Canada: Revisions To The General Preferential Tariff (GPT): Higher Tariffs Foreseen

A seemingly trivial notice published in the December 22, 2012 edition of the Canada Gazette, Part I could have a major financial impact not only for importers, but also for Canadian consumers. Indeed, the proposed amendments to the General Preferential Tariff (GPT) by the Canadian government could trigger an increase in tariffs on imported goods from more than 70 different countries. Importers should conduct a thorough review of their imports as of now in order to determine whether the proposed measures will affect them.

History

In 1974, Canada, on the recommendation of the United Nations Conference on Trade and Development and in concert with other industrialized nations, instituted a preferential customs tariff program to promote the importation of products originating in developing countries. The program, known as the GPT, was intended to assist in the industrialization of countries with relatively precarious economic situations. Today, the GPT grants a preferential tariff (or, in certain cases, even a complete exemption from tariffs) on the importation of a multitude of products originating in about 175 countries.

When the GPT came into effect, it was intended that renewal would occur on a 10-year cycle and this was indeed the case, with the GPT being renewed in 1984, 1994 and 2004. The current cycle, meanwhile, will terminate in June 2014. In anticipation of the renewal of the program, Canada's Finance Minister recently announced that an exhaustive analysis of the GPT regime should be carried out. In this respect, "tidying up" the program would seem to be very much in order given the fact that certain economic powers like China and India are still on the list of countries eligible for the GPT.

Proposed Changes to the GPT

Many countries that were developing countries in the 1970s today find themselves in a much more enviable position, with some joining the ranks of industrialized nations. As a result, the Government of Canada announced some weeks ago a comprehensive review of the GPT regime "[t]o better reflect the current global economy and to ensure that this form of development assistance is aligned with Canada's development policy objectives".

To that end, the Department of Finance has stated its intention to withdraw the benefits of the GPT regime from those countries that:

  • are classified for two consecutive years as high income or upper-middle income economies according to the latest World Bank income classifications; or
  • have a share of world exports equal to or greater than 1% for two consecutive years according to the latest trade statistics of the World Trade Organization (WTO).

As a result of the proposed changes, 72 countries, including China, India, Brazil, South Korea and Russia, would no longer be entitled to the benefit of the GPT regime. Two of the newly-excluded countries (Equatorial Guinea and Maldives) would also lose the benefit of access to duty-free status under the Least Developed Country Tariff (LDCT).

The new measures are expected to come into effect on July 1, 2014.1

Many Canadian importers will accordingly have to carefully review their import countries of origin to determine whether the measures announced will have an economic impact and, if so, the extent of that impact. Given that the rule of origin for the GPT contemplates that at least 60% of the value of a product must be derived from inputs originating in a country that benefits from the GPT (or from Canada), importers will have to exercise extra caution when merchandise is manufactured from materials originating in other countries (e.g., China) that will no longer be on the list of GPT beneficiaries. It should be noted that the "60% rule" has also been included in the review process and could, therefore, be modified as well.

It is anticipated that talks will be initiated with the objective of signing free trade agreements between Canada and some of the countries that are to be removed from the GPT list. From an economic perspective, it obviously makes more sense for Canadian businesses to be able to benefit from reciprocal preferential treatment measures on imports and exports than to be restricted to unilateral measures that support only the import market.

New treatment

Countries that will lose the benefit of GPT treatment also have access to the generally less advantageous Most-Favoured-Nation Tariff (MFN) with respect to their imports into Canada. As of July 1, 2014, the MFN will become the only applicable tariff for the majority of those countries, except where a free trade agreement is already in effect (as is the case, for example, for Chile).

Footnote

1. No change to the LDCT is envisaged for now although the LDCT also expires on June 30, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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