FTA changes bilateral tariffs and other customs procedures - Free Trade Agreement between United States and Canada

Business America, Jan 30, 1989 by Kathleen Keim, Karen Homolac

The U.S.-Canada Free Trade Agreement (FTA) affects U.S. and Canadian businesses in many ways. Changes in tariffs', duty drawback and similar programs, rules-of-origin, and certificates of origin are perhaps the most important for exporters, This article discusses the new Harmonized System (HS) of tariff nomenclature; tariff removal; emergency action; the U.S. customs user fees; and duty drawback, duty waivers, and similar programs. The rules-of-origin and the certificate of origin are discussed in a separate article.

Harmonized System

To understand the FTA, U.S. exporters must be conversant with the Harmonized System, because the tariff elimination schedules and the rules-of-origin are based on the HS. The HS is an international goods classification system designed to be used by manufacturers, transporters, exporters, customs officials, and statisticians in all the major trading nations. Canada implemented the HS on Jan. 1, 1988.

The United States adopted the Harmonized System on Jan. 1, 1989, replacing the Tariff Schedules of the United States Annotated (TSUSA) and Schedule B. Commerce district offices, located in many cities throughout the United States, can assist American exporters to classify their products in the HS (see list of offices on the inside back cover).

Tariffs

The centerpiece of the FTA is the elimination of all tariffs on bilateral trade by 1998. Over 70 percent of American exports to Canada in 1987 were duty-free, but the remaining tariffs, averaging 9.9 percent on dutiable imports from the United States, are effective barriers to many U.S. exports, including apparel, alcoholic beverages, furniture, and chemicals.

For purposes of tariff removal under the FTA, dutiable products, expressed in terms of the HS nomenclature, are placed in one of three categories: Immediate, Five-Year, and Ten-Year. Tariffs on products on the Immediate List were removed on Jan. 1, 1989. Tariffs on products on the Five-Year List were reduced by 20 percent on Jan. 1, 1989. Four additional cuts of 20 percent each will be made on each succeeding Jan. I until the tariff reaches zero on Jan. 1, 1993. Tariffs on products on the Ten-Year List were reduced by 10 percent on Jan. 1, 1989. Nine additional cuts of 10 percent each will be made on each succeeding Jan. 1 until the tariff reaches zero on Jan. 1, 1998.

The FTA also provides for accelerated tariff removal if both countries agree (see separate article).

Once all Canadian tariffs are eliminated, the cost of U.S. exports to Canadian business and consumers will have been reduced by over $1.3 billion per year. Conversely, U.S. business and consumers will save over $650 million per year on imports from Canada. That $2 billion per year in consumer savings can be put to more productive uses by business and for additional purchases by consumers.

American manufacturers need to consider the implications for their business of tariff elimination. Exporters, or potential exporters, will be more price competitive in Canada by the amount of the eliminated duty against both Canadian production and third-country imports into Canada. This will occur because imports from the United States into Canada will no longer be dutiable, but imports from most other countries will continue to be subject to payment of duties.

In addition, costs of production will be reduced to the extent that U.S. firms use previously dutiable imports from Canada among their inputs. Firms using imported materials from third countries should consider the reduced cost of Canadian materials. All of these changes mean that U.S. manufacturers mav be more price competitive at home, in the Canadian market, and in third-country markets, than they are today.

Weighing the Benefits

To take full advantage of the tariff provisions of the FTA one should:

* Determine what duties are applied to your products by Canadian Customs and Excise and the U.S. Customs Service.

* Note the schedule for bilateral duty elimination; i.e., immediate; over five years (20 percent per year); or over ten years (10 percent per year).

* Identify competitive suppliers to the Canadian market, both domestic and foreign.

* Determine how tariff removal will benefit you in relation to your competition in Canada from Canadian and from third-country sources. (Your foreign competition will not benefit from tariff removal.)

* Calculate the effect that tariff elimination will have on your landed costs in Canada.

*Identify production input that is available from Canada and determine its potential advantage vis-a-vis current suppliers in (a) the United States and (b) third countries.

* Consider what changes should be made in sourcing input for production in the United States in order to reduce manufacturing costs and to increase efficiency. As tariffs are phased-out, input from Canada may become more cost competitive, and faster and more reliable delivery schedules may make reduced inventories possible.

* Consider what changes should be made in sourcing input for production in the United States or Canada in order to meet the FTA rule-of-origin and thereby qualify for preferential tariff treatment for sales across the border.