Can You Be Pro-Free Trade and Increase 1,000+ Tariffs? Sure, Just Ask Canada

Nailing down a nation’s trade policy can be tricky. 

 Just look at the trade policies of Canada under conservative Prime Minster Stephen Harper. 

Sure, Canada’s Conservative government is pushing regional and bi-national trade pacts.

But, in Canada’s latest federal budget, there are 1,253 tariffs increases. The fiscal impact: adding $300 million to Canada’s ~$5 billion in existing tariff revenues.

Read all of Stephen Gordon’s excoriation in Maclean’s here. (Note: Terence Corcoran’s Financial Post article earlier this week makes the same point). Below are some highlights:

...Yes, there were those 37 tariff reductions, but there was also the measure to ‘modernize’ Canada’s General Preferential Tariff (GPT) regime by ‘graduating’ 72 countries from the GPT; imports from these countries will now face higher tariffs. Mike Moffatt estimates those 37 tariff reductions will be accompanied by 1,290 tariff increases. By my count, there are 84 GPT countries, but I still haven’t been able to track down a list of which countries will be removed from the GPT (Update: Mike Moffatt informs me 12 of these already have separate agreements with Canada, so that brings it to 72). The budget does name some examples: Korea, China (second-most important source of imports to Canada), Korea (seventh) and Brazil (twelfth), and the GPT countries as a group account for more than 20 per cent of imports. This measure is expected to generate some $300 million in extra revenues, on top of about $5 billion in existing excise duty revenues.

So instead of a unilateral reduction in tariffs, the government is planning a unilateral increase. This is not how a pro-trade government behaves. (Imports from the countries with which the Conservatives have negotiated free trade agreements are dwarfed by those from China alone.)


…

I still can’t get my head around the truly bizarre notion that low tariffs are a subsidy to other countries on the part of Canadian taxpayers, especially since raising tariffs requires Canadian taxpayers to cough up an additional $300 million a year to the government. But if we needed any more evidence that this government is not serious about free trade, here it is. Instead of viewing cheaper imports as a way of increasing consumers’ purchasing power, the Conservative government views them as a problem to be solved.

After seven years in power, the Conservative trade legacy consists of higher tariffs and more obstacles to foreign investment. The Council of Canadians must be thrilled.

Cheetos, Canada Border Services Agency, and the Administrative Ride: Frito Lay Fixes Revenue-Neutral Clerical Error, Gets Slapped With $100Ks in Wrong-Headed Tariffs, Wins Case for Refund 5 Year Latter

By Keith Edmund White, Editor-in-Chief

When thinking about liberalized trade, some may conjure up images of presidential and prime minister press conferences, or abstract discussions among trade experts.  But, as a recent CITT case shows, maintaining free trade in practice sometimes is as simple as ensuring customs officials don't take cross-border traders for "administrative rides."

Globe and Mail Piece Highlights the Hurdles that can Throw a Wrench Even in the Canada-U.S. Trading Relationship, One of the World's Most Successful Trading Relations

The Globe and Mail reports on Frito Lay, a division of PepsiCo and makers of Cheetos, legal victory over the Canada Border Services Agency (CBSA) at the Canada International Trade Tribunal (CITT).  Unless  

The dispute:  In 2007 Frito Lay realized that it brought in Cheetos under the wrong tariff classification and fixed it.  The financial impact?  Well there shouldn't have been any.  The Cheetos went in as cardboard boxes, which incur no duties, and then were corrected to reflect cornchips, which are also duty-free under the North American Free Trade Agreement (NAFTA). 

Frito properly made the correction, but the revenue-neutral correction triggered, in the words of the CITT, "an administrative ride" that resulted in Frito Lay apparently paying hundreds of thousands in cross-border duties:

“It was Kafkaesque, and it lasted for years,” explained Peter Kirby, a Montreal trade lawyer who represented Frito-Lay in the case. “You’re guilty, but of what? What are you accused of? It kept shifting.” 

