Category Archives: Non-Tariff Barriers

Do customs duties compound non-tariff trade costs? Not in the US

For mathematical convenience, economists often assume iceberg trade costs when doing quantitative work. When tackling questions of trade policy, analysts must distinguish trade costs from import taxes. For the same reason that multiplicative iceberg trade costs are tractable, in these exercises it is easiest to model trade costs as the product of non-policy trade costs and ad valorem tariffs. For example, when studying NAFTA, Caliendo and Parro (2015) use the following formulation:

Caliendo and Parro (REStud, 2015), equation (3)

This assumption’s modeling convenience is obvious, but do tariff duties actually compound other trade costs? The answer depends on the importing country. Here’s Amy Porges, a trade attorney, answering the query on Quora:

Tariff rates in most countries are levied on the basis of CIF value (and then the CIF value + duties is used as the basis for border adjustments for VAT or indirect taxes). CIF value, as Mik Neville explains, includes freight cost. As a result, a 5% tariff rate results in a higher total amount of tariffs on goods that have higher freight costs (e.g. are shipped from more distant countries).

The US is one of the few countries where tariffs are applied on the basis of FOB value. Why? Article I, section 9 of the US Constitution provides that “No Preference shall be given by any Regulation of Commerce or Revenue to the Ports of one State over those of another”, and this has been interpreted as requiring that the net tariff must be the same at every port. If a widget is loaded in Hamburg and shipped to NY, its CIF price will be different than if it were shipped to New Orleans or San Francisco. However the FOB price of the widget shipped from Hamburg will be the same regardless of destination.

Here’s a similar explanation from Neville Peterson LLP.

On page 460 of The Law and Policy of the World Trade Organization, we learn that Canada and Japan also take this approach.

Pursuant to Article 8.2, each Member is free either to include or to exclude from the customs value of imported goods: (1) the cost of transport to the port or place of importation; (2) loading, unloading, and handling charges associated with the transport to the port of place or importation; and (3) the cost of insurance. Note in this respect that most Members take the CIF price as the basis for determining the customs value, while Members such as the United States, Japan and Canada take the (lower) FOB price.

While multiplicative separability is a convenient modeling technique, in practice ad valorem tariff rates don’t multiply other trade costs for two of the three NAFTA members.

Colombia’s port-of-entry restrictions on textile imports

Here’s an unusual non-tariff barrier from a 2006 WTO complaint brought by Panama (mentioned in Eaton, Jinkins, Tybout, Xu):

Second, Panama considers that, through three specific resolutions, Colombia has established a requirement that all goods falling under Chapters 50 to 64 of Colombia’s Customs Tariff (textile and footwear products) that originate in, and/or are imported from, Panama or China shall enter into Colombia only through specified ports of entry. This restriction on the ports of entry applies only to relevant goods coming from Panama or China and not to goods imported directly from third countries or customs territories. Panama claims that the restriction on the ports of entry appears to be inconsistent with Colombia’s obligations under Articles I:1, V:6, XI:1 and XIII:1 of the GATT 1994.

Third, Panama considers that, through a specific resolution, Colombia has established a requirement that commercial invoices of goods coming from the Free Zone of Colon shall include, in addition to the regular requirements, the name of the buyer in Colombia, his address and his Tax Identification Number (“NIT”). This requirement applies only to goods coming from the Free Zone of Colon and not to goods originating in third countries or customs territories. Panama claims that this requirement appears to be inconsistent with Colombia’s obligations under Articles I:1, V:6, XI:1 and XIII:1 of the GATT 1994.

While Panama and Colomiba reached a mutual agreement to solve these issues in December 2006, a closely related July 2007 complaint revisited exports from the Free Zone of Colon, which again faced port-of-entry restrictions:

In relation to restrictions on ports of entry, Panama’s request for consultations is directed at a resolution of June 2007 which provides that all goods classifiable in Chapters 50-64 of the Customs Tariff coming from the Free Zone of Colon in Panama shall be entered and imported exclusively through the jurisdictions of the Special Customs Administration of Bogota and the Barranquilla Customs Office. This requirement does not apply to goods arriving directly from third countries. The regulation provides that with respect to these goods, the authorization of the customs transit procedure will not be appropriate. Furthermore, the import declaration applicable to these imports shall be presented prior to their arrival in the national customs territory but not more than 15 days in advance. If an importer does not comply with these requirements, it is subject to special procedures under Colombia’s Customs Code, including the detention of goods.

Panama considers that these restrictions are inconsistent with Colombia’s obligations pursuant to Articles XI:1, XIII:1, V:2, V:6 and I:1 of the GATT 1994.

