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Consumers shoulder burden of Canada’s complex tariff system

The United States border crossing is shown Wednesday, December 7, 2011 in Lacolle, Que., south of Montreal.

Ryan Remiorz/THE CANADIAN PRESS

The 37 tariff reductions on sporting equipment and baby clothes in Budget 2013 received a great deal of attention. Less noticed was the announcement that on Jan. 1, 2015 tariffs will be increasing on more than 1,200 products from 72 countries (including China), affecting everything from bicycles to potato starch, thanks to the elimination of the General Preferential Tariff (GPT) status for these countries. Losing the GPT will cost consumers at least $300-million a year, dwarfing the savings from cheaper shoulder pads and baby bibs. The issue has mostly flown under the radar, mostly because of the complexity of Canada's tariff system, which serves to hide these tax increases from consumers.

Running 1,470 pages, Canada's Custom Tariffs rules are exceptionally complex. The rules cover more than 17,000 classes of products and for each product, there can be as many as 16 tariff rates. The rate charged on an imported good is determined by the type of product and the country of origin of that product. For instance, chewing gum is charged a 9.5-per-cent tariff if it comes from Italy, 7 per cent from New Zealand or Australia, 5 per cent from India, 4.5 per cent from Norway or Israel, and no tariff if it comes from the United States or Laos.

In most instances the rate for a product is determined by the relative wealth of the country, with countries placed into one of three groups: Most-Favoured-Nation (MFN), General Preferential Tariff (GPT) or Least Developed Country Tariff (LDCT), with higher-income countries being charged a higher tariff. For example, imports from Belgium are charged the top MFN rate, imports from medium-income Brazil are currently charged the middle GPT rate and imports from low-income Bangladesh are assessed the lowest of the three, the LDCT rate. There are also 13 other rates, for the various free-trade deals Canada has signed, such as the Chile Tariff (CT) and the Norway Tariff (NT).

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A typical entry in the tariff schedule looks as follows:

6301.40.00 - Blankets (other than electric blankets) and travelling rugs, of synthetic fibres

· MFN: 17 per cent

· LDCT, UST, MT, CIAT, CT, CRT, IT, NT, SLT, PT, COLT, JT: Free

· AUT: 12.5 per cent

· NZT: 12.5 per cent

· GPT: 12 per cent

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The 2013 Budget would decimate the GPT category, and apply the higher MFN rate to imports from the 72 countries losing GPT status. The countries losing the GPT classification comprise some of Canada's largest trading partners and include Argentina, Brazil, China, Hong Kong, India, Indonesia, Malaysia, Russia, Singapore, South Africa, South Korea, Thailand and Turkey. Beginning Jan. 1, 2015, an imported blanket (made of synthetic fibres) imported from one of these 72 countries will be assessed the higher 17-per-cent MFN rate, rather than the 12-per cent GPT rate - making them more expensive to consumers.

By my estimate, there are 1,290 product classes where the existing GPT rate will be replaced by a higher MFN rate. It is difficult to say where consumers will feel the biggest hit from these rate increases, since import statistics at the product level are unavailable to the public. The tariff on bicycles is going up significantly (from 8.5 per cent to 13 per cent), as well as scissors (from 0 per cent to 11 per cent), rubber sandals (0 per cent to 16 per cent), wigs (0 per cent to 15.5 per cent), vinegar (0 per cent to 9.5 per cent), petroleum jelly (0 per cent to 7 per cent), carving knives (0 per cent to 7 per cent), perfume (0 per cent to 6.5 per cent) and artists' brushes (0 per cent to 7 per cent). The tariffs on some less common goods are increasing as well, including rocket launchers (0 per cent to 7 per cent), diesel-electric locomotives (5 per cent to 9.5 per cent), swords (0 per cent to 7 per cent) and grand pianos (0 per cent to 7 per cent). Fortunately, the tariff on nuclear reactors will remain unchanged.

The government estimates that the move will cost Canadians roughly $333-million per year, five times larger than the savings from eliminating the tariffs on sporting equipment and baby clothing. The exact cost of the move is difficult to estimate, as some companies will change their sourcing decisions based on the tariff change. Since tariffs from China, Brazil and India will now be relatively more expensive, Canadian importers have an added incentive to source from LDCT countries such as Bangladesh. This serves to distort and harm the Canadian economy, as firms pass on sourcing goods that provide the best value in order to avoid paying taxes.

There are some benefits to this harmonization; for example, it made little sense to charge products imported from Japan a higher rate than imports from Korea, so some harmful distortions were removed from the tariff schedule.

The issue is that all of these tax rates were harmonized to the highest rate, rather than to a lower rate. Consumers will be left paying hundreds of millions of dollars more for consumer products, and the tariff schedule remains overly complex and a burden on the Canadian economy.

Mike Moffatt is an assistant professor in the Business, Economics and Public Policy group at the Richard Ivey School of Business, University of Western Ontario.

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About the Author

Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University. Mike also does private sector consulting for the chemical industry. More

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