The tribunal says the Canadian government must now refund Frito-Lay hundreds of thousands of dollars in duties that should never have been collected....
“There may be political will to ease the administrative burden of trading across the border, but sometimes that message doesn’t filter down to the agencies charged with overseeing the movement of goods,” Mr. Kirby of law firm Fasken Martineau DuMoulin LLP said in an interview. 

“Perhaps politicians should be making a greater effort to get people focused on easing the flow of goods.” 

Even now, Mr. Kirby is at a loss to explain why Canadian border officials chose to play hardball with Frito Lay for so long. He doesn’t know if it was a money grab or merely an effort by the CBSA to flex its administrative muscles against a powerful U.S. multinational.

Looking at the CITT Decision

After reading the decision, I have to agree with Kirby's description of Frito Lay's experience with the CBSA.

For those of you interested in reading the opinion, I wouldn't read it in chronological order. Start with the background, and then shift to paragraphs 58 to 66 and, most importantly, read footnotes 26-29.

Barrie McKenna's summary is admirable, but the one thing that comes through in reading the decision is just how Byzantine tariff classifications, duty-impositions, and tariff re-classifications processes can be.

In short, Frito Lay corrected incorrect tariff classifications, classifications which had no impact on duty payments--both the incorrect and correct classifications were duty-free. CBSA then performed a bureaucratically elegant bob: ducking Frito Lay's correct by accepting the tariff re-classification, but denying the "amended tariff treatment... ." CBSA's supposed legal basis: Frito Lay failed to make this correction within a 1-year window.

The problem with that? It sure looks like an obvious misreading of Canadian border regulations. From the CITT decision, "[No authority was provided for such a purported 'one-year filing time limit', and the Tribunal knows of none." (Para. 61).

But the result still stood: CBSA slapped Frito Lay with hundreds of thousands of dollars in duties.

Frito Lay, in order to have CBSA review its tariff treatment rejection decision, paid the duties and then made several filings in Sept. 2007 for CBSA to review its decision. (Footnote 26).

The response? Radio silence (i.e. Frito Lay didn't get a response since CBSA took the "blanket position that none of the corrections to the tariff treatment...had any merit whatsoever" and left the matter "pending for several years."). (Footnote 29).

And this only gets to part of the administrative headache CBSA created for Frito Lay: it broke down the Cheetos shipments in five categories (even though they represented the same reclassification issue), and treated them in five different ways.

Hilariously, the first category of Cheetos "represent the manner in which the Tribunal believed that the... [other four categories] should have been treated, but unfortunately were not." (Para. 38).

Conclusion: A Successful, if Slow-Moving, Example of Free Trade Administration Oversight

Now, perhaps CBSA has a stronger case for its tariff imposition of these years-old Cheetos shipments. And it can make them in the appeal it has the right to file within 90 days of the December 21, 2011 decision.  (Note:  While the decision was issued on Dec. 21, 2011, the reasons were issued January 8, 2012.)

But this case shows that maintaining liberalized trade takes more than head-of-state consultations, treaties, and successful political votes. Liberalized trade also requires a well-functioning customs operation, and when it comes to this less-than-glamorous topic, giving cross-border traders effective legal means to challenge customs decisions is critical to a well-functioning border.

But Frito Lay is a trade juggernaut, a division of a large multi-national corporation that can absorb tariff classifications, fight them in court for years, and then even merit the national of national press. What about smaller traders?

Naturally, one case should never color the overall reputation of any agency. But the case does showcase the critical role legal mechanism have in preserving liberalized trade--not the mention the considerable impact tariffs can have on trade. The CBSA's incorrect actions resulted in Frito Lay being hit with a 11 percent duties fee, as opposed to the duty-free treatment its Cheetos should have received. (Footnote 26).

And, on the plus side, regardless of the considerable time it took, the decision represents a successful example of free trade administrative oversight.

Finally, you can read the entire decision below.

CITT Decision: Frito-Lay v. CBSA