12 April, 20051

NZ Retailers Association

Implications of Free Trade Agreements

12 April, 20052

1. INTRODUCTION

• This session will briefly review some technical aspects of the FTAs currently being negotiated by New Zealand and their implications for retailers:

• Tariffs and Tariff Phasing

• Rules of Origin

• Customs Valuation

• Dumping and Subsidies

• Transitional Safeguards

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2. TARIFFS AND TARIFF PHASING

• Current New Zealand Tariffs– Post 2005 Tariff Review– 2006 Review

• Implications of Free Trade Agreements– Tariffs on many goods removed immediately once the FTA takes effect.– Tariff removal is normally reciprocal.– Tariffs in sensitive industries are likely to remain for a period of time after the FTA

takes effect.

• Tariff Phasing under Free Trade Agreements– Tariffs in sensitive industries will usually reduce to zero over a designated period

of time.– Reduction programme contained in schedules to the FTA.– For example, in the New Zealand-Thailand CEPA, there are tariff phasing

programmes for TCF, some automotive components, some steel products, and whiteware products.

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3. RULES OF ORIGIN

• What are Rules of Origin (ROO) and Why Do We Have Them?

• How Do Rules of Origin Operate?

• Change of Tariff Classification (CTC)

• Value Added

• New Zealand’s Position

• Implications for Retailers

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What Are Rules of Origin and Why Do We Have Them?

• Rules of origin (ROO) are laws, regulations and administrative determinations which identify the “nationality” of traded goods.

• ROO determine the extent to which producers can use non-originating inputs and still be eligible for tariff preferences.

• In a preferential trading arrangement, the ROO are needed to determine which goods are eligible for the benefits of the arrangement.

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How Do Rules of Origin Operate?

• All systems of ROO provide two principal means of ascribing originating status:

• Wholly obtained or Produced: Essentially natural resource-based on goods which are inherently the origin of a single country.

• Partly-manufactured (more than one country involved): Goods which have undergone their “last substantial transformation” in the country of export - according to one or more of the following criteria -

– Change-of-HS classification (CTC)

– Value added (Regional Value Content)

– Specified process

Most problems arise with partly-manufactured goods.

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Change of Tariff Classification (CTC)

• CTC approach is the international norm.

• A product will qualify for preferential entry if there is a change of tariff classification, using the Harmonised Commodity Description and Coding System (HCDCS) from the classification used for the components/ingredients to the classification applicable to the finished good.

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Value Added

• Based on achieving a minimum level of local content (usually 50 per cent) in the factory cost of the goods.

• Inherently unpredictable outcomes.

• Can reward inefficiency.

• Compliance and administration costs can be greater.

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New Zealand’s Position

• New Zealand favours outward looking ROO which allow for a reasonable access to third country inputs.

• New Zealand has adopted CTC in its current FTA negotiations and is seeking to change the CER ROO to this method.

• Value added now seen as occasional adjunct - not a primary rule.

• A “generic” model is being developed. It is based on CTC (change at heading or subheading level, generally) without negative standards and with minimal use of RVC adjunct rules (based on FOB).

• ROO for different products in different Agreements will vary depending upon the exact nature of CTC (Change-of-Chapter / Heading / Subheading) and level of RVC thresholds (international levels range from 30-60 percent - usually on FOB or ex-factory selling price).

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Implications for Retailers

• Reliance on overseas suppliers for declaration of preference.

• Liability for error rests with the importer.

• Cannot assume that because certain goods comply with the ROO under one FTA, that those goods will comply under another FTA.

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4. CUSTOMS VALUATION

• What is Customs Valuation?

• New Zealand’s Position

• Transaction Value

• Implications for Retailers

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What is Customs Valuation?

• The valuation of goods is of vital importance in ensuring the integrity of the economic strategies embodied in the domestic Tariff structure.

• It ascribes to imported goods a value which forms the basis for calculating duties and excise taxes, calculating quota usage, collecting and analysing trade data.

• Enables importers to assess with certainty the amounts of duties payable on imports.

• Even when goods are duty free, Customs valuation is a vital component in the calculation of GST.

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New Zealand’s Position

• Customs and Excise Act 1996 and the companion Regulations.

• Follows closely the WTO Agreement on Customs valuation.

• Administered by the New Zealand Customs Service.

• Strong body of judicial precedent which can be referred to.

• A narrow and strongly held view (backed up by legal precedent) on the requirement for royalties to be included in the Customs value.

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Transaction Value

• This method is used for the majority of imports into New Zealand.

• Customs value is based on the price actually paid or payable for the goods when sold for export to the country of importation (eg the invoice price).

• Where there are sales between related parties it must be proved that this relationship does not influence the price.

• The invoice price is subject to various adjustments, eg– Royalties and licence fees

– Assists

– Commissions

– Special discounts

– Cost of container

– Cost of packing

– The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods as accrues directly or indirectly to the seller

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Implications for Retailers

• The responsibility to declare correct Customs value or receive significant penalties for failing to do so.

