ITS GLOBAL ASIA PACIFIC

International Trade Strategies Pty Ltd, trading as ITS Global Asia PacificLevel 1, 34 Queen StreetMELBOURNE VIC 3000AUSTRALIA

Tel: +61 3 9654 8323 Fax: +61 3 9654 4922http://www.itsglobal.net

CENTRE FOR CUSTOMS & EXCISE STUDIES

MAY 2012

Centre for Customs & Excise StudiesUniversity of CanberraUniversity Drive SouthBRUCE ACT 2617AUSTRALIA

Tel: +61 2 6201 5487Fax: +61 2 6201 5746http:/www.customscentre.canberra.edu.au

Commercial-in-Confidence. The views expressed in this publication are those of its authors. The consultant takes no liability for commercial decisions taken on the basis of information in this report. The information is accurate to the best of the consultant’s knowledge, however the consultant advises that no decision with commercial implications which depends upon government law or regulation or executive discretion should be taken by any person or entity without that party’s having secured direct advice from the government agency concerned in writing.

De Minimis Thresholds in APECReport on behalf of the EAA, CAPEC & CLADEC

Table of Contents

Executive Summary 5

1. Introduction to the Study 9

2. De Minimis Regimes in APEC 13

3. Determinants of Current De Minimis Requirements 31

4. Economic Benefits & Costs of De Minimis Regimes 43

5. Conclusions & Recommendations 65

References 69

Annex A: Methodology & Approach to the Study 75

Annex B: Results of Economic Evaluation 85

Annex C: Low Value Consignments to APEC-12 Economies 95

Annex D: Nature of Low Value Consignments to Indonesia 99

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Executive Summary

A de minimis regime provides streamlined border clearance and exemption from customs duties and other taxes. These features generate economic benefits by refocusing public revenue collection on more economic sources of revenue, reducing the costs borne by importers, and accelerating the delivery of imports.

Most APEC economies have de minimis regimes but their thresholds range from less than USD1 to more than USD1,000. Moreover, the product eligibility varies as do the taxes from which they are exempted. These design features affect the balance of economic benefits and costs that a regime produces.

This study assesses the de minimis regimes of Canada, Chile, the People’s Republic of China, Indonesia, Japan, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Thailand and Viet Nam — the APEC-12 for ease of reference — by building upon and extending an earlier study.1 We chose these 12 economies as being broadly representative of the APEC region in terms of merchandise trade, geography and economic development. In doing so the study has estimated the net economic benefit of four alternatives — representing minimum de minimis thresholds of USD50, USD100, USD150, and USD200 respectively. Tables 1 and 2 summarise the key results.

The USD200 threshold generates the largest net economic benefit for the APEC-12 of around USD5.4 billion a year, equivalent to about USD11.9 billion for all 21 APEC members. In relative terms the latter is 0.086% of APEC-21 GDP.

Resource savings in government administration are the largest of the benefits. Under all scenarios, these savings accounted for 76% of the benefits, while savings in business compliance were virtually all of the rest. The latter are particularly important for small and medium-sized enterprises (SMEs) as they generally face disproportionate burdens in completing customs formalities.

These savings have, nevertheless, been conservatively estimated based on the level of fees and charges for the relevant services that apply in Australia where they are generally considered to be delivered efficiently. While these have been adjusted to reflect differences in labour costs with Australia, no allowance has been made for differences in processing efficiency.

Saving time in transit has a clear economic benefit. The longer products take to get to market, the more likely they will perish, become out-dated, be displaced by superior alternatives, or lose the interest of potential buyers. Previous research has shown that a 10% cut in delivery time will, other things being equal, expand exports of time-sensitive manufactures by over 4%. By definition, however, the

1 In 2011 ITS and the CCES conducted a study of the impact of the de minimis thresholds in Canada, Indonesia, Japan, Malaysia, the Philippines, and Thailand (ITS & CCES 2011).

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savings in transit time for low value consignments are generally small compared to the resource savings that depend upon the number of consignments in the category.

Table 1: Economic benefits & costs of alternative de minimis thresholds

Alternative Threshold

USD

APEC-12 (a) APEC-21Net BenefitUSD billion

per year

Net BenefitUSD billion

per year

Ratio of Benefits to

Costs

Net Benefit as Share of

APEC-12 GDP per cent

50 1,954 59.8 0.012 4,342

100 3,138 41.1 0.020 6,974

150 4,251 42.8 0.027 9,446

200 5,357 45.3 0.034 11,903

Notes: (a) Canada, Chile, the People’s Republic of China, Indonesia, Japan, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Thailand and Viet NamSource: ITS Global Asia Pacific

Table 2: Net economic benefit of alternative de minimis thresholds, by APEC-12 economy (a), USD million per year

ThresholdUSD CAN CHL CHN IDN JPN MYS

50 1,589 24.6 286 0 0 0

100 2,688 33.9 310 4.3 0 0

150 3,579 44.2 351 9.2 118 0

200 4,371 53.4 386 13.3 318 22.5

ThresholdUSD MEX PNG PER PHL THA VNM

50 0 0 13.6 14.8 18.6 7.03

100 34.6 0 16.4 17.0 27.0 6.90

150 67.7 0.067 18.3 18.7 35.5 8.63

200 98.4 0.189 20.5 20.6 43.4 9.40

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (THA) and Viet Nam (VNM)Source: ITS Global Asia Pacific

A notable characteristic of the results is the relatively small impact that an increase in threshold has on government revenue. The loss of tariff revenue is only between 1.5% and 2.5% of total savings. Although the loss of VAT/GST revenue is more difficult to estimate, at the very worst it represents no more than 8% of the total resource savings generated by the USD200 scenario and less under the rest.

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The revenue loss is much lower than many may have expected. Over time the revenue base has been eroded by a combination of highly preferential tariff rates introduced under Free Trade Agreements and the existing de minimis exemptions. This is true even for those economies that have relatively high applied tariff rates.

The composition of the results is broadly the same under each of the scenarios and reflects the basic economics of this category of imports — relatively large numbers but relatively low aggregate value. Hence the volume-based impacts, such as those on customs administration and business processing costs loom larger than the value-based ones, such as those involving transit delays and tax collections. Overall we judge our results to be robust. Indeed the conservative nature of our approach means that more refined estimates are likely to yield higher net benefits than we have estimated not lower ones.

Most, if not all, APEC economies would benefit by increasing their existing thresholds by a substantial amount. APEC could assist this process by agreeing to recommend a minimum threshold level to its members with the option of a higher level to better suit individual circumstances. This would leverage the benefits from unilateral action.

These conclusions have been strongly reinforced by recent research. For example, the Productivity Commission, the Australian Government’s independent economic advisory body, is currently reviewing Australia’s de mimimis regime. Although Australia has the highest de mimimis threshold in APEC and a substantial GST rate (10%), the Commission has found that any reduction in the threshold would impose a substantial net cost on the economy.

An increase in de minimis thresholds need not jeopardize border security as advance cargo reporting is required by most countries, irrespective of the declared value of the imports. A higher de minimis threshold can free up the resources to address the more pressing security issues.

The policy implications are straight forward. A commercially attractive de minimis arrangement makes sound economic sense. While the optimal level of the threshold remains an open question, the direction of beneficial policy change in APEC is quite clear. This is strongly underlined by our estimated benefit-costs ratios, which put the total benefits for the great majority of the APEC-12 economies at many multiples of the total costs.

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1. Background to the Study

The facilitation of trade is attracting increasing interest in international and domestic policy circles, including in the Asia Pacific (APEC 2007). Trade facilitation seeks to reduce the transaction costs faced by exporters and importers.2 Reducing such costs stimulates international trade, investment and business innovation, which are the foundations of sustained improvements in community living standards in real terms.

A key aim of trade facilitation is the simplification of customs procedures and a key way to simplify customs procedures is to exempt merchandise from indirect taxation — such as customs duties, VAT, GST, and sales taxes — below a specified minimum — or de minimis — value. The World Trade Organization (WTO), the Organization for Economic Cooperation and Development (OECD), the World Customs Organization (WCO), and the International Chamber of Commerce (ICC) have all recommended the adoption of such thresholds.

A de minimis threshold reduces the compliance costs imposed on importers and accelerates delivery of the merchandise. It also allows governments to refocus their revenue collection efforts on those parts of the indirect tax base that yield higher net revenue.

Most APEC economies have de minimis regimes but they differ considerably. The thresholds range from less than USD1 to more than USD1,000, the products that are eligible for tax exemption vary, as do the nature of the taxes for which the exemption is granted. The nature of these variations can significantly affect the balance between the economic benefits and costs that such regimes generate for the importing economy.

At their meeting in Yokohama in 2010, APEC Leaders committed their governments to the achievement of a 10% improvement in supply chain performance by 2015, after taking into account the circumstances of individual economies (APEC 2010).3

At Big Sky, Montana in the United States on 20 May 2011, the APEC Ministers Responsible for Trade (MRT) agreed that reducing the time, cost, and uncertainty of moving goods and services within the APEC region remains a top priority for the achievement of the Leaders’ 10% goal. Accordingly the Ministers instructed their officials to continue with the development of the APEC Supply-Chain Connectivity

2 Transaction costs are the resource costs incurred in searching out, negotiating, and completing an economic exchange. They include the costs that government regulation and taxation imposes on these processes. Transaction costs need to be distinguished from the costs of producing what is exchanged, which are sometimes referred to as ‘transformation costs’ to underline this distinction. 3 This followed advice that the previous trade facilitation goal APEC Leaders’ had set had been realized by the membership (APEC 2011a).

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Framework (SCCF) Action Plan. The Action Plan includes simplification of customs procedures and implementation of commercially useful de minimis thresholds.

A proposal that was put forward at that time involved setting a baseline de minimis value for APEC, while allowing individual economies to adopt higher thresholds as they saw fit.

As APEC members had agreed to undertake further work on this idea, the Peterson Institute for International Economics in Washington, DC undertook an economic study of the benefits and challenges of de minimis regimes with support from the Express Association of America (EAA) (Hufbauer & Wong 2011). As that study focussed exclusively on the US, the Conference of Asia Pacific Express Carriers (CAPEC) engaged ITS Global Asia Pacific (ITS) and the Centre for Customs and Excise Studies (CCES) at the University of Canberra to assess the de minimis arrangements in a selection of other APEC economies.

For this purpose, Canada, Indonesia, Japan, Malaysia, the Philippines and Thailand were chosen as being broadly representative of the region as a whole, in terms of geography and economic development. ITS and CCES examined the reasons these economies had adopted their current de minimis arrangements, assessed the net economic benefit of applying higher de minimis thresholds across the APEC region, and made policy recommendations on the appropriate baseline de minimis arrangements for APEC (ITS & CCES 2011). Their report was presented to and discussed by the APEC Committee on Trade and Investment (CTI) at its meeting in San Francisco on 22 and 23 September 2011.

At Honolulu on 11 November 2011, the APEC Ministers Responsible for Trade (MRT) agreed to an APEC Pathfinder Initiative to establish a baseline de minimis value of USD100 by the end of 2012 (APEC 2011b). Ten APEC members have joined the Pathfinder: Brunei Darussalam; Hong Kong, China; Japan; the Republic of Korea; Malaysia; New Zealand; the Russian Federation; Singapore; Chinese Taipei; and the United States.

At that meeting the Trade Ministers also foreshadowed the development of a capacity building program to enhance the understanding of the economic and trade facilitation benefits of higher de minimis values, with the goal of assisting economies in joining the Pathfinder.

With this in mind, in January this year the EAA, CAPEC and the Latin American Association of Express Delivery Companies (CLADEC) engaged ITS and the CCES to extend the methodology and approach, which had been used for their 2011 report, to a further six APEC economies — in this case Chile, the People’s Republic of China, Mexico, Papua New Guinea, Peru and Viet Nam. The objective was to produce a comprehensive and integrated study for all 12 economies.

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This report is the outcome of that process. In accordance with the terms of reference for the extended study, it mirrors the structure of the 2011 report. That said, this report incorporates a refinement in the estimation of the distribution of the number and aggregate value of import consignments over the range of consignment values and updates a number of the economic assumptions used in the original analysis (e.g. exchange rates).

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2. De Minimis Regimes in APEC

2.1 Introduction

This Chapter identifies the principal aspects of the de minimis regimes that apply in the 12 APEC economies at the present time and, where possible, the underlying policy rationale for the specified threshold and its supporting arrangements.

There is scant public information available in relation to the policy underpinnings for the setting of particular de minimis thresholds which are often a result of “push and pull” between different national constituencies. The Productivity Commission has highlighted this issue in the Australian context by (2011, p.161). As a consequence the discussion is based on the relevant legislation that establishes de minimis in each case; studies recently conducted in New Zealand, the United Kingdom and Australia; and the author’s own conclusions from the economic analysis.

While acknowledging that the trade and border management environment in New Zealand, the United Kingdom and Australia differs from that pertaining in many of the APEC economies selected for this study; it is strongly arguable that the policy considerations surrounding decisions to adopt a particular de minimis threshold are homogeneous. Support for this view can be found in the research conducted by Yang (2008) in relation to the Philippines. This broader analysis on the rationale for de minimis and the implications for specific thresholds is set out in the following Chapter of this report.

