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Source: ConnectAmericas ConnectAmericas

The ABC of international trade

Published: 16 Mar 2015 00:22:02 PST

What are the benefits or tariff barriers? Which countries have less exporting barriers or which economic blocs benefit specific products? These are all questions that exporting SMEs (small and medium enterprises) in Latin America and the Caribbean should ask before selling goods in other markets.

The international trade system is currently governed by the regulations stipulated in the 1947 General Agreement on Tariffs and Trade (GATT) and the 1995 agreements of the World Trade Organization (WTO). Exporters should take into account three main rules: first, the liberalization, transparency and reciprocity principles that establish the rights and obligations of all member countries; second, a series of exceptions to these rules, granting benefits to certain actors; and third, the system’s “fine print", establishing how regulations should be applied on a case by case basis.

Clauses to consider

Non-discrimination is the fundamental principle of the GATT/WTO system, which assures the same treatment for products from all participating territories. This principle has two specific expressions:

  • First, the “most favored nation clause" (MFN). Professor Amrita Narlikar from the University of Cambridge (England) explains that, “any concession granted by one party should be multilateralized to all other parties." Hence, for example, if a government decides to allow producers from a neighboring country to export a product without paying any tariffs, it must necessarily extend this benefit to producers from all GATT signatory countries.
  • Second, “the national treatment clause" whereby countries must grant equal treatment to foreigners as to one’s own nationals. While the MFN clause is geared towards producers seeking entry from one country to another, Professor Susana Czar de Zalduendo from the University of Bologna, explains that the national treatment clause “guarantees equal treatment (within borders) of foreign merchandise or companies to that accorded within one’s own nation. “For example, once export tariffs have been paid, foreign products cannot be subject to higher taxes or to stricter sanitary restrictions than accorded to local products.


Exceptions

Based on negotiations between countries, the GATT system has developed several exceptions to these general clauses throughout the years. Czar de Zalduendo explains the three main exceptions:

  • Certain regional integration schemes (free trade zones and customs unions) are exempt from the most favored nation clause with respect to States outside their own scheme. For example, a European Union (EU) member country could grant more tariff preferences to a product from a EU country than to one that is not a member of the bloc: hence, Italy could decide that wine imported from EU member countries do not have to pay import tariffs but those from other countries must do so, without violating the MFN clause.
  • Secondly, industrialized countries can grant certain additional advantages to developing countries without infringing the most favored nation clause. These preference systems are known as “generalized systems of preferences" and are only “one way" as Czar de Zalduendo explains, because “those least developed do not have to grant preferences to those more developed or industrialized."
  • Third, developing countries can execute trade agreements amongst themselves, mutually granting greater trade benefits than granted to the other WTO members.


Advantages for SMEs

What appears certain is that these exceptions can provide trade opportunities for small and medium companies in LAC that wish to export their products.

In the first place, exporters can benefit from tariff preferences from trading with countries that are included within the same integration scheme or from a trade agreement between developing countries. Consequently, for example, a Colombian producer seeking to sell shoes to Ecuador could do so paying less export rates than if these were to be sold to Italy.

The main economic integration schemes in Latin America are the following:

Secondly, Latin American and Caribbean exporters can use the different generalized systems of preferences (GSP) that include their countries. Czar de Zalduendo explains that “there are GSP programs granted by Canada, the United States, Japan and the European Union, generally to select areas or groups of countries, either because they are part of former colonies (such as the case with the European Union and the ACP countries – Africa, Caribbean, Pacific) or from regions in the area of influence of whomever is granting these preferences (such as the Caribbean and Central America with Canada and the United States)." Currently, the majority of countries in Latin America and the Caribbean are included in preference systems in the United States or the European Union.

Fine print

As a result of this set of rules, the product’s origin is key for determining applicable tariffs since these will vary depending on whether they come from a State subject to a GSP rule or not or if they come from a country included or not in an integration scheme. However, international trade has become complex and many times a product contains, for example, raw material from one country and added value from another. So, what is the true origin of this product?

This issue is regulated by the so called “rules of origin" (ROO), which as explained by a report from the Overseas Development Institute (ODI), constitute “the ‘fine print’ of the trade preference system and of the regional trade agreements." Although there is generalized agreement that the product’s place of origin is that where the “last substantial transformation" took place, the countries -independently- define how they apply these rules to the particular cases.

The ODI report sets a classical example from an African country: Lesotho “exports trousers made with Chinese material to the United States and obtains benefits within the framework of the African Growth and Opportunity Act since US rules of origin admit them as original products from Lesotho. However, Lesotho cannot export these same trousers so beneficially to Europe because the EU understands that their origin is China (and therefore are not eligible for the trade preferences granted to Lesotho)."

Therefore, producers have to evaluate two concerns upon deciding where to export: tariff preferences provided by the country in question and if the rules of origin of this country admit the product as originating from the place of production.

The article is sourced from ConnectAmericas at: http://connectamericas.com/content/abc-international-trade

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