• Particular attention must be paid to the existence of royalties and licence fees.

• Opportunity for importers to justify their price and to appeal any consequent rejection of the value by the authorities.

• Enables accurate calculation of costs (including duties) in establishing retail price points.

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5. DUMPING, SUBSIDIES & SAFEGUARDS

• What is Dumping?

• When is Dumping Illegal?

• What are Subsidies?

• When are Subsidies Actionable?

• How are Complaints Enforced?

• Penalties / Corrective Measures

• What are Safeguards?

• Implications for Retailers

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What is Dumping?

• Goods are dumped if their export price is less than their normal value in the country of export.

• The export price is the price the importer in the overseas country pays for the goods.

• The normal value is the price the goods sell for in the country of export.

• There must be a fair comparison of export price and normal value.

• Adjustments can be made– Differences in terms and conditions of sale

– Levels of trade

– Taxation

– Quantities

– Physical characteristics

• If there are no domestic sales in the country of export, normal value can be determined by a constructed value or sales made to a third country.

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When is Dumping Actionable?

• There is a dumping margin (difference between normal value and export price).

• Material injury, or threat thereof has been suffered by the domestic industry producing like goods.

• There is a causal link between the dumping and the material injury.

• Like goods are those identical to the imported goods or which have characteristics closely resembling those goods.

• Indicators of material injury include– Volume of dumped imports– Price effects– Consequent economic impacts, eg loss of profits

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What are Subsidies?

• Subsidisation involves the provision of specific assistance, directly or indirectly by a Government, in respect of exported goods.

• Export subsidy - Aims specifically at assisting exports.

• Domestic subsidy - Provides assistance irrespective of whether or not the goods are exported.

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When Are Subsidies Actionable?

• Calculation of the benefit to the exporter.

• Establishment of material injury suffered by the producer of like goods.

• Establish the causal link between the subsidy and the material injury.

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How Are Complaints Enforced?

• New Zealand’s system is an administrative one where the investigation is carried out by Government officials and a final decision is made by the Government Minister upon the advice of his officials.

• Investigation period of 180 days.

• On site verification of overseas suppliers.

• New Zealand operates a very transparent Trade Remedies system through the Ministry of Economic Development.

• New Zealand adheres strictly to the WTO Anti-Dumping Agreement, and relies heavily on the precedents provided by WTO Panel and Appellate Body decisions.

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Penalties / Corrective Measures

• Al valorem duties.

• Threshold prices.

• Provisional measures.

• Undertakings.

• Retrospective measures.

• Remedies may not exceed the level of the dumping margin or the amount of the subsidy.

• The level of duty should not be greater than is necessary to prevent material injury.

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What Are Safeguards?

• Temporary safeguards are short term measures to remedy serious injury to a domestic industry caused by sudden increases in imports.

• Designed for emergency relief in the face of serious injury.

• Provisions contained in the Temporary Safeguards Authorities Act.

• A wider range of remedies is available including the restriction of the importation of the goods.

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Implications For Retailers

• New Zealand’s FTAs signed to date all contain normal dumping subsidy and safeguard provisions except for CER, where dumping and safeguard provisions have been removed for qualifying goods.

• Dumping subsidy and safeguards investigations are powerful tools for domestic manufacturers and provide strategic commercial benefits.

• Significant disruption to the importer’s business can be caused during the course of a dumping investigation.

• The volume of imports is normally impacted during the course of a dumping investigation.

• The imposition of measures leads to an overall lift in the market price.

• Significant measures can cause the imported goods to be withdrawn from the market.

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6. TRANSITIONAL (BILATERAL) SAFEGUARD MEASURES

• Separate and distinct from Global safeguards.

• To be considered when reduction or elimination of duties results in increased imports causing or threatening serious injury to a domestic industry.

• Intention is that a transitional safeguard measures action should be easier to process than an application under the TSA Act.

• Remedies consist of:– Suspension of the further reduction of duties

– Increase in the rate of duty not exceeding the MFN rate (either at the time the action is taken or at the time immediately preceding the date of the FTA)

• Measures are not to exceed 2 years.

• Measures cannot be applied where there are existing dumping, countervailing or safeguard measures under the WTO Agreements.

• Certain goods are excluded (eg goods subject to a tariff quota).

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7. CONCLUSION

• The terms of each FTA will differ with the result that goods from different FTA partners may not be treated the same upon entry into New Zealand.

• It cannot be assumed that because certain goods are sourced from an FTA partner that they are automatically duty free.

• It cannot be assumed that because certain goods qualify for duty free entry under one FTA, the same rules will apply for those goods under another FTA.

• Knowledge of the rules pertaining to each FTA is essential if imported goods are to be costed accurately through to the desired retail price point.