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New Simplified Customs Tariff

• Notice Regarding Availability of Concordances for Proposed 1998 Simplified Customs Tariff (May 24, 1996).
• News Release (1996-027).

Customs Tariff.

Annex I: Results of Consultations.

Annex II: Proposed Legislative Changes.

Customs Tariff

Invitation to Submit Comments on Proposed Simplified Customs Tariff

The government is seeking the views of interested parties on a proposed simplified Customs Tariff. The new Tariff would incorporate previous tariff simplification proposals made public through a series of Canada Gazette Notices (and mailings to a large number of stakeholders) over the last two years, as modified following comments from interested parties on those proposals. It would also include new proposals developed in the consolidation of the draft Schedule to the Customs Tariff, as well as revisions to the Customs Tariff legislative text. It is intended that the new simplified Tariff would be implemented in 1998.

Background

In the Budget of February 22, 1994, it was announced that a three year comprehensive review of Canada's tariff regime would be carried out with the objectives of a) making it more responsive to the competitive pressures facing Canadian industry as a result of freer trade and, b) lessening the regulatory burden and associated costs to both the government and the business community by making the system simpler and more transparent and predictable.

The budget announcement noted that the tariff regime has become increasingly complex as a result of a number of factors, e.g. successive international trade agreements, the adoption of the Harmonized System, and a large number of unilateral tariff changes introduced for domestic competitive reasons. There are now 11 tariff treatments, seven Schedules, over 8,000 tariff items, more than 2,500 concessionary provisions and regulations, and over 200 different rates of duty. Identical or similar products are often dutiable at different rates, depending on their use and their classification, in several different parts of the Customs Tariff (or under separate regulations). As new products are developed and as trade patterns change, many tariff provisions are no longer justified from standpoints of import levels, product differentiations or rate differentials.

The budget announcement also noted that Most-Favoured-Nation (MFN) rates of duty on many goods used as inputs in manufacturing operations were higher than those of our major competitors, particularly the U.S., and that with the scaling down of the export duty drawback program under the NAFTA, the competitiveness of Canadian producers could be adversely affected and Canada could become a less attractive place for investment.

The budget announcement set out the major issues that would be addressed in the tariff simplification study. Most of these have subsequently been the subject of extensive public consultations, through Canada Gazette Notices and direct mailings to a large number of trade and industry associations, Sector Advisory Groups on International Trade, individual firms, customs brokers, trade consultants and provincial governments. The rationale for the approaches and proposals on each of these issues was outlined in the Notices and mailings. The results of the consultations, and the proposed responses to the comments received, are set out in Annex I to this Notice.

The previous proposals are intended to improve the competitive position of the business community but also to make the tariff system simpler and more transparent by deleting a large number of unnecessary or under-utilized provisions and transferring many others to the main body of the Customs Tariff, i.e. Schedule I. The consolidation of this draft interim Schedule, together with changes in the Customs Tariff legislative text, is the final step in the simplification of the tariff system. It is the principal focus of this Notice since it brings together all previous proposals, as amended by the comments received during the aforementioned public consultations, and includes final new proposals.

New Proposals: Legislative Changes

A number of amendments to the legislative text (sections 1 to 114) of the Customs Tariff is being proposed. The general objective is to update and simplify the legislative provisions and thereby improve the overall relevance and transparency of the legislation.

The proposed amendments in some cases simply reflect proposals that have already been the subject of previous Gazette Notices. For example, the termination of the Machinery Program would entail the elimination of sections 73 to 79.5 (and Schedule VI) which are the current legislative provisions for the Program. Other proposals are new, one of the most significant of which is the termination of the British Preferential Tariff (BPT), as provided for in sections 26 to 31 of the Customs Tariff (and related regulations).

The exchange of BPT treatment with Commonwealth countries was based originally on the Canada-United Kingdom Trade Agreement of 1937. However, when the U.K. entered the European Common Market in 1973, the Agreement was terminated and, as a result, the contractual basis for the exchange of preferences disappeared (except with respect to Australia and New Zealand with which Canada has bilateral trade agreements). Notwithstanding this, Canada continues to grant BPT treatment to all Commonwealth developing countries (with the exception of South Africa and Mozambique) on a unilateral basis. These countries have not extended tariff preferences to Canada for some time.

Imports under the BPT from Commonwealth developing countries amounted to $468 million in 1994. However, reductions in MFN tariffs as a result of successive multilateral trade negotiations have significantly eroded, and in many cases eliminated, the margins of preference under the BPT. With the implementation of the Uruguay Round tariff reductions, the BPT margins will continue to be eroded until 2004, when certain final MFN rate reductions are implemented.

