12 April, NZ Retailers Association Implications of Free Trade Agreements

12 April, 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

12 April, 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.

12 April, 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 Zealands Position Implications for Retailers

12 April, 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.

12 April, 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.

12 April, 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.

12 April, 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.

12 April, New Zealands 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 percent - usually on FOB or ex-factory selling price).

12 April, 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.

12 April, CUSTOMS VALUATION What is Customs Valuation? New Zealands Position Transaction Value Implications for Retailers

12 April, 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.

12 April, New Zealands 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.

12 April, 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

12 April, 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.

12 April, 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

12 April, 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.

12 April, 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

12 April, 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.

12 April, 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.

12 April, How Are Complaints Enforced? New Zealands 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.

12 April, 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.

12 April, 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.

12 April, Implications For Retailers New Zealands 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 importers 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.

12 April, 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).

12 April, 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.