Economy

Sorry, Your Costs Are Going Up

The Ottawa move that gives you 20 months to revamp your supply chain

Written by Joy Nott

STOP THE PRESSES! THE FEDERAL GOVERNMENT IS CHANGING TARIFF RATES! Alright, I’ll admit it, it sounds like pretty dull stuff. But, in fact, anyone who runs a business that uses goods imported from countries that we used to consider poor and struggling—or that buys from suppliers who do—should pay attention to the changes to the General Preferential Tariff (GPT) that Ottawa quietly included in the budget.

The Harper government plans to remove 72 countries from the GPT list, including major suppliers such as China, Brazil, Thailand and South Korea, on Jan. 1, 2015. This will boost the tariff rates on goods imported from this long list of countries.

It’s easy to see the logic of this move. After all, Ottawa introduced the GPT back in the 1970s to help developing nations grow their economies. And no one could reasonably argue that countries such as China and Brazil still need Canada’s help to develop their exports. So it makes sense to review which countries should remain on the GPT list.

But this change will boost costs for many, if not most, Canadian businesses. Although many large enterprises have seen the tariff hikes as a significant business challenge and are starting to figure out how to respond, so far I haven’t seen the same level of concern among most SMEs. Yet this is also an issue for smaller businesses. It’s most obviously a challenge for those who import goods for sale in Canada, but it also affects the vastly greater number of companies that buy inputs from these countries, or whose suppliers do.

The new rates will come into effect in only about 20 months. That’s not far off. After all, a supply chain is a complex thing—not something you want to try to revamp at the last minute. So now is the time to start identifying how the tariff hikes will affect your company’s costs, and whether and how you should alter your supply chain.

Here are the five key questions you should ask yourself to prepare:

Which countries on the list do we or our suppliers import from?

It’s a big list. Click here for a list of countries qualifying for GPT. Even if you don’t import directly from these countries, your suppliers may be importing from them. And the duty rates will apply to key inputs as well as finished goods.

You need to do a thorough analysis of your supply chain, preferably in partnership with your suppliers, to analyze where your goods and inputs are coming from and what the financial impact will be. Some of the countries may be partners with which Canada has trade agreements, so the duty impact may be minimal, but in other cases it could be significant. You need to know which it’s going to be. You can also find information on the GPT changes on the Department of Finance website.

What impact will other trade with these countries have?

Once you’ve determined which of the countries on the list are part of your supply chain, you’ll need to get an accurate assessment of the change in duty rates. In some cases, there won’t be. These are the 20 countries on the GPT list that Canada gives preferential tariff treatment to through other agreements. Mexico is covered under NAFTA, and Canada has free trade deals with Colombia, Costa Rica, Chile, Israel, Jordan and Peru. And the Commonwealth Caribbean Countries Tariff (CCCT) covers 13 other countries on the list.

That means that many goods from these countries may already be duty free, so changes to the GPT will have little impact. But for those countries not covered under any other agreement, tariffs are generally expected to increase from 3% to 6%, although that could vary widely depending on the product.

Can I change suppliers and source from another country?

Once you know where you import from, and what the cost increase will be, you need to assess your alternatives. You may decide to just swallow the increase and not alter your supply chain at all. But if you decide to look elsewhere, there are some major issues to consider.

The first thing you need to do is determine what your contractual obligations are. Can you get out of your contract with your current supplier? Will

there be penalties? And if so, will they outweigh the benefits of changing sources? If you’re dealing with an agent, you’ll want to determine if your agent can do business in the new country you’ve decided to source from, or if you will need to find a new agent on the ground.

It’s complicated starting again in a new location. You need to research suppliers and service providers such as transportation providers, warehouses and logistics companies. You’ll also need to do a thorough analysis of the infrastructure in your new source country. Does the supply chain already exist there? Can you find what you need in another location at acost-effective price?

There are many places you can go to find this information. At the government level, Foreign Affairs & International Trade Canada is a start, and the Trade Commissioner Service also has extensive country research. You can also find information through Export Development Canada. Another valuable source is HSBC, which has developed many country guides through its Business Without Borders initiative.

What are the business requirements of my alternate locations?

Once you decide to relocate, or re-source, you’ll need to ensure you’re compliant with all the legal and regulatory requirements of doing business in that country. Can you source directly, or do you need to use an agent? You’ll also want to look into things such as state tax, income tax, the labour force and costs. And if you plan to invest in a business overseas, you must determine the proper rules for foreign ownership. For instance, can a foreigner own a business directly, or must you form a joint venture?

What if I decide not to alter my supply chain?

After considering the above challenges, you may decide to take your chances with the duty rate increase and bear the additional cost. This could be a good strategy, as long as you’ve done an accurate analysis of what the increase in duty will do to your costs and to the final cost of your product. Will your market willingly bear the cost increase or will you lose customers and sales? You may want to come up with a strategy to increase your product value at the same time you increase your prices.

Make no mistake: the changes to the GPT list are going to happen, and they will happen fast. The best defence is always a good offence, so take the time now to analyze your supply chain, determine what your options are and mitigate any cost increases you’ll experience.

Joy Nott is president of I.E.Canada, the Canadian Association of Importers and Exporters, and has more than 20 years of experience in customs compliance. Prior to joining I.E.Canada, she was a vice-president and managing consultant for JPMorgan Global Trade Management Services.

More columns by Joy Nott

Originally appeared on PROFITguide.com