The research has also examined the incidence of ‘informal shipment’ de minimis as an intermediate regime between a completely ‘duty-free’ de minimis regime and the general customs regime where a transaction requires full documentation and payment of all duties and taxes.

It is not uncommon for governments, to implement, through their customs legislation, a second de minimis threshold (in addition to the duty-free de minimis below which no duty is payable) as a mechanism for trade facilitation. This second de minimis threshold generally forms part of a regulatory approach that allows importers to utilize a simplified customs declaration or other simplified clearance process where the value of the imported goods is below a specified de minimis and/or the goods fall within a specific tariff classification or description; for example, document shipments.

2.2 Nature of ‘informal shipment’ de minimis

‘Informal shipment’ de minimis regimes are generally designed to implement the principles outlined in the World Customs Organization’s (WCO’s) Guidelines for the Immediate Release of Consignments by Customs4 (“the Guidelines”). These

4 http://www.wcoomd.org/home_pfoverviewboxes_tools_and_instruments_pftoolsimmreleaseguide.htm accessed on 15th March 2012

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Guidelines divide consignments into four categories for the purposes of providing immediate or facilitated customs clearance ranging from minimum documentation requirements (Category 1) through to full documentation requirements (Category 4). Similarly, the required data elements for each category increase from Category 1 to Category 4 (see Appendix 1 to the Guidelines) with a corresponding impact on processing cost. Details of the suggested characterization for each level of facilitation are as follows:

Category 1 – Correspondence and Documents

This category is intended to cover correspondence and documents having no commercial value and which are not subjected to duties and taxes.

Category 2 – Low value consignments for which no duties and taxes are collected

According to the Guidelines this category comprises:

‘…material for mass distribution in commercial quantities, certain types of literature for the blind, printed papers; low value consignments where duties and taxes are remitted or waived as the amount of duties and taxes would be negligible, e.g. unsolicited gifts below a defined value, trade samples; and low value goods which are not dutiable and taxable in their own right.’

The Notes to this Guideline set out an example where “the value of a consignment should be less than SDR505 or the duty and tax less than SDR3 or the consignment should be both less than SDR50 in value and the duty less than SDR3”.

Category 3 – Low value dutiable consignments

This category comprises:

‘…consignments that are above the value and/or duty/tax limits of category 2 consignments or do not qualify for duty and tax remission or waiver.....For example the value of the consignment should be SDR50 or above but below SDR1000. These consignments are above any de minimis threshold specified for Category 2 but below the value specified in national legislation for which a full Goods declaration is required.’

Category 4 – High value consignments

This category comprises:

‘…consignments not falling under the other three categories described above and includes consignments containing goods that are subject to

5 Special Drawing Rights issued by the IMF.

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restrictions. Normal release and clearance procedures, including payment of duties and taxes apply.’

Table 2.1 sets out the current ‘duty-free’ and ‘informal shipment’ de minimis thresholds in each of the selected APEC economies. They are expressed in the currency nominated by the relevant legal authority —usually but not always their national currency — together with their United States Dollar (USD) equivalents for ease of comparison. Details of the legal and policy framework for the each de minimis regime follow, to the extent to which that information is publicly available.

Table 2.1: Current de minimis thresholds, selected APEC economies

Economy ‘Duty-free’ De Minimis

USDEquivalent

(a)

‘Informalshipment’

De Minimis

USDEquivalent (a)

VAT/GST rate

Canada CAD 20 20 CAD 1,600 1,600 5%

Chile USD 30 30 USD 1,000 1,000 19%

China CNY 50 8 Documents only Documents only 17%

Indonesia USD 50 50 USD 2,000 2,000 10%

Japan JPY 10,000 125 JPY 200,000 2,500 5%

Malaysia MYR 500 165 MYR 2,000 660 4%

Mexico USD 50 50 USD 1,0006 1,000 16%

PNG PGK 250 120 PGK 1,000 480 10%

Peru USD200 200 USD2000 2000 18%

Philippine

sPHP15 0.35

PHP2000 47 12%

Thailand THB1,000 32 THB40,000 1280 7%

Vietnam VND1million 48 VND5million 250 10%

Note: (a) conversion is based on the average exchange rate for 3 May 2012

6 Quantum of threshold is for a consignee that is a legal entity. If the consignee is an individual the threshold rises to USD 5,000

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2.3 Legal & policy frameworks by economy

2.3.1 Canada

The applicable regulatory framework is the Postal Imports Remission Order7 and the Courier Imports Remission Order8 that apply to both commercial and non-commercial imports. Under these Orders, if someone imports an item that is worth CAD 20 or less, the importer does not have to pay duty or taxes on the item. If the item is worth more than CAD 20, the applicable duty, the GST (Goods and Services Tax) or HST (Harmonized Sales Tax), and any PST (Provincial Sales tax) must be paid on the item’s full value.

Canada levies the GST at a rate of 5% but certain goods and services are exempt or zero-rated (WTO 2011). The zero-rated products include groceries, residential rent, medical services, and financial services.

Items that do not qualify for the CAD 20 exemption include: tobacco; books, periodicals, magazines; alcoholic beverages; and goods ordered via a Canadian post office box or a Canadian intermediary.9

In addition the Courier Low Value Shipment (LVS) Program streamlines the processing of low-value shipments through customs while providing the express courier industry with expedited release. This is done through:

a single combined cargo report and release document called the ‘cargo/release list’ for goods valued under CAD 1,600;

the courier is required to provide separate cargo/release lists for cargo valued at less than CAD 2,020 and for cargo valued between CAD 20 and CAD 1,600.

Hufbauer and Wong (2011) suggest that Canada mainly has a low de minimis threshold because the Federal Government imposes a tax on value-added (GST), which applies to imports as well as domestic sales, and is concerned about the potential loss of GST revenue. This concern is amplified by the fact that the United States, Canada’s neighbor and largest trading partner, does not impose a VAT-style of indirect tax.

7 Financial Administration Act, section 17, Order-in-Council P.C. 1985-2954, October 3, 1985 (Canada Gazette, Part II, p.4291) as amended by Order-in-Council P.C. 1986-1400, June 12 1986 (Canada).

Gazette), Part II, p.2616) and Order-in-Council P.C. 1992-1432, June 24, 1992 (Canada Gazette, Part II, p.3098)8 Financial Administration Act, section 17, Order-in-Council P.C. 2955 as amended by Order-in-Council P.C. 1986-1401 and Order-in-Council P.C. 1992-14319 The exemption is also not available in the case of goods from a supplier who is required to be registered under Subdivision D of Division V of Part IX of the Excise Tax Act but has not done so.

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2.3.2 Chile

The foundation of Chile’s customs regime is the Customs Ordinance (Decree with Force of Law No. 30 of the Ministry of Finance, published on 16 June 2005).10 Article 103 of the Customs Ordinance states that: ‘Goods imported into the country must pay import duties unless specifically exempted by law’. Article 68 of the Customs Ordinance also allows the Director-General of Customs to provide for a ‘simplified system different from that used in commercial operations’.

Imports are subject to customs duty, value added tax (VAT) and other additional taxes depending on the nature of the goods. The VAT is levied at the rate of 19% on most goods and services (WTO 2009a). The exceptions to VAT depend on the use or purpose of the goods — one of the most important is the concession for exports. Some goods are subject to additional taxes — including luxury articles, beverages, tobacco, pyrotechnical articles and fuels.

‘Duty-free’ de minimis has been established for shipments with a customs value less than USD30. In these circumstances the goods can be cleared on the basis of the manifest only and without any requirement for a customs declaration. The authorities require limited data elements11 and supporting documentation — commercial invoice and the air waybill or bill of lading together with any permits/certifications required by other government agencies depending on the nature of the goods — but there is 100% non-intrusive screening of this type of cargo.

Chile has established an ‘informal shipment’ de minimis for shipments with a customs value between USD30 and USD1,000. Customs clearance occurs on the basis of a ‘Special Simplified Declaration’ and presentation of the manifest but is restricted to one Air Waybill for each simplified declaration. In other words, the simplified procedure does not allow for consolidated clearance. The data elements and documentation requirements are the same as for ‘duty-free’ de minimis and screening of this cargo is risk-based.

2.3.3 China

China Customs changed some of their rules concerning de minimis with effect from 1 July 2010. Previously, sample and advertising materials that were valued below CNY400 (approximately USD67) were exempt from duties and taxes. However, Customs Order No. 33 removed this duty-free de minimis so that the new threshold is now based on the duty liability as calculated in accordance with the relevant commodity’s HS tariff classification and customs value.

10 Other instruments which form part of the regime are the Organic Customs Law (Decree No. 329 of 20 June 1979), the Customs Tariff (Decree No. 1.019 of 31 December 2001 and amendments thereto), the Tax Code (Decree Law No. 830 of 31 December 1974), the Compendium of Customs Regulations (Resolution No. 1300 of 2006), Law No. 18.525 on the Import of Goods into Chile and amendments thereto, Law No. 19.912 of 2003 (WTO 2009a).11 Neither importer registration details nor HS tariff classification codes are required

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China’s main indirect tax is its VAT; the revenue from which is shared 75:25 between the Central and local governments (WTO 2010a). The standard rate is 17% with 13% on certain items. Exporters are entitled to rebates but the VAT is often not fully rebated (WTO 2010a).

In 2009 China transformed its VAT from a production-based to a consumption-based tax at the national level (WTO 2010a). Before the reform, the VAT paid on inputs could not be offset against the VAT payable on the final product. This was partly corrected by not collecting VAT at the border on imported capital goods. Following the reform, VAT paid on capital is credited against VAT on the final product and the VAT exemption on imported capital equipment was discontinued. The Chinese authorities consider the transformation helps reduce the cascading effects of the VAT (WTO 2010a).

All goods entering China that are valued below CNY400 must provide a 10-digit Harmonized Schedule number, and the importer must apply for a GAC importer registration number. Both of these result in a slowing of the clearance process. Any shipment below CNY50 retains its exemption from duties and taxes.

Another law in this area that is relevant to de minimis is Customs Order No. 43. This requires, inter alia, that business to consumer transactions including online purchases cannot be cleared as ‘personal effects’ and must go through the general Customs clearance process. This latter process can be formal or informal depending on value so there is still scope for ‘informal shipment’ de minimis.

The data requirements for ‘informal shipment’ de minimis exempt importer registration and HS tariff classification in respect of document shipments only. Similarly, power of attorney, invoice, packing list, and contract are exempted from the documentation requirements only in the case of document shipments so ‘informal shipment’ de minimis is quite circumscribed.

2.3.4 Indonesia

Article 6 of Customs Regulation Number P-05/BC/2006 provides that ‘Courier express shipments with value not more than USD50 are exempted from import duty and taxes’.

Value-added tax (VAT) is applied at a rate of 10% to most goods and services. The exceptions include: certain mining and drilling products; certain minerals; basic necessities; food and drink served in hotels and restaurants; shares, bonds, and other commercial paper; healthcare; orphanage, and funerary; postal; banking, insurance, and financial; religious; educational; non-commercial art; non-commercial broadcasting; public transport; manpower; and hotel services (WTO 2007a).

The luxury goods tax is applied at various rates:

10% on bottled water, soft drinks, cosmetics, radios and tapes, luxury houses, and townhouses;

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20% on carpets, sanitary goods, and luxury home appliances such as air conditioners;

30% on non-government ships, sports equipment, certain television receivers, and motor vehicles with fewer than ten seats;

40% on alcoholic beverages, imported leather goods, imported precious metals, private aircraft, and firearms; 60% on two-wheeled motor vehicles; and

75% on luxury yachts, and trailers and semi-trailers for camping or home use (WTO 2007a).

Non-document shipments valued below USD 2,000 and weighing less than 100 kg are able to take advantage of simplified clearance processes unless the items in question are restricted or controlled in some way.

2.3.5 Japan

Goods with a customs value of JPY 10,000 or less are exempted from customs duty and consumption tax. This treatment is provided by:

Article 14 of the Customs Tariff Law12

Article 16 of the Cabinet Order for Enforcement of the Customs Tariff Law 13

the General Notification of the Customs Tariff Law14 Article 13 of the Law for the Collection of Excise Taxes on Imports.15

Consistent with the treatment that is accorded by de minimis regimes elsewhere in APEC, imports into Japan are only exempted from the consumption tax and not from other domestic taxes — for example, liquor tax, tobacco tax etc. The consumption tax is a VAT-style tax and is levied at the rate of 5% (WTO 2011).

Furthermore, the de minimis exemption is not applicable to certain designated articles16 for which tax exemption is considered inappropriate because of their impact on domestic industry or for other reasons, even if their customs value does not exceed JPY 10,000.

The criteria for determining whether the customs value is JPY 10,000 or less are as follows:

12 paragraph 3 13 section 2114 paragraph 1415 no. 1 of paragraph 116 The principal articles that have been designated as those to which duty exemption is not applicable are as follows: Leather bags, handbags, gloves, etc., knitted apparel, ski boots, leather shoes and footwear with leather soles.

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The customs value of imported goods per declaration should not exceed JPY 10,000. When multiple declarations are made for one invoice in order to divide the invoice’s articles into several units, the total customs value of all the articles belonging to the invoice should not exceed JPY 10,000.

