Consultation on the Renewal of Canada’s Tariff Preference Programs for Developing Countries

Issue

Canada maintains non-reciprocal tariff preference programs for imports from developing countries, some of which are set to expire at the end of 2024.  In anticipation of the potential renewal of the programs, we are seeking views on potential adjustments to the programs.

Overview of Canada's Tariff Preference Programs for Developing Countries

In the 1970s, the United Nations (UN) recommended that developed countries grant non-reciprocal tariff preferences to imports from developing countries under a Generalized System of Preferences (GSP), in order to facilitate and promote export-driven industrialization and development. Since then, Canada as well as many other developed economies (including the EU, U.S., UK and Japan) have been providing more liberalized tariff treatment over standard Most-Favoured Nation (MFN) tariffs to developing countries. GSP programs vary considerably among developed countries with respect to the scope and extent of the liberalized tariff treatment offered, the beneficiary countries covered, and graduation criteria from these programs.

Canada extends non-reciprocal preferential market access to goods imported from developing and Least Developed Countries (LDCs) through three programs legislated under Canada's Customs Tariff. Each program covers different products that may be imported into Canada under tariff preferences, as well as different criteria for country eligibility. These programs are:

• General Preferential Tariff (GPT): provides tariff reductions or duty-free treatment for the majority of imports from developing countries;
• Least Developed Country Tariff (LDCT): provides deeper tariff benefits (i.e. duty-free treatment) over a broader array of goods for least developed countries (LDCs); and
• Commonwealth Caribbean Country Tariff (CCCT):  tailored to Commonwealth countries in the Caribbean region, it provides duty-free coverage for an array of goods similar to GPT.

General Preferential Tariff (GPT) Program

Established in 1974, and renewed every ten years since, the GPT program currently grants tariff preferences to 106 developing countries, including 49 LDCs. Tariff preferences (i.e., reduced tariffs or duty-free treatment) cover all goods with the exception of apparel and textile products, footwear, certain sensitive agricultural products (among them supply-managed goods), and certain steel products. Based on 2019-2021 average figures, Canada imported $332 million annually under GPT preferences, in the absence of which these imports would have been subject to an average MFN tariff of 5 percent.

Since the program's last renewal, which took effect in 2015, beneficiary countries may be graduated out of the GPT program once they meet either one of two development-based criteria:

• Two consecutive years of classification as an upper-middle or high income economy by the World Bank; or
• A minimum global exports share of 1 percent for two consecutive years according to World Trade Organization (WTO) data.

Under the Customs Tariff, the program is scheduled to sunset on December 31, 2024, unless it is renewed beforehand.

Least Developed Country Tariff (LDCT) Program

In place since 1983, and also renewed every ten years since, the LDCT program currently applies to 49 LDCs and provides the most extensive coverage of Canada's programs – i.e., duty-free treatment for all imports except over-quota supply-managed goods. For 2019-2021, Canada imported $2.9 billion under LDCT preferences, with apparel accounting for $2.4 billion and representing about 83 percent of LDCT imports. In the absence of LDCT preferences, these imports would have been subject to an average tariff of 17 percent.

GPT membership is a pre-condition for LDCT eligibility and Canada relies on the UN List of Least Developed Countries to determine and update eligibility for the LDCT program. However, UN graduation does not result in automatic graduation out of the LDCT program. Several countries currently benefitting from LDCT duty-free treatment have prospective UN graduations:

• Bhutan in 2023;
• Angola, Sao Tome and Principe, and the Solomon Islands in 2024; and
• Bangladesh, Laos, and Nepal in 2026.

Like the GPT program, the current LDCT program is scheduled to legislatively sunset on December 31, 2024, unless it is renewed beforehand.

Commonwealth Caribbean Country Tariff (CCCT) Program

The CCCT is also legislated under the Customs Tariff but does not expire. Established in 1986, this program provides tariff relief to 18 Commonwealth countries and territories in the Caribbean region. The CCCT offers duty-free treatment for a range of products similar to the GPT's coverage.  Given that the program is separate from the GSP regime, it does require a waiver from Canada's MFN obligations at the WTO; the current waiver expires at the end of December 2023. The CCCT program has not undergone a substantial review since it was established. For 2019-2021, Canada imported $24 million under CCCT preferences, which would have otherwise been subject to an average MFN tariff of 5 percent.

Exploring Program Changes Ahead of 2025 Renewal

Since legislative authority for two of the tariff preference programs, the GPT and the LDCT, are scheduled to sunset on December 31, 2024, the Government is preparing for the potential renewal of these programs. 

