitions
• Beef scares (hormones, BSE),
“Frankenfoods”, tuna, shrimp
• WTO allows import restrictions for
health, safety, public morals, and
preservation of natural resources.
• But rules must be followed:
– Scientific risk analysis
– Least restrictive method to pursue goal
– No protection in disguise
Cases of Disguised
Protection?
• Reformulated gas in the US
• Japanese sho-chu
• “Split-run” magazines in Canada
• Dolphin-safe tuna
• Turtle-safe shrimp
Turtle excluder device
Proliferation of regional
agreements
Canada’s Free Trade
Agreements
•
•
•
•
•
•
•
1988/89: United States
1993/94: Mexico (NAFTA)
1996: Israel
1996/97: Chile
2001: Costa Rica
2009: EFTA (Switzerland, Norway, Iceland)
In negotiation: Dominican Rep., Panama,
CARICOM, Cen. Am. 4, Singapore, Korea,
European Union