Latest Developments in the Canadian Economic Accounts
Treatment of duties applied to imports of Canadian softwood lumber products into the U.S. in the Canadian System of Macroeconomic Accounts
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The Committee Overseeing Action for Lumber International Trade Investigations or Negotiations filed countervailing and anti-dumping duty petitions against Canadian softwood lumber producers with the United States (U.S.) Department of Commerce and the United States (U.S.) International Trade Commission on November 25, 2016. The petitions allege that Canadian softwood lumber producers benefit from government subsidies, particularly from harvesting trees from crown land below market value.
On January 6, 2017, the U.S. International Trade Commission ruled that they believe there is preliminary evidence that American producers are “materially injured” by imports of softwood lumber products from Canada. Subsequently, on April 24, 2017, the U.S. Department of Commerce announced its affirmative preliminary determination on the countervailing duty investigation. Individual subsidy rates ranging from 3.02% to 24.12% were established for five Canadian exporting companies; the subsidy rate for all other exporting companies is 19.88%.
Additionally, the U.S. Department of Commerce determined that “critical circumstances” exist for all exporting companies except four. Consequently, these companies are required to pay subsidy rates retroactively for 90 days prior to the date of publication of the preliminary duties in the Federal Register. The duties will therefore be applied to all imports of in-scope Canadian softwood lumber products into the U.S. that occurred between January 28, 2017 and April 27, 2017.
Beginning on April 28, 2017, cash deposits for all in-scope imports of softwood lumber products from Canada are required by the U.S. Customs and Border Protection. Under U.S. law, preliminary duties can only be in place for 120 calendar days, in this case until August 26, 2017. Duties may once again be collected for imports of Canadian softwood lumber products when the U.S. International Trade Commission makes its final determination, expected in late 2017 or early 2018. The preliminary ruling by the U.S. Department of Commerce on antidumping duties is scheduled for June 23, 2017.
Treatment in the Canadian System of Macroeconomic Accounts
Duties imposed by the United States on imported products from Canada are paid by the importer of softwood lumber. In most cases, the Canadian exporter on shipments to the U.S. is listed as the importer, so in effect, it will be the Canadian exporter paying the duties.
In the Canadian System of Macroeconomic Accounts, the importer is considered a resident unit of the foreign country importing. To be consistent with this concept, a notional unit located in the U.S. economic territory and related to the Canadian exporter is created for balance of payments purposes.
Consequently, this notional unit in the U.S. becomes responsible for making cash deposits with the U.S. Customs and Border Protection equivalent to the amount of the duties. These amounts are shown in the foreign direct investment category of the Balance of Payments statement as money flowing from the Canadian exporter to its related U.S. notional unit. The U.S. notional unit is therefore building a provisional liability to its related Canadian exporter, also reflected in the international investment position, with a corresponding and equal provisional asset vis-à-vis the U.S. government, as the funds are being held as deposits.
For example, if a Canadian exporter sells $100 million worth of softwood lumber products to the United States in a given quarter. The importer, the notional unit located in the U.S, faces a duty rate of 20%. The Canadian exporter makes a $20 million cash deposit with the U.S. Customs and Border Protection through the U.S. notional unit (direct investment outflow). The U.S. notional unit then sets both a payable to its related Canadian exporter and a corresponding claim on the U.S. government equivalent to the value of the duties.
In the first quarter of 2017, transactions recorded in the foreign direct investment category of the Balance of Payments statement represent the retroactive duties paid during the period January 28 to March 31. It is expected that these amounts will increase in the second quarter of 2017 as all exporters will be required to pay duties starting April 28, 2017. The preliminary ruling by the U.S. Department of Commerce on anti-dumping duties scheduled for June 23, 2017 could also increase these values.
Income and Expenditure and National Balance Sheet Accounts
In their financial reports, Canadian exporting companies will either directly expense the payments made to the U.S. Custom and Border Protection or create a contingent liability account. In the case where the Canadian company expenses these payments in their financial statements, earnings will be impacted.
In the Income and Expenditure Accounts, these transactions will not be treated as operating expenses or contingent liabilities, but rather they will be treated as a financial asset – corporate claim loan and advance, in line with the International Accounts treatment. These transactions, therefore, will have no impact on current operating costs or revenues and will not affect value added (GDP). In the Canadian National Balance Sheet Accounts however, a corporate claim loan and advance asset will be created awaiting the international ruling.
Information recorded in the Canadian System of Macroeconomic Accounts will be updated and the treatment might be revisited as new details on the nature of these transactions are made available.
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