Program renewal presents an opportunity to evaluate how these programs have been functioning, explore improvements, and ensure their alignment with Canada's broader trade and development policy objectives. As part of this comprehensive review, Canada is consulting with stakeholders on four main proposals related to these trade preference programs. The information below is intended to seek views from interested parties, including Canadian businesses, NGOs, civil society groups, as well as other interested Canadians on potential changes to these programs that would:

1. create a new GPT+ program extending benefits based on labour and environmental criteria;
2. update GPT eligibility and introduce a five-year review process;
3. add a transitional period for countries graduating out of the LDCT program; and,
4. simplify technical requirements, including for the LDCT rules of origin, to improve access to Canada's programs.

Proposal 1: Creating New GPT+ Program

This proposal would look to expand product coverage under the GPT program (i.e. referred to as GPT+), whereby developing countries that meet and progressively improve their adherence to international labour rights and environmental standards would be eligible for additional tariff benefits beyond what is provided through the GPT program. The goal is closer alignment of Canada's non-reciprocal tariff programs with broader trade and development policy objectives, including those pursued under Canada's free trade agreements (FTAs).

Currently, eligibility for Canada's tariff preference programs is based on economic development factors and does not consider the broader circumstances under which goods are produced in developing countries. Meanwhile Canada has been advancing more ambitious outcomes to promote inclusive trade with its trading partners under its FTAs, including with rigorous and enforceable FTA obligations on labour and environmental standards complementing preferential market access.

Potential change: Expand GPT preferences under a new GPT+ category for developing countries that meet international standards on labour rights and environmental protection. This would take the form of offering tariff benefits to additional products that are currently not subject to the GPT, such as apparel, footwear and ships, which otherwise face MFN tariffs of up to 25 percent.

Monitoring and enforcement of the GPT+ program would allow for withdrawal or reinstatement of GPT+ benefits to countries with the support of key departments, and on the basis of evidence of breach or improvement in meeting international labour and/or environmental standards. Depending on the circumstances, withdrawal of GPT+ benefits may be effective immediately or subject to a transition period.

Considerations:  Given the Government's broader inclusive trade agenda, the establishment of a new GPT+ program could better align Canada's tariff preference programs with labour rights and environmental policies, and create a new impetus for constructive engagement with developing countries on inclusive trade.

In addition, GPT+ could also bring Canada into closer alignment with progressive terms implemented under other economies' GSP regimes, notably the European Union and the United States, by extending benefits on the basis of alignment with labour and environment standards.  

Aside from feedback on the changes proposed above, we would welcome feedback on the following:

• Should the GPT+ program apply to other currently excluded GPT products beyond apparel (e.g., to include footwear, all agricultural goods except over-quota supply-managed products, and steel products)?
• To what extent should tariff preferences be reduced under GPT+ (e.g., what level of tariff reduction compared to applicable MFN rates)

Proposal 2: GPT Country Eligibility Update and Five-Year Review Mechanism

This proposal would update country eligibility under the GPT program, including the implementation of a formal five-year review mechanism to manage country eligibility transparently and consistently, in order to ensure that the program remains targeted to benefit countries with appropriate levels of economic development. This review would apply Canada's existing GPT criteria to update country eligibility through either graduation or re-instatement, as necessary.

While Canada updated GPT country eligibility ahead of the last program renewal in 2015, there is no formal process in place to graduate and re-instate countries based on changes to their economic circumstances and levels of development. This increases the risk that GPT coverage, if not regularly re-assessed, may no longer match countries' economic and development needs over time.

Potential change: Introduce a formal and regular GPT review mechanism to update beneficiary countries. Every five years, existing beneficiaries would be evaluated against Canada's existing GPT graduation criteria (i.e., two consecutive years of classification as an upper-middle or high income economy, or a minimum share of global exports of 1 percent for two consecutive years), and if meeting these thresholds, a one-year transition period would apply before moving countries out of the program. Developing countries could also be re-instated upon request and without a transition period, provided they meet the GPT criteria.

For this review, the following country graduations from the GPT program are anticipated based on the above-referenced criteria:

• Armenia, Belize, British Virgin Islands, Fiji, Georgia, Guatemala, Guyana, Iraq, Marshall Islands, Nauru, Paraguay, Samoa, Tonga, Turkmenistan, Vietnam

Considerations: Given the uncertain global context where the economic and development status of countries may be subject to unforeseen changes, a five-year GPT review would ensure that tariff benefits are aligned to beneficiaries with appropriate levels of development, while minimizing risks of changing beneficiaries' status based on short-term circumstances.

