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What to know about shifting global trade landscape

While governments are counting on exports for growth, they are at the same time restricting imports. This requires businesses to plan very carefully.

While everyone agrees on the importance of free trade to boost the global economy, the reality shows a different picture. According to data of the World Trade Organization (WTO) the G-20 countries adopted 1,244 trade-restricting measures since October 2008, but only 282 have been removed in the same period.

During the most recent observation period from mid-May to mid-October 2014, 93 new measures have been adopted that affect around 0.8% of the value of G-20 merchandise imports and 0.6% of the value of world merchandise imports.

Consequently, while governments are counting on exports for growth, they are at the same time restricting imports. This requires businesses to plan very carefully.

Important advances …

On the positive side, it should be mentioned that countries are negotiating measures to facilitate trade. G-20 economies applied 79 trade-liberalizing measures between May and October 2014. In terms of trade coverage, import-liberalizing measures account for 2.6% of the value of G-20 merchandise imports and 2% of the value of world merchandise imports. This amounts to close to US$370 billion — almost three times the trade value of the new trade-restrictive measures.

In late 2014, the US and India resolved an important impasse over the implementation of the WTO Trade Facilitation Agreement (TFA) reached in Bali in December 2013, paving the way for full implementation of the TFA, which will enter into force once two-thirds of members have completed their domestic ratification process.

The OECD Trade Facilitation Indicators estimate that comprehensive implementation of all measures contained in the agreement would reduce total trade costs by 10% in advanced economies and by 13% to 15.5% in developing countries.

In addition, the number of free trade agreements (FTAs) that are negotiated and signed steadily increases. The WTO currently reports 604 active and pending reciprocal regional trade agreements among its members.

This number does not include unilateral preference programs, i.e., trade preferences granted to products imported from identified countries without reciprocal benefit, such as the Generalized System of Preferences (GSP) in the EU and the US, which provides duty-free treatment to many products from developing nations.

Just a few examples of important recently signed or effective agreements are the FTA between South Korea and Australia (entered into force December 2014), between Canada and South Korea (effective January 2015) or the rules of the Gulf Cooperation Council (GCC) Customs Union (effective January 2015). Negotiations are progressing on two very significant FTAs, the Trans-Pacific Partnership (a 12-country agreement) and the Transatlantic Trade and Investment Partnership (between the EU and the US). The Trans-Pacific Partnership could well be concluded this year.

… but it’s not all good news

Despite the growing number of FTAs, in many cases, businesses are not actually obtaining the potential benefits offered by FTAs because they cannot or do not meet the qualifying conditions. More generally, consistent with the protectionist environment still present in the global economy, many countries strictly enforce the FTA conditions, causing businesses that cannot substantiate FTA claims to pay import duties at the general rate.

Where countries are not bound by FTAs, import duties are still a common and often-used means to steer trade and production development.

Although customs duty rates are generally reducing, these taxes still play a very significant role in meeting countries’ budgetary needs. In many cases, duty rates are high and duties form part of the cost base of affected goods, because duties charged at one stage in the supply chain are not offset against taxes due at later stages (unlike VAT/GST).

In constant search for revenue, countries have started to increasingly focus on the customs tax base. There are attempts to increase the base, like eliminating the first-sale concept and tightening the definition of dutiable royalties. This is reflecting a global trend and the result could be that royalties and service fees will have to be added to the value of imported goods to properly reflect their value, thus enlarging the customs tax base.

Also on the more practical side, many countries are making changes to their customs legislation that reflect a number of these trends.

In the EU, for example, the legislation that governs customs activities is currently being rewritten as the Union Customs Code (UCC). This new code is due to come into force in May 2016. The UCC eliminates the earlier sale rule and tightens the definitions of royalties, which directly impact the tax bases. At the same time, it will entail profound changes to some customs regimes and controls that should facilitate trade, such as:

1. The introduction of Self-Assessment and Centralised Clearance

2. Mandatory guarantees for special procedures and temporary storage

3. The ability to move goods under temporary storage rather than national transit or New Computerised Transit System (NCTS)

4. All communications between customs authorities and economic operators must be electronic

This article is included in EY´s Indirect tax in 2015.

CONTACT

Gijsbert Bulk

Global Director of Indirect Tax

+31 88 40 71175

gijsbert.bulk@nl.ey.com

Claudio Fischer

+41 58 286 3433

claudio.fischer@ch.ey.com

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