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SMEs See Need for Reform of Rules of Origin

Small and medium-sized firms often find it is cheaper and easier to pay customs duties, instead of complying with the Rules of Origin (ROO) requirements could give them preferential tariffs under trade agreements. A new report, “Making Free Trade Deals Work for Small Business: A Proposal for Reform of Rules of Origin” was released that outlines a proposal using “presumption of origin” to improve SME access to the FTA preferential tariffs. Dan Ciuriak, the author, says this could help the SMEs performance, due in part to Canada’s existing free trade agreements (FTAs).

Ciuriak says, “ROOs are a standard and necessary component of FTAs, they are the gatekeepers to the tariff preferences FTAs offer, but they impose costs on trading firms that choose to use this gate. By complying with these requirements, trading firms gain access to the preferential tariffs available under the FTA. If they don’t, firms may pay the full applicable tariff under Most Favored Nation (MFN) rules.”

Two Consequences to Not Complying with ROO

There are some consequences for doing it the easy way. It will first create a bias against small and medium firms who are competing for their share of the market in the FTA zone. This is because the cost of compliance will be distributed over smaller shipments for these firms. Secondly, it will deter some SMEs from trading in the international markets altogether. This will reduce the gains received from Canada’s FTA trades.

What’s the Solution?

One solution is the ROOs exemptions. Normally, rules are waived if the shipment has a face value of $1000 or less. A change could be made to base this value on the MFN duty payable on the particular shipment.

“The reforms proposed in the report involve only a small wording change to existing rules, rather than starting from scratch on new ones,” says Dan Ciuriak. “It would constitute a surgical strike that would measurably improve the functioning of NAFTA and the political prospects of agreements such as CETA and the TPP without materially compromising the enforcement of the FTA rules.” Major benefits include:

  • An increase in SME participation in international trade
  • Changing enforcement focus to more of a risk-based enforcement
  • Trade expansion via new firm entries in international trade
  • A more competitive and fairer framework for domestic competition involved in international trading
  • Increased financial gains from the FTAs

The majority of the traders in Canada are SMEs, which means they face more barriers in taking advantage of FTAs than other larger competitors. That is why it is essential that Canada remove the barriers to SMEs to ensure everyone can make the most of the new opportunities the trade agreements provide.

Ciuriak wraps up his argument with: “Canada should adopt this reform as part of its “template” for negotiating future FTAs, including as an eleventh-hour modification to the TPP to improve that deal’s outcomes for SMEs.”