Colombia lost this WTO case and conformed to the DSB’s ruling in 2010.

The Chinese government didn’t allocate its MFA quotas efficiently

Amit Khandelwal, Pete Schott, and Shang-Jin Wei have a nice VoxEU column describing their forthcoming AER article on Chinese textile exports under the Multifibre Arrangementquotas. In short, inefficiently implemented policy can substantially amplify the economic distortions introduced by trade barriers:

If trade barriers are managed by inefficient institutions, trade liberalization can lead to greater-than-expected gains. We examine Chinese textile and clothing exports before and after the elimination of externally imposed export quotas. Both the surge in export volume and the decline in export prices following quota removal are driven by net entry. This outcome is inconsistent with a model in which quotas are allocated based on firm productivity, implying misallocation of resources. Removing this misallocation accounts for a substantial share of the overall gain in productivity associated with quota removal.

WTO: WTR 2012 discussion forum

The WTO’s World Trade Report 2012 will focus on non-tariff barriers. Of course, NTBs are nothing new, but they’re more relevant in a low-tariff world. Their relative opaqueness makes them more difficult to negotiate, discipline, and study. The WTO invites submissions of short articles for their discussion forum, though I have no idea about the scope for influencing the report (due out in July).

Patent wars at the US ITC

Intellectual-property disputes are being adjudicated by the US International Trade Commission in the form of Section 337 disputes, which may result in US Customs banning importation of infringing products. Here’s a long list of open investigations, and here’s a blog dedicated to such disputes. Here’s a patents blog that often covers ITC disputes. I learned of Section 337 disputes from this story about HTC and Apple’s patent war.

A New York Law Journal article describes why IP battles are being waged at the US ITC forum:

The ITC has some distinct advantages for the patent plaintiff as compared to a federal district court. To start with, it is generally not necessary to establish personal jurisdiction and proper venue over each of the respondents, as the commission has in rem jurisdiction over the articles being imported. In addition, the ITC’s procedural schedules are enormously accelerated as compared to the average district court…

The 2006 Supreme Court decision in eBay v. MercExchange made it more difficult for plaintiffs in district court patent litigation to be granted an injunction. Under earlier Federal Circuit precedent, a prevailing plaintiff was virtually guaranteed an injunction, which forced an infringer to settle on the patent holder’s terms or face a complete shutdown of its business. In eBay, the Supreme Court rejected this long-standing rule and instead instructed the lower courts to make a case-by-case determination, based on “well-established principles of equity.”5 This determination is not applicable to exclusion orders in the ITC…

The combination of fast-moving schedules, reduced jurisdictional requirements, and the ready availability of injunction-like remedies make the ITC an ideal forum for the enforcement of patent rights. In addition, the domestic industry requirement, once a significant barrier for NPEs, has become easier to satisfy. As traditional manufacturing facilities abandon the United States, the ITC can still be the forum of choice for those American businesses that manufacture abroad, or even those whose sole business is to exploit patents.

Here’s another piece on the ITC forum, dubbed “outbidding the Supreme Court” (pdf), which says that “a Section 337 action before the ITC may be the most efficient, cost-effective and surefire way for a patentee to obtain the equivalent of a permanent injunction against an infringing party.”

Is the NAFTA trucking dispute finally over?

A Mexican truck will make a delivery to a Dallas suburb this afternoon, thereby realizing some of the liberalization promised by NAFTA 17 years ago. WaPo:

The first Mexican carrier to deliver goods in the U.S. interior under a long-delayed free-trade provision is scheduled to enter the country at Laredo, Texas, shortly after midday Friday.

The truck owned by Nuevo Leon, Mexico-based Transportes Olympic will make a delivery to the Dallas suburb of Garland. That’s despite continuing opposition from the Teamsters union and some lawmakers who fear the program will make U.S. highways more dangerous and cost American jobs.

The truck will carry a monitoring device. The move complies with a provision of the 1994 North American Free Trade Agreement.

The company was also the first approved under the 2007 pilot program before President Barack Obama’s administration canceled it [in 2009]. Mexico retaliated by placing tariffs on 99 agricultural products worth more than $2 billion annually.

A little over a year ago, I noted that Washington insiders didn’t expect the dispute to be resolved “any time soon”, but in the broader context, 14 months isn’t bad. So what does the program do? It includes a lot of measures to address the safety concerns raised by its opponents:

Supporters say especially strict safeguards have been implemented: Electronic devices will track the routes drivers take, how long they drive and how long they rest. Participating drivers must undergo national security and criminal background checks, and inspectors will administer oral English-proficiency exams.

