How to boost Canadian competitiveness for very little money: Selectively eliminate tariffs.

Edited to add: Tariff calculator — see bottom of piece.

Short-version: There are a lot of import tariffs that generate almost no revenue for the government, but impose significant compliance costs on small business. Canada should eliminate them (by setting their MFN tariff rate to zero). I’m working on a more formal piece on this issue and would love your feedback.

Back in March 2016, I published a paper at Mowat advocating for the selective elimination of tariffs. (Paper is available here. I highly recommend it if you’re interested in the issue). In Budget 2016, the federal government followed the spirit of the advice, by eliminating a dozen tariffs. The 2016 argument for tariff elimination is even stronger now that CPTPP, CETA, USMCA and our trade deal with Korea have all been completed.

Free Trade Isn’t Free

There are significant compliance costs in bringing in a product tariff-free under a trade deal such as NAFTA. Importers who want to import tariff-free under NAFTA must deal with the paperwork burden of navigating a complex and often amended 557 page NAFTA Rules of Origin Regulations, obtain valid certificates of origin, meet the extensive record keeping requirement, and face post-entry verification risk. In my paper, I estimated these costs to be over $1 billion for NAFTA alone. Small businesses often don’t have the resources to deal with this complex regulatory environment so simply end up paying tariffs they’re not legally required to, just to avoid these headaches.

A Simple Solution

If the MFN tariff rate for a product is set to 0%, then an importer does not have to seek the protection of a trade-deal, they can simply import the product and face much lower (and less-expensive) regulatory hurdles.

There are many products that we import that we largely only import from countries that we have a trade deal with, so having an active tariff on the books raises little revenue (and what revenue it does raise is mostly from small businesses who pay it despite the trade agreements), but ties our companies up in a great deal of red tape. These tariffs are the vestigial organs of the Customs Tariff; they no longer serve any useful purpose.

Why “Selective” Tariff Elimination? Why not Eliminate All Tariffs?

Eliminating all tariffs might not be desirable, for a few reasons:

1. Some tariffs exist as a backbone for other policies, such as supply management; these tariffs are not wholly eliminated even in trade deals.
2. Some tariffs generate a great deal of revenue for the government. In 2017, the government raised $4 billion in revenue from tariffs. Even with CPTPP and CETA coming on board, this number is likely to stay above $3 billion per year, unless the government signs a trade deal with China (imports from China generate over half of all tariff revenue, keeping in mind that the tariff is paid by the Canadian importer). The federal government likely does not have billions of extra dollars to devote to tariff elimination.
3. Canada may want to keep some tariffs behind as a bargaining chip for future trade deals. Specifically, there are 12 countries that Canada has significant non-oil imports from (the tariff on oil is zero, so while we import a great deal from Saudi Arabia, the federal government only collected roughly $100,000 in tariffs from Saudi imports in 2017). These Big-12 countries are as follows: China, Taiwan,Brazil, India, Thailand, Argentina, Indonesia, Turkey, Bangladesh, Philippines, Cambodia and Dominican Republic.

How Much Would it Cost?

I will be posting a costing estimator shortly, so you can come up with your own set of tariffs to eliminate.

In 2017, Canada collected revenue from 1299 different HS-6 product classifications. These are our candidates for elimination.

If we eliminated all tariffs that both generate less than $1 million USD in revenue (using World Bank estimates, so everything is denominated in USD) and where the import share of the Big-12 is less than 50%, it would cost the government roughly $100 million USD, and eliminate over half of all active tariffs (665 of 1299).

Given how much the federal government is concerned about competitiveness, and how much our business community would like to eliminate pointless red tape, this feels like a no-brainer to me.

If This Is Such a No-Brainer, Why Hasn’t it Happened Already?

Jeremy De Mello asks a great question: If these tariffs are unnecessary, why haven’t they been eliminated already? A few reasons:

1. There hasn’t been a comprehensive tariff elimination in at least a decade (past tariff eliminations were based on themes, such as “manufacturing inputs”).
2. Some of these tariffs may have had a use prior to CETA and CPTPP, but no longer serve a useful purpose now.
3. Some of these tariffs act to protect domestic industries. (I’ll leave it to the reader to decide the validity of that reason). Most of those should fall into the large dollar amount category, but there’s likely a handful of tariffs that don’t generate much money, but do act as a barrier to entry. One way to isolate these would be to filter out any tariff that is over a certain percentage, say 8 or 10%. There’s surprisingly few of these higher percentage tariffs, but they probably should be filtered out.

Cost Your Own Tariff Cut

I’ve created a spreadsheet where you can cost out your own tariff cut. It’s available here on Google Sheets. I’d recommend downloading it and using it in Excel. You can get Google Sheets to do the calculations for you, but it takes forever because it’s a big sheet.

There’s only two editable fields in the sheet:

E2: Threshold for excluding imports that generate significant tax revenue. If you set this to $1,000,000, it means to exempt (that is, don’t cut) tariff items that generated more than $1 million in tax revenue in 2017. The higher you set this threshold, the more tariff items you’ll cut.

E3: Threshold for excluding imports from the Big-12 countries. If you set this to 50%, it means to exempt (that is, don’t cut) tariff items where the collective import share from the Big-12 countries for a specific tariff item exceeds 50% of all imports of that item to Canada in 2017. The higher you set this threshold, the more tariff items you’ll cut. (Reminder: Big 12 countries are China, Taiwan, Brazil, India, Thailand, Argentina, Indonesia, Turkey, Bangladesh, Phillipines, Cambodia, Dominican Republic).

E6:E7: Main results.

G2:O20. Breakdown of results, including revenue generated (or cut) for various types of goods: Raw Materials, Intermediate Goods, Consumer Goods and Capital Goods, based on UNCTAD SoP classification. Unfortunately I only had the classification for 97% or so of goods, so the numbers don’t add up to 100%, but they’re close. I’ll try to fix this.

From Row 22 down, it is the result for every single HS6 code. So if you wanted to know the tariff revenue generated by 09.02.10 Green tea (not fermented), you’d look up the row associated with 90210, which has a detailed breakdown and also indicates how that tariff item would be affected by your tariff cut plan.

I’m quite certain this sheet isn’t completely free of bugs, so please let me know if you see anything that looks strange.