For parcel post, the customs value of all articles enclosed in one package should not exceed JPY 10,000. If a shipment is divided (to avoid weight limits, etc.) and sent from a given sender to a given receiver at the same time, the total amount of customs value of all the parcels shipped separately from the sender to the recipient should not exceed JPY 10,000.

Under the General Notification of the Customs Law goods with a customs value of JPY 200,000 per article or less, as specified on the import declaration form, are enter by utilizing a simplified customs clearance procedure. 17 This is subject to the importer putting the following description on the import declaration: ‘Simplified customs clearance procedure for low-value goods’. Simplified clearance is not available for certain specified goods such as goods requiring an import license.

2.3.6 Malaysia

Express consignments with a de minimis value of MYR 500 are exempted from the payment of customs duties. The direct release of non-dutiable express shipments below MYR 2,000 without a formal declaration is permitted unless the goods are controlled or otherwise restricted.

Malaysian Government has stated that the purpose of its de minimis threshold is:

‘…trade and business facilitation, effective delivery of services and reducing the cost of doing business…to enhance efficiency and effectiveness in the delivery of goods and services, the Government is also promoting the growth of integrated logistics services.’ (WTO 2005a, pp. 1-2)

The WTO has reported that the Malaysian authorities are planning to introduce a broad-based VAT-type of tax of goods and services (GST) to replace the existing system of sales taxes and taxes on services, which generally involve tax rates of between 5% and 10% (WTO 2005c & 2009b). It is not clear whether the Government is going to extend their de minimis arrangements to include GST exemption once that tax has been introduced.

2.3.7 Mexico

Mexico's customs regime is based on the 1995 Customs Law that entered into effect on 1 April 1996. The current revision is 2012. There are also Implementing Regulations, as well as the General Foreign Trade Regulations and the annexes thereto, and the decisions taken annually by the Secretaría de Hacienda y Crédito Público (SHCP) [the Ministry of Finance and Public Credit].

17 paragraph 67

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The customs legal framework also includes other legislative instruments such as the Tax Code of the Federation and its Implementing Regulations; the Foreign Trade Law (LCE) and its Implementing Regulations; and the Law on General Import and Export Taxes (TIGIE), the agreement under which the Ministry of the Economy (SE) issues general regulations and criteria for foreign trade, and the customs provisions in the free-trade agreements (FTAs) signed by Mexico.

Imports and domestic products are subject to a VAT, the Impuesto Especial sobre Producción y Servicios (IEPS) [special tax on production and services], and the Impuesto sobre Automóviles Nuevos (ISAN) [tax on new automobiles] (WTO 2008).

Mexico levies its VAT at a general rate of 15%. Certain products are exempt: products for basic consumption such as foodstuffs and some beverages

(water, milk, juices and syrups); pharmaceuticals; unprocessed products of plant or animal origin; and goods for export, inter alia, are exempt from VAT.

The IEPS applies to both domestic and imported products and rates range from 20% to 110% on: alcoholic beverages; alcohol, denatured alcohol and non-crystallized honey; tobacco products; petroleum spirit and diesel fuel (WTO 2008)

The Customs Law of Mexico (Ley Aduanera) and associated Customs Regulations provide for the specification of de minimis thresholds. The ‘duty-free’ de minimis has been set at USD 50 so that in circumstances where the value of the shipment is equal to or less than USD 50, the shipment can enter Mexico duty- and tax-free.

‘Informal shipment’ de minimis is set at USD 1,000 (USD 5,000 if the consignee is a private individual). Shipments below this threshold can be cleared in a consolidated entry and certain documents are exempted from production (the contract and the packing list). If the goods are valued below USD 300 the commercial invoice is also exempted from production. There are also reduced data elements for informal clearances.

2.3.8 Papua New Guinea

Papua New Guinea’s customs regime is based on the Customs Act 1951 and the Customs Regulations 1951. Section 19 of the Customs Act 1951 states that:

‘Entries may be made for all goods subject to the control of the Customs in accordance with the regulations relating to the requirement to enter goods.’18

18 sub-section (1)

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The regime imposes customs duty, excise tax, and GST on imports, the latter two at uniform rates for domestic and imported sources (WTO 2010b). The rate of GST is 10% and it applies to most goods and services. The exceptions are fine metal (‘pure’ gold or platinum) beyond the ‘first supply’; raw rice; and certain services, mainly financial, educational, and health services. Zero-rated products are mainly exports. Subject to government approval, GST exemption may be granted on imported production inputs, including equipment, as an investment incentive, on a case-by-case basis, especially for mining, petroleum, and gas projects.

Section 19A of the Customs Act 1951 also provides that:

‘The owner of goods of a kind referred to in the Regulations that do not require an entry to be made shall provide information relating to those goods at such a time and in such a manner and form as the Regulation (sic) specify.’19

Sub-regulation 21(2) of the Customs Regulations 1951 exempt goods from the entry requirements if they, inter alia, ‘have a value for duty not exceeding 1,000 Kina’.20 The Regulations also prescribe a less formal reporting process.21 Goods that have a value for duty less than 250 Kina are deemed to have a ‘free’ rate of duty; that is, they are subject to a ‘duty-free’ de minimis.22

Generally speaking, reduced data elements and documentation requirements are imposed on eligible ‘duty-free’ de minimis and ‘informal shipment’ de minimis consignments. PNG Customs, however, may request additional paperwork for specific shipment verification.

2.3.9 Peru

Peru’s customs regime is set out in its General Customs Law, Legislative Decree No. 1053. Article 98 of the General Customs Law sets out the rules that apply to ‘special customs procedures or exceptional procedures’. It establishes ‘informal shipment’ de minimis by providing: ‘Goods without commercial purposes destined to natural persons and whose FOB value does not exceed two thousand (2,000) U.S. dollars are subject to the Simplified Import Procedure.’23

In general, imports by Peru receive national treatment in relation to internal taxes, which includes its general sales tax (IGV), excise taxes (ISC), and municipal promotion tax (WTO 2007b). The IGV is levied at 17% on the importation or sale of most goods and services at each marketing stage. The municipal promotion tax adds two percentage points to that rate.

The exempt products include:

19 subsection (1)20 paragraph 21(2)(a)21 sub-regulation 21(322 sub-regulation 21(4)23 paragraph (m)

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certain live animals; fish, except those for meal and oil processing; whole raw milk; garden produce, vegetables and various other food products, fresh or

chilled; certain fresh or dried fruit; raw or green coffee and tea; unhulled rice; various seeds for sowing; seabird guano; urea and potassium sulphate for agricultural use; wool and cotton, unprocessed; and certain motor vehicles (WTO 2007b).

There is a limited ‘duty-free’ de minimis for goods with an FOB value less than USD 200 and that are classified to Peruvian HS classification 9809.00.00.20, which essentially applies to documents only.

There are some limited exemptions in relation to documentary requirements for ‘informal shipment’ de minimis and ‘duty-free’ de minimis. However, the exemptions are not as extensive as those provided by other economies examined in this study.

2.3.10 Philippines

Section 709 of the Tariff and Customs Code provides that:

‘…a Collector [of Customs] shall have discretionary authority to remit the assessment and collection of customs duties, taxes and other charges when the aggregate amount of such duties, taxes and other charges is less than 15 pesos 24 and he may dispense with the seizure of articles of less than 15 pesos in value except in cases of prohibited importations or the habitual or intentional violation of the tariff and customs laws.’25

In addition to customs duties and excise taxes, the Philippines impose a 12% VAT on imported and domestically produced goods and services (WTO 2012). Excise taxes are levied on alcohol products, automobiles, jewelry, minerals, perfumes, cigarettes, and petroleum. The exemptions from the VAT include:

agricultural and marine food products; agricultural inputs; coal and petroleum products; books, newspapers and magazines; and passenger and/or cargo vessels of more than 5,000 tons (WTO 2012).

VAT is zero-rated on the sale and purchase of bio-organic products and coal, and petroleum products (WTO 2012).

24 The original legislation specified a threshold of PHP10 but it was amended subsequently. 25 A Bill to increase the threshold to PHP 2,500 has been introduced into the Philippines Senate but it does not seem to have been passed at this time.

25

The following import consignments need only complete the informal entry process:

articles of a commercial nature that are intended for sale, barter or hire, the dutiable value of which does not exceed PHP2000; and

personal and household effects or articles, not in commercial quantities, that are imported in a passenger’s baggage, mail, or otherwise for personal use.

The following have to complete the formal entry process, regardless of value and whatever purpose and nature of the importation:

articles of a commercial nature intended for sale, barter, or hire, the dutiable value of which is more than PHP2000; and

those articles which the Collector of Custms may require, upon the recommendation of the Tariff Commission, for the protection of a local industry.

2.3.11 Thailand

Under the Thai de minimis threshold, postal items or express consignments with an FOB value that does not exceed THB 1,000 may be imported free of tax and duty.

In addition to customs duties, Thailand levies three types of indirect taxes: excise tax, interior tax (10% of amount of excise tax), and value-added tax (VAT). All three are levied on imports at the same rates as on domestic production (WTO 2007c). The VAT is applied at a rate 7% to nearly all goods and services. The WTO has reported that the Thai authorities have delayed the implementation of their decision to restore the rate of VAT to 10% (WTO 2007c).

The goods that are exempt from the VAT are: books; unprocessed agricultural products; fertilizers; animal feed; pesticides; and certain other ‘social goods’ (WTO 2007c).

To assist the Royal Thai Customs in determining data requirements and the exact procedure to be applied, imported express consignments that are being presented for immediate release are divided into the following categories:

Non-Dutiable documents – comprising correspondence and documents having no commercial value and which are not subjected to duties and taxes under Part II of the Customs Tariff Decree B.E. 2530. Any items that are prohibited or restricted are not included;

Non-dutiable consignments – comprising

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(a) consignments not subjected to duties and taxes under Part II of the Customs Tariff Decree B.E.2530 (any items that are prohibited or restricted are not included);

(b) low-value consignments, imported via an airport, of which the value does not exceed THB 1,000 and which are exempted from applicable taxes and duties under Part IV, Heading 12 of the Customs Tariff Decree B.E.2530 (any items that are prohibited or restricted are not included); and

(c) trade samples of no commercial value which are exempted from applicable taxes and duties under Part IV, Heading 14 of the Customs Tariff Decree B.E.2530 (any items that are prohibited or restricted are not included);

Dutiable consignments of which the FOB value does not exceed THB 40,000 (any items that are prohibited or restricted are not included); and

Consignments other than those listed under the previous three headings.

To a large extent, the above four categories are a direct reflection of the WCO Guidelines for the Immediate Release of Consignments referred to previously.

Royal Thai Customs applies simplified import procedures to inbound express consignments where the FOB value of the shipments is less than THB 40,000. Shipments above that threshold have to undergo the formal entry process.

2.3.12 Viet Nam

Those aspects of Viet Nam’s customs regime that are relevant to the issue of de minimis are set out in:

the Law on Customs No. 29-2001-QH10; the Law on Import Duty and Export Duty 2005; Decree No. 87/2010/ND-CP of 13 August 2010; Circular No. 100/2010/TT-BTC ‘providing for customs procedures for

imports and exports sent via international air express delivery services’; and

Decision No. 78/2010/QD-TTg of November 30, 2010 (Decision No. 78) on ‘the level of value of imports sent via the express delivery service which are exempt from duty and tax,’

Decision No. 78 sets up a ‘duty-free’ de minimis regime by providing as follows:

‘Article 1. Imports valued at VND 1,000,000 (one million dong) or less which are sent via the express delivery service are exempt from import duty and value-added tax. For imports valued at over VND 1,000,000 (one million dong) which are sent via the express delivery service, import duty and value-added tax shall be paid according to law.

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Article 2. To assign the Ministry of Finance to, based on the practical situation in each period, decide to adjust the level prescribed in Article 1 of this Decision by at most 20%, in line with the administrative reform policy and international practice. Any adjustment of the level specified in Article 1 of this Decision by more than 20% shall be submitted by the Ministry of Finance to the Prime Minister for decision.

Article 3. This Decision takes effect on February 1, 2011.

Article 4. Ministers, heads of ministerial-level agencies, heads of government-attached agencies and chairpersons of provincial-level People’s Committees and concerned organizations and individuals shall implement this Decision.’

Article 5 of Circular No. 100/2010/TT-BTC provides that:

‘1. Imports and exports shall be channeled for customs inspection purposes in accordance with the WCO Guidelines on Express Consignments Clearance (the March 2006 version) and current regulations on the management of imports and exports and applicable tax policies.

2. On the basis of the channeling of imports and exports prescribed in Clause 1 of this Article, customs inspection of imports and exports shall be carried out in a simple and convenient manner, combining the application of risk management methods with the use of screening machines to physically inspect goods while ensuring strict state management and compliance with law.

3. The General Director of Customs shall provide in detail the channeling of imports and exports and customs inspection.’

Article 5 therefore sets out the foundations for ‘informal shipment’ de minimis. Further guidance is given in Article 6 that provides:

‘Particularly for gifts and samples sent to Vietnam-based organizations of which the taxable value is under VND 5 million and the total payable tax amount is less than VND50 it is not required to carry out procedures for tax exemption consideration. In this case, customs declaration and customs inspection will be the same as applicable to duty-free goods.’26

For other than ‘duty-free’ de minimis, the data and documentary requirements are essentially the same as for a full customs declaration.

