The General Preferential Tariff

What do the Changes mean for Canada and Canadians?

The Canadian Government announced its strategy to accommodate the evolving nature of the global market in the 2013 federal budget. By making substantial changes to the General Preferential Tariff (GPT) for the first time since 1974, to take effect January 1, 2015, the government hopes to see an additional $1 billion in revenue over the next several years.

Initially, the GPT was a policy developed in the interest of foreign aid, introduced as a means to subsidize the growth and diversification of the economies of developing countries. The GPT extended a three percent tariff break on imports from developing countries, in contrast to what is applied to imports from major industrialized countries. The countries that have been upgraded on the Canadian government’s list will likely be subject to the Most-Favoured-Nation Tariff (MFN) moving forward.

The government hopes the changes to the GPT will help to diminish the deficit faster at the domestic level, while on the international level, enabling Canada to remain competitive with other tariff granting nations, minimizing the amount of currency manipulations being experienced, and affording better leverage in free trade negotiations.

A total of over 1000 items from 72 countries will now be subject to a three percent tariff increase, on goods such as appliances, electronics and clothing. The criteria established by the Canadian Government when making its decision to update the list of countries that enjoy the benefits of the GPT were based on a country’s ability to maintain world exports at a rate of one percent or greater over two consecutive years, as well as a country’s classification as upper-middle or high income economies, as rated by the World Bank.

Many countries no longer require such economic subsidies, particularly the BRIC nations (Brazil, Russia, India and China), South Korea and Japan. Other nations such as Jamaica, the Dominican Republic, Cuba, Venezuela and Kazakhstan will no longer be receiving the subsidy, but the basis of the decision seems to be more in the interest of political leverage, as these countries have not yet experienced the levels of growth that the BRIC countries have enjoyed. The Canadian government expects that many companies that currently operate in countries no longer receiving the GPT will respond to these changes by sourcing their products from countries that still enjoy the preferential tariff rate.

Although the Canadian government is forecasting an additional $1 billion in revenue over the next several years from the change, the projection stems from an estimated three percent increase to the average cost of imported products, at $330 million per year over the course of three years. The changes were motivated by a drive to remove the responsibility for subsidizing growing economies from the backs of Canadian taxpayers, yet Canadian consumers will likely bear most of the cost. Some, however, have disputed this claim, stating that the hardships on consumers will be negligible as the change only impacts a small percentage of import goods.

The tariff increase has been cause for concern for Canadians and interest groups alike. Under Finance Minister Flaherty’s own admission, minimal costing analysis has taken place with regards to this policy change. In an attempt to downplay concerns, the government has announced cuts to tariffs on sporting goods and baby clothes, which can range anywhere from 2.5-20 percent duty. This move will generate $76 million in annual consumer savings, in hopes of satisfying families and retailers. By contrast, tariff increases will be seen on imported assembled bicycles to protect the Canadian bicycle industry, which is predominantly located in Quebec.

Critics have touted that the 2013 federal budget reeks of hypocrisy, with the Liberals calling this policy move “a new tax on the middle class,” and the NDP balking at the Conservatives for criticizing tax increases while the government increases the base price of goods.

This first step, or “test case” as Minister Flaherty calls it, is a period where the government aims to gather information and hopes that retailers will pass on savings to consumers, as well as attempting to align Canadian and U.S. prices and limit the gap between these two pricing systems. Many early speculations expect that this move will yield more cross border consumption, especially considering the strength of the Canadian dollar.

It will be interesting to see how the “test case” will go with sports equipment and baby clothes. Hockey equipment alone enjoys a $200 million annual wholesale market in Canada. Many parents and children, and Canadians in general, do not have the opportunity to participate in Canada’s favourite national pastime because of the costs associated with joining a team and being safely equipped for play. Statistically, participation in hockey has experienced a relatively slow growth rate in Canada and many believe it is due to the costs associated with playing the sport.

By using athletic equipment as a “test case,” the Canadian government should be able to measure several indicators to deduce the success or failure of this most recent policy effort to strengthen the Canadian economy on the global market. If retailers do, in fact, pass on savings to the consumer it is likely that enrolment in hockey nationwide will increase. If retailers do not pass on the savings to the consumer it is likely that current trends will continue; hockey will remain a slow growth sport and consumers everywhere will struggle even more to keep up with rising commodity prices.

Of those voicing their concerns, the Retail Council of Canada has raised alarm bells about the negative impact on consumers. The best example is the increased hardship that will be faced by those on a budget. The concern is not that individuals will no longer have the disposable income to purchase clothing, appliances, and electronics, but rather the impact these tariffs will have on food prices, on items like canned tuna, which serve as a primary source of protein for many consumers on a budget. Increases to food prices will have the largest impact on consumers from a variety of socio-economic classes.

The Canadian government is of the belief that raising tariffs is the correct move to level out the playing field on the global market, although these same ends could have been achieved by lowering tariffs across the board. The lack of costing done, admittedly, by the Canadian government will not bode well for retailers, especially those who operate in proximity to the U.S. border, nor for consumers who will be forced to pay more for common goods.

In the end, the government will benefit from increased revenue helping to shave down the deficit, while providing Canada a strategic advantage in future trade negations with many nations. There is a strong push by the Canadian government to establish as many Foreign Investment Promotion and Protection Agreements as possible, with as many nations as possible, toward the goal of establishing and promoting free trade zones.

By making this first move of updating its list of developed and developing nations while increasing tariffs accordingly, Canada has accumulated greater leverage when crafting bi- and multi-lateral economic agreements. The changes to the GPT foster a more balanced global playing field, while attempting to ensure limited currency manipulations. Unfortunately, the reform comes at a domestic cost, placing the onus on Canadian consumers.

May 29, 2020, 3:08 AM EDT