Month: October 2018

Putting things together in Australia: Base rate structure and CPTPP phasing-out schedules.


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So far, we have described separately Australia’s tariff commitment in the CPTPP and its base rate structure of customs duties. Now, it is time to intertwine these two important elements of any FTA.

The following chart summarizes Australia’s strategy of trade liberalization in the CPTPP by combining its 8 staging categories negotiated and 7 base rates applied. 

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There are, at least, four aspects that any contracting Party of an FTA must assess when negotiating any market access chapter in the realms of eliminating customs duties.

  1. The maximum number of years that any contracting Party should be allowed to phase out its base rate structure of customs duties.
  2. The base rate of customs duty at which any Party must initiate the phasing out schedule.
  3. The shape of the phasing out schedule that any Party should adopt during the transitional period.
  4. The existence of exclusions regarding the elimination of customs duties commitments, if any. If so, the contracting Parties must minimize the number of products that are to be excluded and seek mechanisms for granting an acceptable market access of those products.

Bearing these 4 analytical concepts in mind, how can we grade Australia’s commitments to trade liberalization within the CPTPP?

ANSWER: OUTSTANDING!

Some comments on Australia’s commitments of tariff elimination

  • It will take Australia only 4 years to liberalize 99.87% of all tariff lines!
  • As it has been said before, the new trade liberalization at Entry Into Force (EIF) carried out by Australia within CPTPP covers 2,826 tariff lines (45.68% of total). However, special attention must be paid to the EIF liberalization of 79 tariff lines which display a 10% tariff, the highest tariff in place nowadays in Australia.
  • Australia’s already low base rate will be reduced even further by initial tariff cuts in 337 tariff lines covered by staging categories AU3-A (from 5% to 2%, and 3-year linear elimination), AU3-B (from 10% to 5% and 3-year bullet/grace elimination) and AU4-A (from 10% to 5% and 4-year bullet/grace elimination). These are very important early crop concessions that Australia made to all CPTTP partners.
  • For 20 tariff lines, Australia used a 4-year linear phasing-out schedule (namely, B4 staging category), which grants more tariff-protection in terms of years but less protection under the shape of the phasing-out curve during the transitional period when comparing with a 3-year bullet/grace period applied only in 2 tariff lines (namely, AU3-C staging category) measured both by using the same initial base rate of 5%.
  • The Australian staging category which granted the greatest tariff-protection during the 4-year transitional phasing out period is AU4-B applied in 54 tariff lines (0.86% of total). But what does it mean AU4-B? It is a phasing-out schedule negotiated by Australia in which the base rate remains at its original level (5%) for 3 years and after year 4 and the subsequent years the customs duties will be eliminated to become a duty-free product/tariff line.
  • Again, the most protected staging category in Australia is AU-R1 applied in 8 tariff lines of second-hand vehicles. These 8 tariff lines will not be fully liberalized at the end of the 4-year transitional period. However, Australia granted some trade liberalization by eliminating the ad valorem component of the MFN customs duty (the 5% part of the compound base rate).
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Understanding Australia’s base rate structure.


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According to WTO tariff profiles, in 2017, the simple average MFN applied tariff for all goods in Australia was 2.5% weighted by 1.2% for agricultural products and 2.7% for non-agricultural products. That makes Australia one of the most-open economies within the CPTTP bloc and also in the world.  One may argue if Australia is such an open economy why bother to negotiate a Free Trade Agreement (FTA). This type of argumentation lacks many important angles such as the economic comprehensiveness of a modern FTA such as the CPTPP. However, even if one doesn’t care about many relevant topics covered by the TPP11 and we only focus on tariff liberalization as the most important element of an FTA, the short-sighted critics will be wrong anyway! Why?

Some empirical studies have made clear the existence of a long-run relationship between tariff liberalization and trade growth, but this substantial and significant association has been gradually losing ground, because of the reduced level of tariffs, on average, over recent decades[1]. This may suggest that there is little room left for tariff liberalization to contribute to welfare gains through trade and income growth, except perhaps for some developing countries that continue to maintain high tariff levels. However, despite of this, evidence exists that when considering a more complex and realistic world-production setting with production linkages, supply chains and multiple sector models, the removal of even small tariffs could deliver significant welfare gains[2].

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These are some basic features of Australia’s base-rate structure

  • Australia displays seven different types of base-rate duties: MFN duty-free (0%/free), 3 different levels of ad valorem (4%, 5%, and 10%), 1 specific (AD$1.220/kg), 1 mixed (min {5%, AD$0.45/kg}), and 1 compound (5% + AD$12,000).
  • There are 6,187 tariff lines in Australia’s Harmonized Tariff Schedule (HTS) in 2012.
  • 2,941 tariff lines are already MFN duty free, namely, 47.54% of Australia’s tariff lines when negotiating the CPTPP. For purposes of this analysis, I have called this previous tariff liberalization effort of Australia, when referring to CPTPP tariff commitments as the consolidation of its current MFN duty-free status[3].
  • The highest Australian base rates are: 10% ad valorem applied in 228 tariff lines and the compound base rate applied in 8 tariff lines (5% + AD$12,000). Thus, one may state that these 236 tariff lines are the most tariff-protected products in Australia, nowadays.
  • The most frequently applied MFN tariff in Australia is 5% in 48.33% of total tariff lines (2,990 tariff lines). Again, pretty low for international standards but when taking into consideration distance costs and a very competitive international setting among firms this 5% tariff could mean the difference between exporting or not.
  • The base rates of customs duties established in the Tariff Schedule of Australia reflect the MFN rates of duty in effect on 1 January 2010 for all products.

[1] Nenci, S. (2009) “Tariff liberalization and the growth of world trade: a comparative historical analysis for the evaluation of the multilateral trading system”, University of Roma Tre, accessed 27 April 2017, http://www.stat.unipg.it/aissec2009/Documents/papers/88_Nenci.pdf

[2] Caliendo, L, R C Feenstra, J Romalis and A M Taylor (2017). “Theory and evidence for the last two decades of tariff reductions”, 26 April 2017, VOX CEPR’s Policy Portal, accessed 27 April 2017, http://voxeu.org/article/theory-and-evidence-last-two-decades-tariff-reductions

[3] https://fgsaenzfgs.blog/2018/10/24/knowing-more-about-the-cptpp-or-tpp11-australias-tariff-schedule-some-notes-and-annotations/

Getting ready for the CPTPP: Some basic facts about the trade-investment relation between Mexico and Australia.


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On 17 October 2018, Australia’s senate passed legislation on ratifying the CPTPP Agreement, making it the fourth country to approve the deal and raising its chances of taking effect early next year, given the fact that Mexico, Japan and Singapore have already ratified it and New Zealand and Vietnam are expected to follow suit in a matter of weeks, rounding out the six nations needed for the pact to take effect[1].

In the light of this remarkable event, I thought it would be appropriate to make a brief monograph of the trade-investment relation between Mexico and Australia with some of the most important facts from the Mexican point of view (and Australian sometimes).

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[1] https://asia.nikkei.com/Economy/Australia-approves-TPP-11-raises-chance-of-pact-taking-effect-in-early-2019

 

 

Persistencia inflacionaria, deterioro en las expectativas de inflación y el reto de la convergencia en 2018 – 2019 y ¿2020?


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En la entrada del Blog del 9 de marzo de este año[1], se presentó un análisis de las dificultades que enfrentaba el Banco de México para lograr que la inflación observada regresara a niveles por debajo del 4%, es decir, el límite superior de su meta inflacionaria de largo plazo de 3%. Con nueva información a septiembre de 2018, podemos comentar que la situación ha empeorado pues ahora tenemos una sincronía entre la persistencia y repunte de la inflación observada y una creciente divergencia de las expectativas de inflación en 2018 y señales de deterioro y contaminación en las expectativas de inflación para 2019 y 2020. Esta afirmación se trata de confrontar en el siguiente análisis gráfico.

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[1] Ver https://fgsaenzfgs.blog/2018/03/09/grafica-el-dia-expectativas-de-inflacion-2018-y-2019-banda-objetivo-inflacion-observada-y-las-dificultades-para-la-convergencia-al-4/