2.4 Relevance to management of border protection

26 clause 1.3.4

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Hufbauer and Wong have framed the issue of de minimis entry and border protection in the following terms:

‘…within the Asian part of the APEC region, the de minimis threshold is a good barometer of the LPI [the Logistics Performance Index published by the World Bank (2009)]. Countries with higher de minimis exemption levels tend to have better LPI scores (the correlation coefficient is 0.6). De minimis reform can be a harbinger of broader improvements in customs facilitation’ (Hufbauer and Wong 2011, p.3).

Since a high correlation co-efficient does not necessarily imply either the degree of causation or its direction, we have sought to test this statement by comparing the selected APEC economies against a series of performance benchmarks in the following publications:

the World Bank’s Doing Business Report 2012 (World Bank 2010); the World Bank’s Logistics Performance Index 2010 (World Bank 2009); and the World Economic Forum’s Global Enabling Trade Report 2010

(WEF 2010).

Table 2.2 provides the details of the comparisons. It shows that while there is some correlation between the de minimis threshold and the performance of border management there is not necessarily a direct relationship between the two. Nevertheless, it is an issue that is worth exploring in more detail to determine the actual influence of a particular de minimis threshold on border performance.

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Table 2.2: Border management performance by select APEC economies

Economy Doing Business (a)

Logistics Performance Index (b)

Global Enabling Trade Report (c )

Overall Trading Across Borders

Overall Customs Efficiency

Timeliness Overall Border Administration

Canada 13 42 14 13 5 8 18

Chile 39 62 49 41 44 18 23

China 91 60 27 32 36 48 48

Indonesia 129 39 75 72 69 68 67

Japan 20 16 7 10 13 25 16

Malaysia 18 29 29 36 37 30 44

Mexico 53 59 50 62 54 64 65

PNG 101 99 124 138 87 N/A N/A

Peru 41 56 67 64 79 63 58Philippines 136 51 44 54 42 92 74

Thailand 17 17 35 39 48 60 41

Vietnam 98 68 53 53 76 71 88Notes: (a) Trading Across Borders rankings are based on three sub-indicators: all documents required by customs and other agencies to export and import; document preparation, customs clearance and technical control, port and terminal handling, inland transport and handling (time taken to export and import); and cost in USD per 20-foot container, no bribes or tariffs included (World Bank Group 2010a). (b) Logistics Performance Index components are: efficiency of the customs clearance process; quality of trade and transport-related infrastructure; ease of arranging competitively priced shipments; competence and quality of logistics services; ability to track and trace consignments; frequency with which shipments reach the consignee within the scheduled or expected time (World Bank Group 2010b). (c) Global Enabling Trade Report, Border Administration sub-index components are: efficiency of customs administration, efficiency of import-export procedures, and transparency of border administration (WEF 2010)

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31

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3. Determinants of Current De Minimis Regimes

3.1 De minimis as a concept

The concept of de minimis in relation to duties and taxes is not itself controversial. The concept is an acknowledgement that at some point the costs involved in assessing and collecting duties and taxes will actually exceed the revenue gained (OECD 2009; Simpson 2009; NZ Customs Service 2011; Productivity Commission 2011).

In the Global Enabling Trade Report 2009 published by the World Economic Forum (WEF), Simpson points out that:

‘There is a significant cost to government and business, in terms of administrative burdens and delays, resulting from subjecting shipments of minimal value to full customs formalities. All WTO Members should adopt the practice of having de minimis exemptions from full formalities for small shipments. It is common in income tax regimes to provide for simplified tax returns for persons having only small incomes. Much of the logic that lies behind this policy is applicable to collection of tax information on goods crossing borders...Related to but separate from the issue of waiving full customs formalities for small value shipments is the more sensitive issue of waiving collection of small amounts of duties and taxes. Even in a moment such as the present, when public revenues are reduced, governments that do not already have them should establish value limits below which shipments will not be subject to taxation; collecting taxes on such shipments is a procedure that is not cost effective.’ (Simpson 2009, p.64)

The World Customs Organization (WCO), the pre-eminent international body on customs matters, has made express provision for de minimis regimes in its Revised Kyoto Convention on the Simplification and Harmonization of Customs Procedures (Revised Kyoto Convention). Among other things, the revised Kyoto Convention states that:

‘National legislation shall specify a minimum value and/or a minimum amount of duties and taxes below which no duties and taxes will be collected.’ (Transitional Standard 4.13)

Moreover, in relation to Transitional Standard 4.13 of the Revised Kyoto Convention the WCO has subsequently stated that:

‘...the collection and payment of duties and taxes should not be required for negligible amounts of revenue that incur costly paperwork, both for the Customs administration and the importer/exporter. Customs

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administrations must establish and specify in national legislation amounts below which duties and taxes need not be collected and paid.’27

This tension between tax revenue and costs of its administration is also an issue that is well established at the national level.

The recently published report on the Economic Structure and Performance of the Australian Retail Industry by the Productivity Commission (2011) draws on the Henry Tax Review (Henry 2009) to make this point:

‘On the other hand, the administrative arrangements for taxes recognise that there are circumstances under which it is inefficient to impose administration and compliance costs on the government and the community in an attempt to collect small amounts of revenue. The costs to government, business and consumers entail efficiency losses and are a deadweight loss for the community. Therefore, from the viewpoint of maximizing the welfare of all Australians, the question may be whether there are likely to be bigger losses in efficiency from trying to provide equal treatment by collecting taxes on all imports, than from the distortions created by differential tax rates for foreign and domestic retailers.’

As the Henry Tax Review noted:

‘Related to the issue of complexity are the costs of administering and complying with the tax and transfer system. These costs represent a net loss to the economy, because the resources engaged in these activities could otherwise be put to more highly valued uses. Recent research suggests there is an optimal level of system complexity and operating costs, one that balances administration and compliance costs with improved efficiency and distributional outcomes.’ (Henry 2009, p.21)

NZ Customs describes the issue in this way:

‘A de minimis represents a trade-off between two aspects of taxation design; that is, integrity, which suggests that the intended rates of taxation are collected without discrimination – all like transactions treated alike for taxation assessment etc....and administrative efficiency, which suggests that accounting for, and collection of, every last dollar of taxation revenue due cannot be practically or efficiently achieved as a point will be reached where more is being spent on administrative and collection processes than will be collected in revenue” (NZ Customs 2011, p.8)

27 WCO Guidelines to the Revised Kyoto Convention

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3.2 De minimis as trade facilitation

From the perspective of customs clearance the de minimis threshold is used in two ways:

firstly, as a ‘value’ threshold below which duties and taxes are not collected and no customs declaration is required; and

secondly, as a ‘reporting’ threshold for goods in respect of which a full customs declaration must be submitted.

In other words many customs administrations adopt two levels of de minimis. Goods whose value falls between the two thresholds are usually the subject of a simplified customs declaration. The significance of these thresholds is the documentation associated with the relevant declaration requirement and the implications this has for clearance times and compliance effort. As acknowledged by New Zealand Customs:

‘For consignments required to undergo full customs formalities, the importer must submit to a customs administration detailed information on the classification, origin, and valuation of the goods at a consignment level to satisfy valuation elements for the calculation of duty, and statistical data for balance of trade purposes....’ (NZ Customs Service 2011, p.8-9)

The OECD has also recognised the potential of de minimis procedures as a trade facilitation measure. In examining trade facilitation reform for Sub-Saharan Africa it has noted that:

‘De minimis procedures could allow consignments valued below a de minimis level (i.e. threshold) to be exempted from formal customs clearance procedures, such as the submission of an import declaration, and be subject only to the submission of a consolidated manifest (such as an airway bill of lading (sic) or a commercial invoice) or simplified documentation. Furthermore, for some of these consignments, the collection of duties and taxes and other regulatory impediments may be waived and immediate release issued, based on information contained in the consolidated manifest detail records...’(OECD 2009, p.37)

De minimis arrangements are particularly important for small and medium-sized enterprises (SMEs) as they generally face a disproportionate compliance burden with respect to the completion of customs formalities. A 2003 OECD paper reported an EU study of customs procedures as finding that ‘firms with fewer than 250 employees incur trade transaction costs that are 30-45% higher per consignment than those falling on larger firms’ (Walkenhorst & Yasui 2003, p.12). This was partly because of an inability of such businesses to take advantage of the simplified procedures that the authorities generally made available.

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Indeed, additional formalities often end up being more inefficient ‘…since they have created an additional cost burden, added to the time it takes to clear goods and also created further opportunities for solicitation of “facilitation payments”’ (OECD 2009, p.39).

These costs increase the perception of risk and act as a barrier for SMEs considering entry into new markets. The effect becomes more pronounced in times of economic downturn when SMEs become particularly vulnerable to added cost burdens. As Brooks and Stone have stated:

‘Flexibility, as well as timeliness, will become more valuable as greater trade implies greater potential vulnerability to external shocks such as financial turmoil…..Factors such as delays in customs clearance, unofficial payments, and poor governance are particularly damaging because they impede flexibility’. (Brooks and Stone 2010, p.156)

The quantum of a threshold is in inverse proportion to the compliance burden. There can be little doubt that the lower the de minimis threshold, the higher the administrative burden to traders and, in particular, SMEs (Hummels 2001; Hornok and Koren 2010).

The significance of a lower de minimis threshold in the context of the administrative and compliance burden is its impact on time and administrative costs. In particular, a lower threshold means increased documentation due to the larger volume of consignments requiring a full customs declaration. Increased documentation means increased time for both business and government to prepare and process that documentation and an adverse impact on delivery time (de Souza et al 2007).

Hornok and Koren point out that document preparation is the most time-consuming of four procedures specified in the Trading across Borders database, which is maintained by the World Bank for its annual Doing Business Report. Document preparation represented about 50% of the total time of delivery for the average country — see Table 3.1 below.

Table 3.1: Time Taken by & Cost of Import Procedures (a)Procedure Days per TEU (b) Cost (USD) per TEU (b)

Mean As % of total Mean As % of totalDocument preparation 13.7 51.7 306.1 19.0

Customs clearance & inspection

3.7 14.0 213.7 13.2

Port & terminal handling 4.5 16.8 317.0 19.6

Inland transport from seaport to importer’s premises

4.7 17.5 778.0 48.2

ALL 26.6 100 1614.8 100

Notes: (a) The time taken and the fees incurred in importing a shipping container of widely traded non-perishable merchandise (b) twenty-foot equivalent unit, a standardised measure of shipping container volume Source: Adapted from Hornok and Koren (2010) and World Bank Group (2010a)

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In Hummels research on time as a trade barrier he concludes that:

‘...each day in travel is worth an average of 0.8% of the value of the good per day, equivalent to a 16% tariff for the average length ocean shipment...Estimates indicate that each additional day in ocean transit reduces the probability that a country will export to the US by 1% (all goods) to 1.5% (manufactured goods)’ (Hummels 2001, p. 3).

One might expect an even more dramatic effect of time delays on time-sensitive cargo such as that regularly transported by express companies and in fact that is the case. Djankov et al find that ‘...a 10% increase in time reduces exports of time-sensitive manufacturing goods by more than 4%, all else equal’ (Djankov et al. 2010, p.172).

In fact traders react to any increase in administrative burden by sending fewer shipments of larger size and use larger-shipment transport modes more often to spread the freight and administrative costs over a larger number of individual items.

In extreme cases it may lead to the cessation of trade with that country altogether (Hornok and Koren 2010; Productivity Commission 2011). The de minimis level therefore has a flow-on effect on choice of transport mode and therefore on the total landed cost of goods. It can mean that what was an economic transaction becomes uneconomic because:

‘[T]he choice is on the frequency/size of a shipment and the trade-off is timeliness versus smaller per shipment administrative costs. The demand for timeliness requires relatively small and frequent shipments, while the burden of per shipment administrative costs can be mitigated by reducing the frequency, and increasing the size, of shipments’ (Hornok and Koren 2010, p.3).

It is generally accepted that entry processes can be an impediment to trade and this adverse potential is behind the inclusion of ‘trade facilitation’ in the current WTO Doha Round of multilateral trade negotiations. Determinations on de minimis can have a negative impact on entry processes as noted previously and therefore have that potential to hinder trade, particularly where low value shipments are an input to business. As the Productivity Commission has recently stated in relation to Australia:

‘Competition from international retailers can be important in driving efficiency in the Australian retail industry. In addition many businesses currently receive goods which enter Australia under the LVT [low value threshold]. Longer delays or unnecessary charges associated with processing such imports will also hinder those businesses and there will be very limited additional revenue collected...’ (Productivity Commission 2011, p.159)

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3.3 Qualitative Benefits of Harmonization of De Minimis

While we have highlighted the incidence of ‘informal shipment’ de minimis across the selected APEC economies we have not conducted any economic analysis of the potential impact of harmonizing this second level of de minimis. This was outside the scope of the current project.

It is important, nevertheless to acknowledge that there is the potential for additional savings to both governments and the private sector from harmonizing ‘informal shipment’ de minimis across the APEC region quite apart from the savings already identified in relation to the ‘duty-free’ de minimis. The potential savings are a consequence of adopting a consistent and harmonized approach to simplified declarations across APEC that results in decreased documentation and faster release for goods falling within the equivalent of Category 3 of the WCO Guidelines.