Based on 1994 imports, there are only 126 tariff items (predominately apparel and other made-up textile products), representing $235 million in BPT imports, which would continue to receive tariff preferences after 1998 until the MFN rates overtake the BPT rates. For most of these items, the margins of preference in 1998 (when the simplified Tariff is intended for implementation) will be 4.2 percentage points until eliminated by 2004 at the latest. To avoid tariff increases on these imports, it is proposed that an Order in Council be introduced in 1998 to maintain the preferential rates on these goods until they are matched by the MFN rates. (The list of affected items will be updated as new import statistics become available.)

For a small number of tariff items (currently 19 items covering imports valued at about $17 million on the basis of 1994 data), in 2004 the current BPT rates would still be more favourable than the final Uruguay Round MFN rates. However, in some of these cases, the Commonwealth developing countries would be able to take advantage of GPT rates (nine of the 19 items have GPT rates) which, although somewhat higher than the BPT rates, are more favourable than the MFN rates.

Termination of the BPT would have no substantive impact on trade from Australia or New Zealand. In 1995, Canada converted BPT rates of duty (except Free rates) to new Australia and New Zealand (AU/NZ) rates. These new rates will maintain, for a three year period beginning January 1, 1995, the margins of preference that existed in 1994 between MFN and BPT rates, while a review of the preferential trade with these two countries is carried out. As it is not possible to predict the outcome of the review at this time, the proposed 1998 tariff Schedule shows the 1997 AU/NZ rates. In addition, as it is proposed to eliminate the BPT, the Free BPT rates to which Australia and New Zealand will be entitled in 1997 have been shown as Free AU/NZ rates in the Schedule. The AU/NZ rates are subject to possible change in the final legislated version of the new tariff Schedule.

Another noteworthy legislative proposal is to broaden the scope of section 68 which currently provides Order in Council authority to reduce or remove duties on materials for use in manufacturing operations. This section has been used extensively to lower tariff rates as a means of helping Canadian producers become more competitive. The proposal is to broaden the scope of the provision to allow tariff reductions on all inputs used by manufacturers, as well as service providers who use imported inputs and who compete in the domestic and world markets with foreign service providers. In view of the proposal to eliminate the Machinery Remission Program, a broadened section 68 would retain a measure of flexibility to respond to tariff relief requests by users of imported machinery. As is the case under the current section 68, duty relief would be available in situations where it is clear that such action is required for competitiveness reasons. As a matter of policy, retroactive relief, which is currently available under the Machinery Program, would be provided only in cases where there are compelling economic reasons.

Details of other proposed changes to the legislative text are outlined in Annex II to this Notice.

New Proposals: Consolidation of Schedule

The aim of the consolidation of the Schedule is to enhance competitiveness and to further simplify and streamline the tariff system by reducing the number of tariff lines, by reducing the number of different duty rates, by eliminating rates that serve no meaningful purpose, by rectifying structural problems, and by making further rate reductions on inputs. This involves the following major elements, most of which were highlighted in the 1994 Budget announcement of the initiative:

(a) the implementation, in 1998, of the final Uruguay Round tariff reductions currently scheduled for January 1, 1999, as well as the final GPT rate reductions applicable to those items. It is intended to implement the new Tariff in 1998 to coincide with the implementation of duty-free trade between Canada and the U.S., by far our largest trading partner, accounting for about 70% of imports in 1994. The acceleration of the Uruguay Round and GPT tariff cuts would allow for the achievement of simplification objectives in 1998 without any significant impact on Canadian industry;

(b) the rounding down of decimal rates to the nearest half percentage point. This would reduce the number of different rates and contribute to a simpler rate structure;

(c) the elimination of "nuisance" rates, i.e. those under 2%. These rates are not considered important from the standpoint of tariff protection but represent a burden on businesses. Their elimination would help achieve a simpler rate structure and tariff schedule, and would lower input costs since they generally apply to manufacturing inputs;

(d) the harmonization of rates, where possible and usually at the lowest levels, to bring into line the tariff treatment of goods (generally inputs) that are identified as being directly competitive;

(e) the rectification, where possible, of identified tariff anomalies, i.e. to ensure that goods used as inputs for other goods are not dutiable at rates higher than those of the further manufactured products;

(f) the combining of tariff items where there have been little or no MFN imports under one or more of the items, where MFN rates are the same or the rate differentials are small (i.e. generally less than two percentage points), where the goods affected are manufacturing inputs, and in other cases where such action is clearly desirable. This was done only if there were no serious obstacles to taking action, e.g. no known domestic sensitivities, no international trade constraints, and no rules of origin requirements. Items were normally combined at the lowest MFN rate but in a limited number of cases (e.g. where the vast majority of imports was under a higher rate), items were combined at the higher rate. (Combined GPT rates were normally determined on the same basis while Mexico Tariff rates and Mexico/United States Tariff rates were combined at the lowest rates.) The import period (three years) and import value thresholds (less than $10,000 annually for each of the three years) employed in the conversion of tariff concessionary codes were generally used. The combining of items is aimed at reducing the number of lines and rates and at generally simplifying the tariff Schedule.