Does this end the dispute? Not necessarily. Look up the Federal Motor Carrier Safety Administration’s announcement in the Federal Register and you’ll discover that this is a three-year pilot program, a fact not made clear by some press coverage. From the Federal Register (pdf):

The Federal Motor Carrier Safety Administration (FMCSA) announces its intent to proceed with the initiation of a United States-Mexico cross-border long-haul trucking pilot program to test and demonstrate the ability of Mexico-domiciled motor carriers to operate safely in the United States beyond the municipalities in the United States on the United States-Mexico international border or the commercial zones of such municipalities (border commercial zones)…

In a pilot program, DOT typically collects specific data for evaluating alternatives to the regulations or innovative approaches to safety while ensuring that the goals of the regulations are satisfied. A pilot program may not last more than 3 years, and the number of participants in a pilot program must be large enough to ensure statistically valid findings.

Will the pilot program have large effects on international trade? Both sides claim big numbers:

Todd Spencer, the executive vice president of the Independent Drivers Association, which represents small independent trucking businesses, said 100,000 trucking jobs will be lost. Proponents say it will spur economic growth as companies save millions by sending the goods door-to-door.

But I doubt we’ll see any such impacts soon. Tire Business reports:

So far two small Mexico-based motor carriers have been certified for the program. They are Transportes Olympic of Monterrey, with two vehicles, and Grupo Behr de Baja California S.A. de C.V. of Tijuana, with five vehicles.

However, the FMCSA is withholding Grupo Behr’s permit while reviewing objections raised by the Teamsters and others regarding Grupo Behr’s safety record. The Teamsters also question Transportes Olympic’s record on safety.

You can track the approvals online at the FMCSA’s website. That site says that Transportes Olympic has registered one vehicle and two drivers. It looks like the dispute will continue in some form, for the time being.

Creative protectionism: Argentina requires firm-level balanced trade

The Economist describes some very unusual trade policies implemented by Argentina:

Argentine manufacturers have been booming ever since the 2001 crash. Over most of that period, a cheap peso has ensured their competitiveness. But since 2005 inflation has been in double digits. As the trade surplus has dwindled, Cristina Fernández, the president, has beefed up her industrial policy. According to Global Trade Alert, a database of restrictions on international commerce, Argentina now imposes more trade limitations deemed “harmful” than any country save Russia…

On the import side, Argentina cannot raise tariffs on its own because it belongs to the Mercosur customs union. So it is resorting to informal tools. Its main method is “non-automatic licensing”, a tactic recognised by the World Trade Organisation that lets countries delay imports for 60 days.

Argentina has made no pretence of honouring that time period. In January it expanded the list of products requiring licences from 400 to 600. It was a limit on phone imports that led Research in Motion to hire Brightstar to make BlackBerrys in Argentina (tax incentives then led the firm to Tierra del Fuego). Other affected goods include toys, pharmaceutical ingredients, tyres, fabrics, leather and farm machinery. On September 15th Argentina blocked imports of books, and over 1m piled up at the borders. Imports of Harley-Davidson motorcycles are frozen until 2012.

For firms that refuse to (or cannot) move production to Argentina, the government offers another option: deals to export goods worth at least as much as a company’s imports. In January customs officials stopped letting Nordenwagen import Porsches. Its cars languished in port for three months before the firm succumbed to a deal. Since its owners also possess Pulenta Estate, a vineyard, they agreed to launch a new line of mass-market wines for export, erasing the family’s trade deficit. They are also considering canning fruits. “It’s not the same margins as fine wines, but it takes time and investment. We’re trying to make it profitable,” says Eduardo Pulenta, the company’s export manager. “We’ll keep working to import cars. That’s what we know how to do.”


The policy was adopted in March. Here’s the Global Trade Alert entry from July, which relies on Spanish-language news stories. Here’s an English-language story from April. Thanks to Bernardo Astarloa, who passed along this Spanish-language story in Argentina’s La Nación. It details the products being exported by various car manufacturers in exchange for importing autos into Argentina:

  • Porsche: wine and olive oil
  • Hyundai: peanuts and soy biofuels
  • BMW: rice and leather upholstery
  • Alfa Romero: biofuel
  • Kia: auto parts, plastics, refrigerators
  • Mitsubishi: mineral water, pet food, peanuts
  • Nissan: biofuels and soy

An Argentinian commenter at the Economist post argues that these policies don’t add up to much, but their novelty is certainly notable!