The potential savings from harmonization of de minimis thresholds at an economically optimum level are particularly significant for the express industry, whose business model relies on the timeliness and hence efficiency of door-to-door delivery. Increased documentation and/or overly complex clearance procedures create friction for supply chains and in the express industry’s case reduces efficiency of delivery. This has a knock-on effect for trading firms because of their reliance on express delivery services for time-sensitive deliveries of intermediate goods (components and semi-finished products) with a corresponding negative impact on the wider economy. These potential benefits were also identified and discussed in the report of the Peterson Institute in 2011 (Hufbauer and Wong 2011).

Trade in intermediate goods constitutes almost 60% of world trade (Miroudot et al 2009; Gamberoni et al 2010). According to Ueki (2011) intermediate goods represent a similar percentage of imports for the ASEAN-7 countries (Cambodia, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam). Research has shown that timeliness is critical for trade in intermediate goods (Nordas 2007).

As Gamberoni et al state:

“Delays in delivery increase the cost of holding stocks, impede rapid responses to changes in customers’ orders and limit the ability to rapidly detect, fix and replace defective components” (Gamberoni et al 2010, pages 2-3)

The findings in the Gamberoni study suggest inter alia, that improving trade facilitation would improve participation in production networks, particularly for developing countries. Harmonizing de minimis thresholds across the APEC region could therefore prove to be a very effective trade facilitation measure in this respect; particularly when you consider the potential impact on trade in intermediate goods, given the volume of such trade within the region and between the region and other countries.

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3.4 Does de minimis increase non-compliance?

An argument that is raised in relation to the setting of a particular threshold is that it encourages non-compliance by traders; that is, traders will engage in ‘under-invoicing’, ‘split shipments’ and other forms of valuation fraud to avoid customs formalities and the payment of duties and taxes.

These concerns have been behind the recent decision of the UK Government in its 2011 budget to reduce the level of the UK threshold from £18 to £15 from November 2011. Previously, the stance of the UK Government was a reluctance to reduce the threshold because of the demands it would place on HM Revenue and Customs but this view has now shifted to favour an industry protection perspective.

Box 3.1: Case Study – PhilippinesPHILIPPINES – INCREASED INSPECTION OF LOW VALUE SHIPMENTS

In 1990 the Philippine Government progressively lowered the minimum value threshold above which pre-shipment inspection had to occur. The policy rationale for lowering of the threshold was to improve Customs enforcement.

In a review of the Philippine Government’s actions, Yang concluded that ‘the empirical analysis finds that when the Philippine Government increased enforcement by expanding inspections to low-value shipments, imports from treatment countries shifted differentially to an alternative duty-avoidance method: shipping via duty-exempt export processing zones’ (2008, p. 2)

The lowering of the threshold was not economic. As Yang concluded:

‘Conservative estimates of tariff revenue gains and losses (net of PSI fees) suggest that the minimum value threshold reductions were a starkly uneconomic proposition, leading to significant losses in net revenue for the Philippine government...The minimum value threshold reductions led to two types of revenue gains. First, because importers were no longer able to avoid the PSI requirement by valuing shipments between $5000 and $500, import duty collections should have increased on shipments that would not have been inspected before. Second, shipments were not subject to PSI (thus saving inspection fees) if they were shifted to valuation under $500 or to export processing zones. I estimate that total revenue gains from these two sources amounted to roughly $24.6 million...

These revenue gains were considerably overshadowed by two kinds of costs to the Philippine government. First, the cost of additional inspections of shipments valued between $500 and $5000 would have amounted to $28 million. Second, losses in import duties due to shifts to the other methods of duty avoidance would have totalled $33.3 million. These gross revenue losses balanced against gross revenue gains imply that the minimum value threshold reductions led to a net loss of $36.8 million for the Philippine government.’ (2008, p.12)

Source: Yang 2008

The decision to lower the threshold in the UK has been a reaction to government concerns that some UK retailers had been taking advantage of the low value threshold by selling goods over the internet, VAT-free, from subsidiaries based in Jersey and Guernsey. The estimated loss to government revenue from that practice had increased from around £80 million to £130 million over the past five years at the same time as having an adverse effect on UK SMEs who argued that they were

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unable to compete with large companies operating VAT-free in the Channel Islands and elsewhere.

Research on crime displacement in the context of customs reform in the Philippines raises serious questions about the effectiveness of lowering thresholds on non-compliance — sees Box 3.1. In that case the work has concluded that lowering the duty threshold as part of a decision to increase enforcement actually led to a net loss of revenue for the Philippine government (Yang 2008). This phenomenon is worth exploring in more detail, given the propensity for governments to justify low thresholds on the basis of reducing revenue leakage and improving compliance.

In Australia, the Australian Customs and Border Protection Service (ACBPS) undertook an ‘enhanced compliance campaign’ in relation to low value imports over the period from January to March 2011. The campaign was designed to ‘…treat concerns raised by industry about non-compliance with the low value threshold’. Some 33,000 physical examinations were undertaken on international mail articles and 32,000 assessments were undertaken on air and sea cargo declarations to assess compliance with the low value threshold. According to the ACBPS:

‘[T]hese 65,000 interventions resulted in 1,942 instances of undervaluation and bulk orders in breach of the low value import threshold....revenue underpayments...totalled $718,000’ (ACBPS 2011, p.4-5).

The ACBPS report on this compliance campaign does not provide any detail on the resource and administrative costs that were associated with the campaign so it is not possible to provide a cost-benefit analysis. However, the ratio of non-compliance against interventions is about 3%. This places some question marks over its cost-effectiveness, particularly when combined with the report’s conclusion that estimates of the revenue leakage due to non-compliance with the low-value threshold were 0.66% of total revenue collected in the 2009-2010 financial year (ACBPS 2001, p. 5).

Similarly, an increase in de minimis thresholds does not jeopardise border security since advance cargo reporting is required by most APEC economies, irrespective of the declared value of the goods. As Hufbauer and Wong point out in their research in relation to the United States, de minimis thresholds can actually have the effect of freeing up resources ‘…to deal with more important security and product safety issues’ (Hufbauer and Wong 2011, p.2).

3.5 What is the appropriate de minimis level?

Determining the appropriate quantum of de minimis threshold is fundamentally an assessment of where the balance lies between revenue gained, on the one hand, and the overall costs to business and government of compliance and customs administration, on the other (NZ Customs 2011; Productivity Commission 2011).

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This assessment differs from country to country depending on a diverse range of political, trade and socio-economic factors.

Table 3.2 has a comparison between the contrasting conclusions reached by Australia and New Zealand respectively within a similar timeframe that is informative in this respect, given the high degree of commonality that exists between these two economies.

Table 3.2: Contrasting conclusions on de minimis thresholdsAustralia: Productivity Commission 2011 New Zealand: NZ Customs Service 2011

Australia should retain its current low value threshold of $1000. While data are limited, the Commission estimates that with current processes, without the low value threshold, about $578 million of revenue would be collected and over $2 billion of collection costs would be borne by businesses, consumers and government. These costs are a deadweight loss to the community...

The costs and benefits of implementing a new process should be assessed. The low value threshold should only be lowered to a level which still remains cost-effective.(p.151)

Source: Productivity Commission 2011

Customs considers that NZ’s de minimis is at an appropriate level based on its costs of transaction processing...

A higher de minimis would reduce overall compliance and administration costs and encourage low value importations, but it would also have the effect of undermining the integrity of the taxation system and reduce government revenue. The impacts of setting a de minimis based on a customs value of $650 or $1000 have been examined. The taxation revenue foregone under these options is estimated to be up to $10.4 million and $24 million per annum respectively, which would exceed the combined compliance and administration costs of collecting it, based on current practice and cost structures. An increase in the de minimis therefore does not appear to be justified (p.2)

Source: NZ Customs 2011

What is clear is that accurate data is necessary for governments to make an informed decision as to where they should set the de minimis threshold for their economy. As the Productivity Commission has stated:

‘A number of factors affect the calculation of the amount of revenue foregone and the possible impact of any changes to the threshold. The accuracy of any estimates will be affected by the reliability of data on the:

Number, value, and distribution of low value consignments entering [Australia] through international mail, air cargo and sea cargo;

Rate of duty applicable to low value consignments;

Value of consignments which are GST [VAT] exempt, addressed to businesses registered for GST [VAT], or to non-profit organisations exempt from GST [VAT];

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Level of other costs (such as freight, insurance and customs duty) which may be included in calculations of the value of taxable importation for calculation of GST [VAT]; and

Extent to which any change in the threshold may affect the behaviour of importers and alter the value of consignments entering [Australia]” (Productivity Commission 2011, p.168)

Again, as a comparison, it is interesting to note what the Common Market for East and Southern Africa (COMESA) and the East African Community have each done in this area.28 In each case the countries in question decided to implement a threshold of USD500 for the application of more simplified customs documentation and border procedures to the trade between their members. In both cases the decision was taken with a view to facilitating trade between them. Box 3.2 has the details.

Box 3.2: Case Study – Common Market for East and Southern AfricaCOMESA – SIMPLIFIED CUSTOMS AND ORIGIN DOCUMENTATION

A simplified trade regime for selected types of commodities is being implemented by COMESA member countries.

Small-scale traders benefit from a simplified customs document and a simplified certificate of origin. Goods that originate from COMESA member states and whose value does not exceed USD 500 per consignment qualify automatically for duty-free entry anywhere in the COMESA market. In the East African Community too, a simplified certificate of origin for cross-border trade of a maximum value of USD500 has been in force since 1 July 2007.

This was agreed by COMESA Trade Ministers at the Business Summit and Exhibition held in Kigali, Rwanda in May 2007. It intended to apply initially to maize, rice, beans and traditional food crops such as cassava, as well as cotton and dairy products.

Source: OECD 2009, p.39

In relation to the United States, Hufbauer and Wong found that:

‘...that the net gain from raising the de minimis threshold on the existing volume of shipments would be about $17 million, taking into account the cost savings to all affected parties — customers, express firms, US Postal Service, and Customs and Border Protection. In other words, the loss of tariff revenue would be more than offset by the savings to the multiple parties in the delivery chain’ (Hufbauer and Wong 2011, p.6)

28 The Member States of COMESA are Burundi, Comoros, the Democratic Republic of the Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, the Seychelles, the Sudan, Swaziland, Uganda, Zambia, and Zimbabwe

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The UK Government, on the other hand, gave particular prominence to the issue of tax avoidance in making its decision to reduce the threshold from £18 to £15 with effect from November 2011.

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4. Economic Benefits & Costs of De Minimis Reforms

4.1 Overview of the economic analysis

We have estimated the economic benefits and costs that would be generated for 12 APEC economies — namely Canada, Chile, the People’s Republic of China, Indonesia, Japan, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Thailand and Viet Nam — under a range of de minimis scenarios. For ease of reference, they are referred to throughout this report as the APEC-12, while the full APEC membership is termed the APEC-21. We chose the 12 economies in question as we considered that they were broadly representative of the whole region, in terms of merchandise trade, geography and stage of economic development.

For the economic analysis we developed a spread-sheet model of the resource costs to business and government and the public taxation revenue associated with the entry of low value import consignments in each of the economies in question. The model was used to estimate the economic benefits (resource savings to business and government) and costs (public revenue foregone) for each economy under a range of de minimis scenarios. These scenarios involved the application of a minimum threshold value in all 12 economies. The minimum values analysed were USD50, USD100, USD150 and USD200.

Each scenario assumed that all import consignments with a customs value below the threshold were exempt from tariffs and other indirect taxes and were eligible for more streamlined border inspection and customs clearance procedures compared to consignments that were valued above the threshold. For the purposes of the analysis, the de minimis arrangements in any given economy were assumed to be unchanged if its current threshold exceeded the minimum level that was specified in the definition of the scenario in question.

This report presents and discusses the results of the economic analysis of the scenarios from three distinct perspectives, which are captured by the following indicators:

the value of the net economic benefit in USD (for ease of comparison); the ratio of total benefits to total costs; and the net economic benefit as a percentage of GDP.

The individual economy estimates are aggregated to provide the collective result for the APEC-12 economies, which is then projected to the APEC-21 level.

The rest of this Chapter presents and discusses the key results of the analysis. A complete description of the methodology and approach that was used in the modelling analysis is in Annex A, while the detailed results that were obtained from the analysis are set out in Annex B.

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4.1.1 Aggregate results for the APEC-12 economies

Table 4.1 has our estimates of the aggregate net economic benefit for the APEC-12 economies under each of the de minimis scenarios.

Table 4.1: Net economic benefit of alternative de minimis thresholds in APEC, USD billion per year

De MinimisThreshold

USD

APEC-12 Economies (a) APEC-21NEB (b)Net Economic

Benefit (NEB)Benefit-CostRatio (BCR)

NEB as % of APEC-12 GDP

50 1,954 59.8 0.012 4,342

100 3,138 41.1 0.020 6,974

150 4,251 42.8 0.027 9,446

200 5,357 45.3 0.034 11,903

Notes: (a) Canada, Chile, the People’s Republic of China, Indonesia, Japan, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Thailand and Viet Nam(b) Product of the APEC-12 NEB as a percentage of its GDP and APEC-21 GDP in USD.Source: ITS Global Asia Pacific

The Table also includes an estimate of the net economic benefit of each de minimis scenario for all 21 APEC economies. These estimates involve the projection of the net economic benefit of each scenario for the APEC-12 to the rest of the region, based on the net benefit expressed as a percentage of GDP. Given that the APEC-12 economies are considered to be broadly representative of the whole APEC region, we believe that this approach is valid.