The consolidation of the Schedule would reduce the number of ad valorem rates from around 200 to about 55 and the number of tariff provisions from the current 11,000 (including tariff items, concessionary codes and regulations) to less than 8,100. About 1,500 MFN and GPT rates would be reduced (other than for purposes of rounding) on tariff items under which there have been imports; most of these cover goods used as inputs.

Overall Impact of All Proposals

While some of the simplification proposals made public to date have been modified to address concerns expressed by interested parties, most are retained as initially presented. The implementation of these proposals and the new ones developed in the consolidation of the tariff Schedule and in the examination of the legislative text would assist the business community in facing the competitive pressures resulting from freer trade, would make the tariff system simpler and more transparent and predictable, and would lessen the regulatory burden on both industry and government.

On the competitiveness side, production costs have been lowered by the implementation, effective June 13, 1995, of the MFN rate reductions on manufacturing inputs covered by about 1,500 tariff lines. The cost competitive position of the business community would be further enhanced by the other simplification initiatives, in particular the proposed removal of the "not made in Canada" conditions in nine tariff provisions, and a number of proposals made in the context of the consolidation of the Schedule, the majority of which would lower the rates on products used as manufacturing inputs, e.g. the acceleration of certain of the Uruguay Round tariff cuts, the elimination of rates under 2%, the rectification of tariff anomalies, and the rounding down of rates to the nearest half percentage point. Some of the proposed legislative amendments would ensure that businesses continue to have a vehicle to seek tariff relief to enhance their competitive position.

A major simplification of the tariff system would be achieved, and its transparency and predictability enhanced, by the combining or elimination of a large number of provisions, the full or partial replacement of many concessionary codes with tariff lines in the new Schedule, the conversion of the Machinery Program remission system to statutory tariff lines, and the elimination or replacement of almost 400 tariff regulations. As a result of these measures, and a number of legislative changes (e.g. the list of prohibited importations in Schedule VII would be transferred to the legislative text), the new Tariff would have only one Schedule compared to the current seven and would contain about 7,900 tariff items compared to the current 8,400 items and 2,000 codes.

The conversion of a number of specific rates to percentages as well as the elimination of "nuisance" rates, the rounding down of rates, the elimination of tariff anomalies and harmonization of rates on similar goods would also make an important contribution to reducing the complexity of the Customs Tariff and in achieving a simpler rate structure. The elimination or amendment of a significant number of legislative provisions that are no longer required, such as the BPT, and the streamlining of other provisions, would also complement tariff simplification.

The regulatory burden for both the private sector and the government would be considerably lessened by the proposed action on the "not made" codes (i.e. there would no longer be a need to obtain "not made in Canada" rulings ) and by the termination of the Machinery Program which would do away with the costs of complying with the administrative procedures of the Program. The regulatory burden would also be reduced by the elimination of over 300 tariff regulations. Some of the proposed legislative changes, such as the combining of certain Order in Council authorities, would also help ease the regulatory burden.

The effect of these initiatives on the overall level of tariff protection and trade flows would not be significant as most of the proposals are in the nature of technical changes and are essentially rate neutral. The proposed rate reductions are generally not deep (in most cases less than two percentage points). The rate increases that would occur are very few and are essentially in two areas, i.e. the deletion of concessionary codes, in whole or in part, in cases where the levels of imports are insignificant, and in the combining of tariff lines at the highest rate in the context of the consolidation of the Schedule where imports at the lower rates are nil or not meaningful.

Until implemented, the proposed Customs Tariff will continue to be revised to reflect ongoing amendments to the current regime, new import statistics and adjustments required as a result of the consultations.

Submissions

The proposed tariff Schedule is available on computer diskette from the Tariff Simplification Task Force, Tariffs Division, Department of Finance, 140 O'Connor Street, Ottawa, Ontario, K1A 0G5. If interest is limited to specific tariff items, subheadings, headings or chapters, print copies of these can be obtained from that address. The Schedule is also available on Revenue Canada's Customs Information Service Electronic Bulletin Board.

Interested parties wishing to comment on the proposals should write to the Task Force by July 31, 1996. Submissions should indicate which proposals are of interest and provide reasons for any support or opposition (in particular, detailed information to substantiate any expected adverse impact).

General information on this initiative can be obtained from the Task Force at 613-992-6885 (telephone) or 613-992-6761 (facsimile). Specific information on individual proposals can be obtained from the following members of the Task Force: