Written on behalf of Feigenbaum Consulting
We’ve previously blogged about the US’s NAFTA negotiation goals. This week, the pending NAFTA discussions are back in the news after the U.S proposed that Canada and Mexico vastly raise the value of online purchases that can be imported duty-free from online retailers such as Amazon and eBay. The issue may prove to be a sticking point in the upcoming renegotiations of the NAFTA trade agreement.
The Proposed Change
The U.S Trade Representative has proposed raising Canadian and Mexican duty-free import limits for e-commerce to $800 USD, a significant increase from the current threshold of $50 USD and $20 CAD. The proposal was introduced in July as part of the Trump administration’s overall NAFTA renegotiation strategy.
Rare Liberalization of Trade Rules
President Trump has heavily criticized NAFTA. Much of his criticism arises from his belief that the trade agreement has devastated U.S. manufacturing as companies have shifted production from the U.S. to Mexico, where labour is cheaper. This has created a U.S. trade deficit of more than $60 billion.
Unlike most of the Trump administrations slated changes, which generally seek to tighten trade rules, the duty-free proposal looks to liberalize the trade rule. E-commerce in North America is currently dominated by the U.S., and the changes weight in the U.S.’s favour. However, many industries have expressed concern and pushed back against the proposal.
A further complicating factor in negotiations and in coming to a common set of rules are the diverging tax regulations and how restrictions on imports differ depending on how they enter (i.e. land, sea, or air).
Concerns from Key Canadian and Mexican Industries
For Mexican retailers, the biggest concern is that the change would open a “back-door” to cheap imports from Asia and other non-NAFTA players. Canadian retailers, on the other hand, fear that e-commerce companies will undercut their prices. Canadian and Mexican business leaders are concerned that the change could make their industries vulnerable, and have argued that unless online retailers can establish that their products are made in North America, they should not be exempted from the duties that are levied on other imports.
Governments for both Canada and Mexico have not yet formulated an official response, however Mexico City is reportedly leaning strongly against the proposal as currently outlined, and Canada is likely to also oppose. Mexico’s Economy Minister Ildefonso Guajardo has called the proposed increase “a very sensitive topic”. Guajardo noted that representatives of the Mexico’s National Self-Service and Department Store Association, a retail group that includes powerful members such as Wal-Mart de Mexico, visited him last week to express their concerns.
In Canada, opposition is being led by retailers. The Retail Council of Canada has noted its concerns with the “…behavioural shift that would inevitably result if shoppers can buy a far wider range and higher value of goods tax-free and duty-free.” The Council notes that eBay has lobbied previous finance ministers for a similar change and has not been successful. Similarly, the U.S. has raised the issue of duty-free limits in Trans-Pacific-Partnership (TPP) discussions and did not secure the concession.
Neither Amazon nor eBay have officially taken a stance on this latest issue, though eBay has previously stated that it supports an increase in Canada’s low-value customs to a de minimis threshold when it comes to e-commerce in order to “promote seamless access to the global marketplace”.
A spokeswoman for Bill Morneau has stated that “when it comes to waiving duties and taxes, we need to carefully consider the impact it would have on Canadians and on Canadian businesses”. This is perhaps a hint about a compromise wherein a higher limit would exempt products ordered online from duties but not sales taxes.
Tax Advice for Cross-Border Businesses
It remains to be seen what will happen once NAFTA renegotiations begin. We will continue to monitor developments and will blog about updates as they become available. In the interim, if you have begun to think proactively about the impact potential changes may have on your business, contact the team at Feigenbaum Tax Law. We have extensive experience dealing with US-Canada cross-border trade and corporate law and can help you assess the impact any pending changes may have on your business. To make an appointment, contact us online, or call our office toll free at (877) 275-4792.