We estimate that a minimum de minimis threshold of USD200 would generate a collective net benefit for the APEC-12 economies of around USD5.4 billion a year.

Perhaps what is equally significant about this result is its composition. The value of the resource savings that the scenario generates completely overshadows the value of the revenue foregone. This is very well demonstrated by the fact that the ratio of economic benefits to costs for the APEC-12 averages over 45:1 under the USD200 scenario and only slightly less for most of the other scenarios. Indeed the one exception to this was the USD50 scenario, which has a significantly higher benefit-cost ratio of nearly 60:1.

The absolute net benefit of the USD 200 scenario is equivalent to 0.34% of APEC-12 GDP. If this relationship were to hold across the APEC region as a whole, the net economic benefit for all 21 members would be nearly USD12 billion a year.

As expected, the higher the minimum threshold, the greater the net economic benefit in monetary terms. What is perhaps not so obvious though is that the higher the minimum threshold the greater the net benefit as a percentage of GDP. The net benefit rises from 0.012% of GDP under the USD50 scenario to 0.034% under the USD200 one. This largely reflects the fact that as de minimis thresholds rise across the region, a greater proportion of low value consignments enter the

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economies in question through the less costly de minimis customs channel. The exception is the USD 50 scenario.

At the margin, the increase in the net economic benefit is not proportionate to increase in the minimum threshold. For example, doubling the minimum threshold from USD50 to USD100 increases the net benefit for the APEC-12 economies by USD1.24 billion a year, an increase of nearly 58%. In contrast a further doubling of the threshold from USD100 to USD200 would raise the net benefit by USD2.25 billion a year. This is equivalent to an increase of around 67%.

4.1.2 Results for each APEC-12 economy

Table 4.2 breaks down the APEC-12 net economic benefits under each scenario by individual economy.

The individual results make clear that each of the APEC-12 would realise a net benefit from raising its de minimis threshold and that the resource savings heavily dominate the revenue foregone in each case. This pattern is evident across the entire range of thresholds that we examined. This implies that any increase in threshold would generate a net benefit for any of these economies.

Table 4.2: Net economic benefit of alternative de minimis thresholds, by APEC economy (a), USD million per year

ThresholdUSD CAN CHL CHN IDN JPN MYS

50 1,589 24.6 286 0 0 0

100 2,688 33.9 310 4.3 0 0

150 3,579 44.2 351 9.2 118 0

200 4,371 53.4 386 13.3 318 22.5

ThresholdUSD MEX PNG PER PHL THA VNM

50 0 0 13.6 14.8 18.6 7.03

100 34.6 0 16.4 17.0 27.0 6.90

150 67.7 0.067 18.3 18.7 35.5 8.63

200 98.4 0.189 20.5 20.6 43.4 9.40

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (THA) and Viet Nam (VNM)Source: ITS Global Asia Pacific

By definition of course where a scenario does not change the threshold that is in place there can be neither benefits nor costs. This was the case for Indonesia under the USD50 scenario, Japan under the USD100 scenario and down, Malaysia

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under the USD150 scenario and down, Mexico under the USD50 scenario, and PNG under the USD100 scenario and down.29

The size of the net benefit varied substantially across the six economies, both in monetary terms and as a percentage of the economy’s GSP. Most of these variations reflected a combination of the extent of an economy’s current de minimis threshold and the stage reached in its economic development. For example, other things being equal, the higher an economy’s GDP per capita, the more intensively it tends to import low value consignments for use by both business (intermediate inputs) and by households (goods for final consumption).30

The most obvious manifestation of this characteristic is the increasing tendency for businesses and households to use air express services for the delivery of low value consignments, even though the freight rate is significantly more expensive than for either mail or sea freight. For these reasons, we consider that expressing the net economic benefit as a percentage of GDP provides a better basis for comparing the results for individual economies.

We estimate that Canada would experience the greatest net economic benefit under all four scenarios. This is the case on both the absolute and the relative net benefit measures. The rate of net benefit under the USD200 scenario is 0.288%. In absolute terms, this amounts to USD4.4 billion a year.

The Canadian results are the consequence of the interplay of several factors. They include the fact that, within the APEC-12, Canada:

is the third largest economy in terms of GDP; has the highest GDP per head of population; makes the most intensive use of low value import consignments; and has the one of the lowest de minimis thresholds. 31

Chile has the second highest rate of net economic benefit in the APEC-12 under all four scenarios. In the case of the USD200 the net benefit rate is 0.026% of GDP — or USD53.4 million a year in monetary terms. The modelling results reflect the combination of Chile’s relatively high intensity of use of low value import consignments — it is ranked seventh in the APEC-12 on this indicator — and the relatively low level of its de minimis threshold.

Next in rank on the net benefit rate measure under all the scenarios is a cluster of three economies. In the case of the USD200 scenario, the cluster is headed by Thailand (0.14% of GDP or USD43.4 a year), closely followed by Peru (0.013% of GDP or USD20.5 a year) and then the Philippines (0.011% of GDP or USD20.6 a

29 Table 2.1 has the existing de minims thresholds in national currency and in their USD equivalents.

30 For this purpose, we define the intensity of use of low value imports as the ratio of the aggregate value of import consignments of USD200 or less to GDP.

31 This intensity is measured as the total value of import consignments with a landed valued of USD200 or less, as a percentage of the importing economy’s GDP.

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year). Thailand and the Philippines are in the middle of the APEC-12 on the intensity of low value import use and Peru is just below them.

Mexico, Malaysia and Viet Nam generally rank next in terms of the rate of net benefit, closely followed by China. Mexico, Malaysia and Viet Nam have a rate of 0.009% under the USD200 scenario, with China at 0.007%. This is despite the significant differences in their intensity of low value import use and in the level of their de minimis thresholds. Their absolute net benefit results are, of course, quite different — respectively USD98.4, USD22.5 million, USD9.4 million and USD386 million a year — largely due to the extent of the differences in the sizes of their economies.

Japan, Indonesia and Papua New Guinea are more or less consistently ranked at the lowest levels on the net benefit rate scale. Their net benefit rates are 0.006%, 0.002% and 0.002% respectively under the USD200 scenario and this pattern is evident across their rankings under each of the other scenarios. Their relatively low rankings on the intensity of low value import use are a large part of the explanation for this. Nevertheless the benefits generated for each of these three these economies are generally several times the costs.

Despite the fact that Japan is one of the most developed economies in APEC and has the fifth highest GDP per capita out of the APEC-12, it has the second lowest intensity of use of low value imports. Moreover, as it has the second highest de minims threshold of the APEC-12, a much higher proportion of its low value import requirements already benefit from de minimis entry compared to other economies in the study.

4.1.3 Composition of the net economic benefit

Table 4.4 breaks down the net economic benefits for the APEC-12 under each scenario by its key components:

resource savings in: o merchandise transit time;o government administration; o private sector compliance;

public revenue foregone.

The savings in government administration dominate the results for the APEC-12 economies under all scenarios. We estimate that the extension of the more streamlined and faster customs and other border clearance procedures that are generally associated with a de minimis clearance channel accounts for around 76% of the resource savings that were estimated for each of the scenarios.

The savings in public administration would be initially realised by the customs and other border agencies. If these agencies recover the costs that they incur in administering the border clearance process — through processing fees and

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charges levied on importers or their agents — the savings could be expected to be eventually passed onto to the private sector.

Table 4.4: Composition of net economic benefit of alternative de minimis thresholds, APEC-12 (a), USD million per year

Component of Net Economic BenefitDe Minimis Threshold

USD50 USD100 USD150 USD200

Saving in merchandise transit time 9 24 44 53

Saving in government administration 1,512 2,439 3,294 4,150

Saving in business compliance 467 753 1,014 1,275

Less Tax revenue foregone 33 78 102 121

Net economic benefit 1,954 3,138 4,251 5,357

Benefit-cost ratio (b) 59.8 41.1 42.8 45.3

Notes: (a) Canada, Chile, the People’s Republic of China, Indonesia, Japan, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Thailand and Viet Nam (b) The ratio of the total resource savings to the tax revenue foregone Source: ITS Global Asia Pacific

The other important source of benefits is the saving in compliance costs incurred by importers or their agents from any extension of more streamlined border clearance procedures. These costs include the cost of preparing and submitting the documentation required to obtain the requisite border clearances. We estimate that these savings account for 23% of the total resource savings generated by each of the scenarios for all APEC-12 economies.

A notable characteristic of the results is the relatively modest impact that higher de minimis thresholds have on taxation revenue. The loss of tariff revenue is between 1.5% and 2.5% of the total resource savings under the various scenarios. As would be expected this share declined with the level of the minimum de minimis threshold.

In fact the revenue forgone only approximates the smallest of the resource savings under all scenarios — namely, the savings in merchandise transit time. The more streamlined customs procedures allow delivery times to be cut by up to 60% for eligible consignments; their relatively low aggregate value, however, means that their overall impact is much smaller than the volume-based impacts on government administration and business compliance costs.

These estimates do not, however, include any allowance for the extension of the de minimis exemption to GST, VAT or any other broadly based indirect taxes. This was due to the design complexity of APEC indirect tax regimes and the difficulties in modelling their impacts, given the paucity of public information on their coverage.

We have therefore undertaken a sensitivity test of the maximum possible revenue loss from tax exemption under each of the scenarios. On average these tests indicate that the VAT/GST revenue loss is at its worst less than 8% of the total

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benefits on average and in only one case — Papua New Guinea — did they suggest the costs might be greater than the benefits.

Each of the components of the net benefit estimates is described in more detail in the rest of this Chapter. This discussion includes an explanation of the determinants of the results that were obtained, as well as the sensitivity of those results to the key assumptions used to develop the spreadsheet model used in estimation process. Before doing so, however, the Chapter canvasses the projections of the volumes and values of low value imports on which the net benefit critically depend.

4.2 Projections of low value import consignments

The most critical input to the evaluation is the estimate of the number and value of import transactions that would be affected by any de minimis expansion. As was implied by Table 4.2, by far the more important of these two variables is the number of import consignments that would enter under each of the scenarios.

Unfortunately the public information on low-value import consignments is sparse and of uncertain quality. In principle the border agencies collect information on all inwards (and outwards) air and sea cargoes. This includes the classification of the merchandise in question under the Harmonized System, its country of origin and declared value for customs purposes. In practice, such information is generally very costly for customs agencies to collect, check and validate, particularly in developing economies, while the usefulness of the information that is collected can vary to a considerable degree. As a general rule, the more valuable the transaction, the more reliable is the information collected on it.

In the light of this, the approach used to estimate the value and number of low-value import transactions by each of the APEC-12 economies is straightforward and cautious. This was in the knowledge that the estimates of net economic benefit, which were derived from them, would be highly conservative. We are confident that a more accurate approach would only increase the absolute size of the net benefit that we have calculated for each of the scenarios.

Our approach draws on the results of recent research in Australia (CIE 2011). This research was undertaken on behalf of CAPEC for an official inquiry on behalf of the Australian Government. Among other things, the inquiry is looking into the de minimis arrangements in Australia and their impact on the local retail industry.32

The CIE estimated how the number and value of consignments entering Australia varied along the spectrum of consignment values. Mail and sea cargo accounted for 84% of the total value of consignments with a landed value of less than AUD 200, and 87% of those with a value of less than AUD 100. Mail and sea cargo were

32 Among other things, the inquiry by the Australian Productivity Commission is examining the de minimis arrangements that apply in Australia. On 4 August 2011 the Commission has released its Draft Report for public comment (Productivity Commission 2011).

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responsible for 89% of the total number of consignments under the AUD 200 and 88% of the total number under AUD 100.

Despite an extensive literature review, we were unable to find any other estimates that could throw some light on the distribution of low-value imports by consignment value and number, let alone those that could comprehensively describe that distribution. In the light of this, we had to estimate the value and number of low-value consignments that enter each of the APEC-12 economies by each of the delivery modes by projecting the results of our survey of air express transactions.

These projections were based on the modal shares estimated by the CIE for low value import consignments entering Australia by air, sea and international mail (CIE 2011). In the absence of any other relevant information, we have also assumed — most conservatively, we believe — that the air express firms that we surveyed had handled all the inwards air cargo for each of the economies in question.

The spread-sheet model used to estimate the net economic benefit, however, allows each of these assumptions to be varied on a case-by-case basis. For each economy, the model extrapolates our survey results to get the annual value and number of inwards air express consignments under each scenario. From this the model projects the total value and number of consignments that enter by each mode for each evaluation scenario — based on the CIE estimate of the market share for each mode.33

Our projections for the import consignments that are received by each of the APEC-12 economies under each threshold scenario are set out in Table 4.5 (the total value of consignments by all modes) and Table 4.6 (the total number of consignments by all modes). The full details of the projections — with the breakdowns for each of the modes — are set out in Annex A.

We have attempted to check the accuracy of these projections against the information made publically available by official sources.