How PTAs may segment regulatory systems

Back in April, I wrote:

One such danger is that FTAs might be a means for the US or EU to try to lock in first-mover advantages in shaping regulatory standards (such as technical barriers to trade). While preferential tariffs can be undone relatively easy by further tariff cuts, plurilateral agreements that promulgate the adoption of a larger economy’s preferred technical standard might serve to determine which standard is later adopted multilaterally. A first mover might gain at the expense of others if its preferred standard is worse for world welfare.

A new WTO report tackles this very issue:

Director-General Pascal Lamy, in launching the World Trade Report 2011 on 20 July 2011, warned that preferential trade agreements (PTAs) “may lock in their members to a particular regulatory regime reducing the potential for trade to prosper with countries outside the arrangement”. “The new challenge posed by deep PTAs to the multilateral trading system is one of market segmentation because regulatory systems, which can become divergent, have now more importance on trade flows than tariffs,” he added…

In fact PTAs of today are less about tariff preferences and more about regulatory measures that were once considered the domain of national rather than international economic policy.  This change is occurring partly because of changes in the way production is being organized internationally with the rise of global production networks.  To prosper, these production networks require an enabling regulatory environment that provides stronger investor protection, better infrastructural services, freedom of movement of corporate personnel, protection to intellectual property rights, and facilitation of trade.   The demand for governance in these policy areas is being met by the supply of deep PTAs…

Another idea would be that we should not ignore the potential difficulties that deep PTAs can give rise to on the regulatory side.  One can observe in the sprawl of agreements what can only be called “families” of PTAs, with each family adopting a particular approach to important policy areas such as technical barriers to trade or competition policy.  The peril here is that PTAs may lock-in their members to a particular regulatory regime reducing the potential for trade to prosper with countries outside the arrangement.

In a nutshell, the new challenge posed by deep PTAs to the multilateral trading system is one of market segmentation because regulatory systems, which can become divergent, have now more importance on trade flows than tariffs. This is not a statement about the legitimacy of these regulatory systems. It is a factual assessment of their impact on economies of scale, which is what the WTO should care about.

The report, titled “The WTO and preferential trade agreements: From co-existence to coherence”, is available online.

Revenue-neutral tariff cuts are tricky business

Sallie James:

[B]ecause implementing the FTAs (which will lower tariff revenue) and paying for the billion-dollar-plus TAA extension “requires” offsets, the draft language specifies in Sec. 601 that revenue should be raised by increasing customs user fees.

Scott Lincicome:

But “customs fees” are simply hidden taxes on import consumers.  A quick review of the US Customs website on “customs users fees” makes this clear.  They’re paid (mainly) by commercial transporters bringing goods (imports) into the United States, thus raising the costs of importation…

[A]ssuming that the agreement would raise US customs users fees (or implement new ones) in order to generate revenue for the federal government, it would probably violate GATT Article VIII, which governs WTO Members’ imposition of “Fees and Formalities connected with Importation and Exportation” (in other words, customs fees).  The key provision of Article VIII reads:

1.(a) All fees and charges of whatever character (other than import and export duties and other than taxes within the purview of Article III) imposed by contracting parties on or in connection with importation or exportation shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes.

US cotton subsidies causing turmoil

The US House has passed legislation that threatens its WTO-approved agreement with Brazil on cotton subsidies:

Questions are being raised about the future of the hard-won US-Brazil cotton agreement, thanks to last week’s vote in the US House of Representatives to end payments to the Brazil Cotton Institute. In a 223-197 vote, members passed an amendment to the Agricultural Appropriations bill for fiscal year 2012 that, if enacted into law, would violate the terms of the 2010 WTO US-Upland Cotton agreement between the two countries (see Bridges Weekly, 8 June 2011).

The US$147.3 million annual payments were part of an agreement between the two countries that meant to hold Brazil back from imposing US$830 million in WTO-authorised countermeasures. The agreement came after a protracted WTO dispute that deemed various aspects of the US cotton subsidy regime as illegal.

The bill’s sponsor would like to see cuts to US agricultural subsidies, but those aren’t in the legislation:

“I’m pleased that a bipartisan group of Members agreed with me that supporting Brazil’s cotton industry with taxpayer dollars is wasteful and unnecessary. But the bill as a whole still irresponsibly overlooks other commonsense cuts such as the billions of dollars in outdated farm subsidies going to very few large agribusinesses. We cannot afford to continue spending carelessly and cutting recklessly, especially in this tough economy.”

In ongoing discussions about a mini-package for the WTO’s December ministerial meeting, the US ambassador to the WTO is pointing fingers at China for its cotton subsidies.