Proposal 3: Introducing a Transition Period when Graduating Countries out of the LDCT Program

This proposal would establish a formal transition mechanism for countries that are set to graduate from the LDCT program based on their status according to the UN List of LDCs. A transition period would enhance the transparency of the program, helping importers and beneficiary countries prepare for the removal of LDCT preferences, as well as minimizing disruptions to Canadian supply chains reliant on LDCT duty-free treatment, especially in the apparel sector. 

Canada determines LDCT beneficiary countries by relying on the UN List of LDCs. Currently, there is no formal mechanism or transition period to graduate countries out of the LDCT program when they have graduated from the UN List. Since Canadian importers rely on LDCT tariff preferences to make decisions on where to source their imports, this means that updates to the UN List can create uncertainty for supply chains. As noted above, several LDCs have prospective UN graduations in the coming years, with Bangladesh targeted for 2026 and accounting for 43 percent of LDCT imports, mainly in apparel goods. 

Potential change: Establish a graduation mechanism whereby UN graduation would automatically trigger a three-year transition period out of the LDCT program.

Considerations: A fixed and reasonable transition period of three years would provide Canadian importers and beneficiary countries predictability and valuable lead-time to make sourcing adjustments in order to minimize supply chain disruptions. The mitigation of impacts on Canadian businesses and on beneficiary countries due to the loss of LDCT preferences can be mitigated by the introduction of the new GPT+ benefits.   In conjunction with potential new GPT+ benefits, the transition period could create a clear timeframe for eligible LDCT graduates to maintain a certain level of tariff benefits.

A formal transition period is consistent with the GSP policy of the EU, which provides an additional three years of tariff preferences for LDCs following their UN graduation.

Proposal 4: Technical Simplifications and Improvements to Increase Access to Programs

This proposal would involve technical changes to simplify and liberalize the programs' requirements. These include simplification of the LDCT's rules of origin for apparel goods to increase the program's uptake and allowing a broader array of documentation to ease the administrative burden for importers seeking to benefit from tariff preferences across all three programs.

Certain technical requirements under the GPT, LDCT, and CCCT programs may create an undue burden for businesses seeking to access tariff benefits, thereby potentially reducing program uptake. Under the LDCT, the rules of origin for apparel require cutting and assembly in the LDC beneficiary, with non-originating yarns and fabrics permitted only if a minimum 25 percent of the value of the garment is added in the LDC or Canada. The yarn and fabric restrictions, along with the value-added threshold, could create difficulties for Canadian importers and their LDC-based producers in demonstrating compliance due to limited first-hand information regarding the production process.

Documentation requirement under all three tariff preference programs can also be looked at in order to maximize programs' usage. Under the GPT, LDCT and CCCT, goods must be shipped directly from the beneficiary country to Canada under a specific type of shipping document, known as a through bill of lading. This requirement may create compliance issues for importers who regularly rely on other types of documents as part of their transportation activities, such as a bill of lading, house way bill, or forwarders cargo receipt.

Potential changes: Eliminate the non-originating yarn and fabric restrictions, along with the value-added threshold, from the LDCT program, to be replaced with a simple cutting and assembly requirement.  In addition, expand the types of documents accepted to prove that goods are directly shipped from a beneficiary country under all three programs.

Considerations: Simplification of the LDCT rules of origin to a simple cutting and assembly requirement for apparel, without additional conditions, reflects production realities in LDCs that generally do not manufacture the yarns and fabric themselves. This approach, adopted by the EU and Japan in their LDC programs over the past decade, has proven effective in facilitating LDC access to tariff preferences and significantly increased program utilization and performance. This would also streamline compliance for origin verification process for imports of apparel. The liberalization of direct shipment documentation requirements could allow for other supporting documents that contain adequate information in case of CBSA verifications. Liberalization would make it easier for both importers and the CBSA to ensure compliance with Canada's non-reciprocal tariff preference programs.

Conclusion

As part of program renewal, Canada's comprehensive review will evaluate program performance, consider potential improvements and new elements, and help ensure that programs effectively contribute to Canada's trade and development goals. In this regard, the Government welcomes your views and feedback on the proposed plans presented above, as well as any other improvements that may help to increase program function and uptake. The comments received will help inform the Government's legislative proposals to Parliament for the renewal of these programs and we will seek to notify consequential program changes well before they would come into force, on January 1, 2025.