The projected number of consignments of USD200 or less by all modes for Indonesia is consistent with the Indonesian customs data on this category of imports that we obtained from Trade Data International — Annex D has the details. After adjusting for timing differences, the projections for Indonesia in Table 4.6 are about 90% of the equivalent levels recorded by Indonesian customs This suggest that the projection methodology and assumptions are broadly reliable, if somewhat conservative.

On the other hand the total value of import consignments that were less than USD200 per consignment recorded by Indonesian customs is more than twice as much as the total value we have projected for Indonesia in Table 4.5. 33 The approach may be expressed formally as follows: TV [total value of imports by all modes] = TVa [total value of imports by air cargo] / Sa [air cargo’s share of the total value of all imports by all modes].

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Table 4.5: Projected value of import consignments under alternative de minimis thresholds, by APEC-12 economy (a), USD million per year

ThresholdUSD CAN CHL CHN IDN JPN MYS

50 797 24.8 339 54 332 93

100 2,165 48.3 597 105 661 199

150 3,030 63.1 700 128 821 305

200 3,720 73.7 756 139 915 353

ThresholdUSD MEX PNG PER PHL THA VNM

50 89 1.66 13.1 40 56 34.6

100 197 4.31 29.1 83 121 69.9

150 262 6.00 37.1 102 156 84.2

200 317 8.26 44.2 115 182 99.2

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (THA) and Viet Nam (VNM)Source: ITS Global Asia Pacific

Table 4.6: Projected number of import consignments under alternative de minimis thresholds, by APEC-12 economy (a), million consignments per year

ThresholdUSD CAN CHL CHN IDN JPN MYS

50 44.0 1.98 31.1 4.39 25.1 4.97

100 61.9 2.30 34.7 5.03 29.3 6.32

150 76.4 2.63 38.4 5.63 33.2 7.92

200 89.2 2.92 41.6 6.16 36.6 9.06

ThresholdUSD MEX PNG PER PHL THA VNM

50 6.41 0.117 1.00 2.92 4.26 3.05

100 7.83 0.153 1.22 3.47 5.08 3.54

150 9.12 0.184 1.40 3.93 5.83 3.96

200 10.33 0.219 1.57 4.35 6.51 4.38

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (THA) and Viet Nam (VNM)Source: ITS Global Asia Pacific

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The frequency distribution of the consignments in the Indonesian customs data is far less skewed towards the lower unit values, than are the results of either our survey of air express consignments or earlier research into low value imports by other APEC economies (CIE 2011 and Hufbauer & Wong 2011). This is puzzling and does not admit any easy conclusions.

As we have already seen the intensity of use of low value import consignments varies very considerably across the APEC-12 economies. It is lowest in Japan and highest in Canada; a result that holds for both the volume and the value measures of intensity. Give the projection methodology that we used, both sets of results are, of course, a direct reflection of the results that we obtained from our survey of transactions by CAPEC members in these two economies.

The differences in intensity of use of low-value imports consignments may be a reflection of the combination of the economic geography of the APEC-12 economies and their regulation of the international supply chain within their jurisdiction.

For example, Canada shares the longest land border in the world with the United States, such that the physical location of most Canadian economic activity is closer to the United States than the rest of Canada. The two also share a common language, a common system of commercial law, and a common business culture. Not surprisingly they have the most intensive bilateral trading relationship in the world. This is reflected in the very high intensity with which low value import consignments are used in Canada.

In sharp contrast Japan is bound by sea and does not have nearly as much in common with its major trading partners, in terms of institutions that facilitate trade. This manifests itself in the very low intensity with which Japan used low value import consignments.

4.3 Savings in government administration

An inherent part of any de minimis regime is a customs clearance process that is substantially more streamlined that the one generally used. The general clearance process tends to be relatively costly in terms of government administration. It involves a case-by-case assessment of each transaction based on the collection of extensive documentation, the possibility of physical inspection of the merchandise in question, and the involvement of multiple government agencies responsible for border protection.

As low value imports are characterised by high transaction volumes compared to the aggregate value of what is being imported, savings in the cost of government administration loom large in any question of extending the de minimis threshold or the merchandise that it covers. So much so that the savings in government administration accounted for 72% of the benefits estimated for all of the threshold scenarios.

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For the present study we undertook a literature review to identify any published estimates or public sources of the resource costs of custom clearance as well as the cost differences between general and de minimis clearances. The review concentrated on finding the capital and operating costs of clearance costs for each of the entry channels in economies that had customs arrangements and levels of economic development that were similar to those of the APEC-12 but did not find anything particularly useful for the purposes of this evaluation.

We have therefore inferred the unit costs of custom clearance from an examination of the user charges and fees levied by customs and border protection agencies.

The Australian Productivity Commission (PC) used this approach to analyse the impact of a change in the Australian de minimis threshold on the costs of customs administration within that jurisdiction. The PC used the charges and fees levied by the Australian Customs and Border Protection Service (ACBPS) as a proxy for the costs of customs administration in Australia (Productivity Commission 2011). It was also the approach that the CIE had proposed to the Commission (CIE 2011).

Customs clearance charges are unlikely to yield an overestimate of the costs of customs clearance. The General Agreement on Tariffs and Trade (GATT) expressly requires that fees and charges levied for any services rendered in respect of imports — or exports for that matter — are limited to the approximate cost of the services in question and may not represent an indirect protection to domestic goods or taxation of trade for fiscal purposes.34

Due to the difficulties of accurately measuring all of the costs associated with customs clearance, most WTO members do not try to recover all of their import processing costs in clearance fees and charges. For this reason we were conscious that, other things being equal, the highest of the observed levels of fees and charges were likely to be the best proxy for the costs of customs clearance.

Of those that we have examined, the charges levied by the ACBPS are the most promising for the purposes of the economic evaluation. By law the ACBPS is required to set its charges so as to fully recover the costs that it incurs in processing imports by each mode, without regard to the value of the goods in question.35 Given this requirement and the GATT obligation not to over-recover import processing costs, we consider that its charges are the best indicators of the resource cost of conducting a full customs clearance for a low value import consignment by each of the modes in question.

The ACBPS charges AUD40.20 per declaration for the electronic clearance of mail and air cargo and AUD50.00 per declaration for the electronic clearance of sea cargo. Its charges for manual clearance are somewhat higher — AUD48.85 per

34 General Agreement on Tariffs and Trade (GATT 1954), Article VII.135 The legal authority for this is the Import Processing Charges Act 2001. The charges are widely published by the Service (Australian Customs Service 2006). As far as we are aware, Australia is the only APEC economy that has mandated the full recovery of customs processing costs.

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declaration for international mail and air cargo and AUD65.75 per declaration for sea cargo. For the evaluation, we have used their electronic clearance charges, converted to their USD equivalents.

To reflect the different economic situation and circumstances faced by each of the economies under evaluation compared to that in Australia, we have multiplied these USD equivalents by the ratio of GDP per worker in the economy in question to the GDP per worker in Australia in each case. In calculating this ratio, the GDP values, of course, have to be expressed in USD.36 This approach assumes that, if the GDP per worker in USD in one of the APEC-12 economies is half that of Australia, so too will be the public administration cost of an equivalent customs clearance in that economy.

The estimates for each of the APEC-12 economies are in Table 4.7. They were used to evaluate the savings in public administration costs on the basis that the resource cost for a de minimis clearance is negligible. For each of the scenarios, the unit costs in Table 4.7 were multiplied by the change in the number of de minimis clearances that we estimated for the relevant delivery mode under each scenario.

In the absence of concrete evidence to the contrary, we also assume that any compliance assurance programme would not necessarily have to involve substantially greater costs to cover any enhanced de minimis regime in an effective manner.

Table 4.7: Cost to public administration of de minimis consignments, APEC-12 economies (a), USD per consignment

Mode of delivery CAN CHL CHN IDN JPN MYS

Air & mail cargo 38.74 19.85 7.35 5.06 36.61 14.14

Sea cargo 48.19 24.69 9.15 6.29 45.53 17.58

Mode of delivery MEX PNG PER PHL THA VNM

Air & mail cargo 16.05 2.50 8.68 3.37 8.38 1.97

Sea cargo 19.97 3.11 10.79 4.19 10.42 2.45

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (THA) and Viet Nam (VNM)Source: ITS Global Asia Pacific

4.4 Savings in business compliance

The more streamlined customs procedures under a de minimis regime can be expected to reduce the significant compliance costs that the general customs clearance regime imposes on importers, either directly or indirectly thorough their agents. Our estimates indicate that savings in business compliance costs for consignments under the USD200 scenario accounts for over a quarter of the gross

36 The GDP and employment data in question were sourced from the April 2011 edition of the World Economic Outlook database (IMF 2011).

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savings from the change in the de minimis thresholds. The relative size of the business compliance savings under the other scenarios is broadly in line with this figure.

Competition will ensure that the agents will eventually pass on any such costs savings to their clients in the form of lower fees or higher quality of service, and the importers, in turn, will pass the savings onto their customers in the form of lower product prices

Our literature review only identified a few published estimates of the potential for savings in business compliance costs from switching low value transactions from a general customs clearance channel to a de minimis one.

Hufbauer and Wong (2011) estimated that increasing the de minimis threshold in the United States from USD200 to USD800 would generate savings in business compliance costs of up to USD33 million a year for international mail and air express consignments.

This estimate was based on an assumed saving in employee time of 0.15 hours in completing the customs documentation for a low value transaction and a labour cost of USD21 per hour to cover wages and labour on-costs, such as the employer’s health insurance and pension contributions. In addition Hufbauer and Wong estimate that the statutory storage requirements in respect of completed customs documentation cost air express firms in the United States about USD1 million a year. Their calculations imply that business compliance costs in the United States for full customs clearance of low-valued import consignments total USD6.60 per consignment.

The CIE (2011) found that switching from the general to the de minimis clearance channel in Australia would generate significant savings in business compliance costs. Customs brokers and air express carriers reported that a formal declaration took about 10 to 15 minutes of a broker’s time and their typical rate for the service was charged out at AUD 60 to AUD 80 per hour — or around USD66 to USD88 per hour. The CIE quoted the fees charged by online customs brokers in respect of low value consignments as ranging upwards from AUD 50 per consignment — equivalent to USD55 per consignment.

Using what they considered to be a conservative approach, the CIE estimated the saving in business compliance costs from switching from full formal to de minimis compliance in Australia was AUD 30 per consignment. This was substantially more than what has been estimated by Hufbauer and Wong for the United States (Hufbauer and Wong 2011). Even allowing for the greater economies of scale that would be available to express firms in the United States, there appears to be significant disagreement between the CIE estimate and that of Hufbauer and Wong.

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For our purposes we have preferred to take the most conservative approach to each of the components that made up the relevant business compliance costs — the time taken by an importer or their agent to fulfil the customs requirements and the opportunity cost of that time.

We conclude that 15 minutes is a reasonable allowance for the minimum amount of time that it takes a knowledgeable person to process a low value customs clearance for a private business, while AUD 60 per hour is a minimum estimate of the opportunity cost of that time based on the fee rates charged by customs brokers. This gives a minimum business compliance cost of AUD 15 per transaction, and we stress that it is a minimum estimate.

To apply this estimate to any of the APEC-12 economies, it needs to be adjusted to take account of the relative differences in GDP per capita, as was the case in estimating the savings in public administration to reflect the different economic situation and circumstances faced by each of the economies under evaluation compared to Australia or the United States.

The USD unit values that were estimated for each of the APEC-12 economies are in Table 4.8. These values were used to evaluate the savings in public administration costs under all the threshold scenarios on the assumption that the compliance cost for a de minimis clearance was negligible. For each of the threshold scenarios, the unit costs in Table 4.8 were multiplied by the change in the number of de minimis clearances for the relevant mode under that scenario.

Table 4.8: Cost of business compliance for de minimis consignments, APEC-12 economies (a), USD per consignment

Mode of delivery CAN CHL CHN IDN JPN MYS

Air & mail cargo 14.46 7.41 2.74 1.89 13.66 5.27

Sea cargo 14.46 7.41 2.74 1.89 13.66 5.27

Mode of delivery MEX PNG PER PHL THA VNM

Air & mail cargo 5.99 0.93 3.24 1.26 3.13 0.73

Sea cargo 5.99 0.93 3.24 1.26 3.13 0.73

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (THA) and Viet Nam (VNM)Source: ITS Global Asia Pacific

4.5 Savings in merchandise transit time

In trade as in all economic activity time has an economic cost. The longer a product takes to get from the producer to the final consumer, the more likely the product is to perish, to become out of date, to be displaced by a superior alternative, or to simply lose the interest of consumers. There is also an opportunity cost in having working capital tied up in inventory. Hence saving the

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time merchandise has to spend in transit has an economic benefit; the extent of which depends on the nature of the product.

This study used the approach previously adopted by the APEC Secretariat for the interim and final assessments of the Second APEC Trade Facilitation Action Plan (PSU 2010 & 2011). For this purpose APEC used the economy-wide valuations of merchandise transit time developed Professor David Hummels of Purdue University (Hummels 2001a, 2001b & 2007).

This study also used the Hummels’ valuations. In the present case they were expressed in terms of a ad valorem tax equivalent of a day’s transit time for each of the products classified under the UN Standard International Trade Classification (SITC) (Hummels 2001b). We converted these SITC tax equivalents to a HS basis by aligning the two classification systems and estimating a weighted average of the value of a transit day for low value import consignments at the four-digit level of the HS. This was based on the HS product weights, which we derived from Indonesian customs data on import consignments of USD200 or less — Annex D has the details.

This put the valuation at 1.08% of the value of the consignment per transit day. As we had no other comprehensive information of how the product composition of low value consignments might vary across the APEC-12, we have used this for each of the scenarios in the study.

This value is, however, significantly higher than the estimate of 0.4% calculated by Hufbauer and Wong (2011) for the United States, which was also based on the Hummels’ work referred to above. Their estimate was, however, based on a much wider range of consignment values and a much narrower range of HS classes than were evident in the Indonesian customs data. For example, Hufbauer and Wong focussed on consignments valued at between USD200 and USD800.37 Such a relatively wide valuation range is likely to be characterised by considerably greater product specialisation but resolving this issue was well outside the terms of reference for our study.

Under each scenario, the time saving for each mode of delivery was the product of: the daily ad valorem tax equivalent; the increase in the aggregate value of de minimis imports by that mode as a

consequence of the assumed threshold level; and the estimated transit time saving for the mode in question as a

consequence of switching from the general clearance channel to the de minimis channel.

Our estimates of the increase in aggregate value of de minimis imports were taken from the projections of import consignments in Tables 4.5 and 4.6. Our estimates of the transit time savings from switching to the de minimis clearance channel are in Table 4.9.

37 The current de minimis threshold in the United States is USD200 (PC 2011).

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The savings in air cargo transit time for each economy were taken from the results of our survey of CAPEC members. In the case of sea cargo, the size of the assumed saving in transit time was based on the results of the most recent Time Release Survey by the Japanese Customs and Tariff Bureau.

The Bureau conducts regular surveys of the time taken between the submission of an import declaration and the release of the cargo in question. It has used its 2009 Time Release Survey to compare customs processing times for sea cargoes that entered Japan under its Approved Economic Operator (AEO) programme with the equivalent times for sea cargo that entered through the general customs clearance channel.38 The Bureau found that the clearance times for the AEO cargoes were, on average, 60% faster than those for general cargoes (Igarashi 2010).

To put these results into an appropriate context, the World Bank’s annual series of Trading across Borders surveys have consistently put Japan well below the APEC average in terms of the time taken by importers in negotiating what the World Bank terms as Customs clearance and technical control (World Bank 2010a). From this we conclude that the transit saving achieved through the Japanese AEO programme should, as a minimum, approximate what could be achieved through the de minimis clearance of sea cargo.

Table 4.9: Saving in transit time for de minimis consignments, APEC-12 economies (a), days per consignment

Mode of delivery CAN CHL CHN IDN JPN MYS

Air & mail cargo 0.5 1.0 1.5 1.6 0.5 0.5

Sea cargo 0.6 1.8 2.4 2.4 1.2 0.6

Mode of delivery MEX PNG PER PHL THA VNM

Air & mail cargo 0.8 0.5 3.3 1.6 1.3 0.5

Sea cargo 1.2 2.4 1.8 1.2 1.2 2.4

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (THA) and Viet Nam (VNM)Source: ITS Global Asia Pacific

Accordingly we have used a saving of 60% to estimate the transit time saving for sea cargo entering any of the APEC-12 economies. It has been applied to the total time taken in 2010 by sea cargoes to complete Customs clearance and technical control in each of the APEC-6 economies, as estimated by the World Bank from its annual Trading across Border survey (World Bank Group 2010).

38 An Approved Economic Operator (AEO) is a private business involved in the international movement of goods in whatever function that has been approved by, or on behalf of, a national Customs administration as complying with World Customs Organization or equivalent supply chain security standards. The requirement for an AEO program is a key component of the WCO Framework of Standards to Secure and Facilitate Global Trade (SAFE) (WCO 2007).

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This represents a very conservative approach. Greater savings should be possible in virtually all cases given that the border clearance process in Japan has been shown to be among the fastest in the world and substantially faster than most APEC economies (World Bank 2010a). Nevertheless, the relatively low value-to-volume ratio that applies to low value consignments generally means that the value of any time savings are small compared to the savings that are based on transaction volumes — such as public administration and private sector compliance costs.

4.6 Taxation revenue foregone

The tariff revenue forgone from a higher de minimis threshold will vary with the product composition of the imported merchandise covered by the threshold, the country of origin of the imports, and the rates of taxation applied by the importing economy.

As far as the product composition of the imports is concerned, we have drawn on the results of our analysis in Annex B, which examined the HS classification of import consignments by Indonesia with a landed value of USD200 or less.

Our decision to use Indonesian HS product weights reflected the clear absence of any real alternatives in this regard. In our view the substantial differences that we have identified previously between air cargo imports and those by all modes argued against the use of the former as the basis for the estimates of the foregone revenue.

With these HS weights we have estimated the average Most Favoured Nation (MFN) tariff rate that applies to the low value import consignments that enter each of the APEC-12 economies — Table 4.10 has the results. Each weighted average was based on the latest Tariff Schedule of the economy in question.

The estimate for each APEC-12 economy involved weighting the individual MFN rates in the Tariff Schedule by the HS product shares that we had previously calculated for Indonesian import consignments with a landed value of USD200 or less per consignment. These product weights were estimated at the four-digit level of the HS level — Annex B has the details.

Multiplying the average MFN rate by our projection of the increase in value of de minimis imports under each de minimis scenario gave an approximation of the potential revenue loss for the threshold scenario in question. It needs to be adjusted, however, for the impacts of preferential tariff rates and the current de minimis revenue exemptions.39

39 For this report we have refined the method, which we had used previously (ITS & CCES 2011), to estimate the number and aggregate value of the consignments that benefit from its existing de minimis taxation exemptions. The refinement substantially increased the numbers and aggregate values in each case as well as their distribution. As a consequence, it significantly changed our estimates of the net economic benefits under each of the scenarios. For example, it lowered the net benefit for the APEC-12 under the USD200 scenario from USD5.9 billion a year to USD5.4 billion a year and increased it under the USD50 scenario from USD30,000 a year to USD2 billion a year.

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Table 4.10: Weighted average tariff rates on import consignments of USD200 or less, APEC-12 economies (a), per cent

Measure CAN CHL CHN IDN JPN MYS

MFN tariff rate 4.70 6.00 9.49 7.70 1.66 14.68

Applied tariff rate (b) 0.77 3.82 8.55 3.47 1.41 7.14

Revenue yield (c) 0.70 3.05 7.96 2.11 0.27 0.97

Measure MEX PNG PER PHL THA VNM

MFN tariff rate 6.34 4.72 2.82 6.79 10.41 13.59

Applied tariff rate (b) 1.85 4.72 2.82 3.59 5.33 5.61

Revenue yield (c) 1.33 4.72 1.11 3.58 4.24 5.35

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (THA) and Viet Nam (VNM) (b) MTN rate less adjustment for preferential tariff rates under existing Free Trade Agreements(c) Applied rate less a deduction for existing de minimis exemptions Source: ITS Global Asia Pacific

For example, since ASEAN established the ASEAN Free Trade Area (AFTA) in the early 1990s, its has concluded free trade agreements (FTAs) with a number of its major trading partners, including China (2002), the Republic of Korea (2005), Japan (2008), India (2009) and Australia and New Zealand (2009). ASEAN has also concluded the ASEAN Trade in Goods Agreement (ATIGA), which is in the process of completing tariff liberalization within ASEAN by 2010 for the foundation member states and by 2018 for the newer member states.

The depth, scope and pace of tariff liberalization under each agreement varies by ASEAN economy, product and trading partner. In some agreements, such as the ASEAN–India FTA, certain sectors or products are excluded from the liberalization provisions in the Agreement. In others, such as the AANZFTA, scope of the tariff liberalization is far more comprehensive.

The time available for the study did not allow for a highly time consuming, product- by-product assessment of each of the five ASEAN economies in the APEC-12, let alone the rest. We have therefore assumed that all low value imports by the five ASEAN economies from any of their ASEAN or FTA partners are duty free.

We have used the same approach for each of the other APEC-12 economies. This assumes that all imports by Canada or Mexico from any of their NAFTA partners are duty free, as are those by Chile from the United States, and by China or Japan from any of the ASEAN economies. Adjusting for the duty free rates we have assumed are in the process of being applied to imports from FTA partners, gives an estimate of the effective applied

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tariff rate for each of the APEC-12 economies in the study. They are also presented in Table 4.10.

We have also assumed that the tariff revenue lost due to the existing de mininis threshold is the existing threshold level as a percentage of the threshold level in the scenario under analysis. This percentage is multiplied by the applied tariff rate gives the revenue yield for each economy under the scenario in question. These estimates are also set out in Table 4.9. They may be thought of as the indicators of the long-run impact on revenue after the tariff preferences that have been included in recent FTAs are fully implemented.

In most of the economies in the study the scope for revenue loss is much lower than many may expect. This is due to a combination of relatively low MFN rates in all but two of the economies and extensive departures from MFN rates for much of the trade of all six due to the proliferation of FTAs.

The spread-sheet model that we have developed for this study does not estimate the impact of changes to de minimis thresholds on other indirect tax revenue. This reflects the technical challenges of modelling highly complex tax regimes with different rates for different products at different stages of production. It is, nevertheless, possible to use a model such as this to test the sensitivity of its results to a range of key assumptions about the nature of the indirect tax regimes in the APEC-12.

Except for Malaysia, all APEC-12 economies currently impose a tax at each stage in the production of most goods and services, along the lines of the Value-Added Tax that is imposed by the European Union. For its part, Malaysia is planning to replace its selective sales and services taxes with such a Goods and Services Tax (GST). The indications are that the rate will be no more than 10%.

At the present time, GST or VAT-type taxes are currently levied at rates of: 5% in Canada and Japan; 7% in Thailand; 10% in Indonesia, Papua New Guinea, Peru, the Philippines and Viet Nam; 16% in Mexico; 17% in the People’s Republic of China; 18% in Peru; and 19% in Chile. In no case, however, is this rate applied to all goods that are consumed within the economy in question.

Applying these nominal rates to the projected change in the value of imports that enter an economy via the de minimis channel gives an indication of the maximum amount of VAT revenue that could be foregone by lifting the threshold under each scenario.

The impact that the maximum revenue loss have on the earlier estimates of net economic benefit for the APEC-12 economies are respectively summarised in Tables 4.10 (the APEC-12 results) and Table 4.11 (the individual economy results).

Table 4.11: Net economic benefit of alternative de minimis thresholds, APEC-12 economies, VAT/GST sensitivity test, USD billion per year

De MinimisThreshold APEC-12 Economies (a)

APEC-21NEB (b)

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USD Net Economic Benefit (NEB)

Benefit-CostRatio (BCR)

NEB as % of APEC-12 GDP

50 1,869 16.8 0.012 4,154

100 2,899 10.1 0.018 6,442

150 3,924 10.2 0.025 8,720

200 4,958 10.5 0.025 11,018

Notes: (a) Canada, Chile, the People’s Republic of China, Indonesia, Japan, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Thailand and Viet Nam(b) Product of the APEC-12 NEB as a percentage of its GDP and APEC-21 GDP in USD.Source: ITS Global Asia Pacific

Table 4.12: Net economic benefit of alternative de minimis thresholds, by APEC-12 economy (a), VAT/GST sensitivity test, USD million per year

ThresholdUSD CAN CHL CHN IDN JPN MYS

50 1,566 22.7 237 0.00 0 0

100 2,596 27.5 218 -0.79 0 0

150 3,444 35.1 241 1.90 114 0

200 4,201 42.2 267 4.85 309 17.7

ThresholdUSD MEX PNG PER PHL THA VNM

50 0 0 11.3 10.87 17.2 4.04

100 17.4 0 11.2 8.65 21.2 0.38

150 40.1 -0.034 11.6 8.52 27.1 0.68

200 62.0 -0.138 12.6 9.09 33.3 -0.04

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (THA) and Viet Nam (VNM)Source: ITS Global Asia Pacific

The message of the sensitivity test is rather clear-cut. The loss of VAT/GST revenue does not qualitatively change the results that were discussed above, with the possible exception of Indonesia, Papua New Guinea and Viet Nam. Even in those cases net losses are evident only in certain circumstances and the absolute levels of the losses are so small that they are unlikely to be significant in any statistical sense. For example, in no case do they exceed USD0.8 million a year.

The overall conclusion is strongly reinforced by the fact that our estimates of the VAT/GST revenue forgone are almost certainly excessive and significantly so in many cases. The sensitivity test assumes that the nominal tax rate applies to all low value imports but in fact each of the APEC-12 economies exempts certain types of goods from their broadly-based indirect tax regimes. The sensitivity test makes no allowance for such exemptions.

More importantly no allowance has also been made for the fact that a high proportion of low value imports are business inputs. Classical VAT-style regimes, including those imposed within APEC, work by taxing the value that is added at each stage of production. To minimise the tax distortions involved in cascading

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effective tax rates along the chain of production, most regimes of this type allow taxpayers to claim a tax credit for any taxes that their suppliers have paid on the business inputs that the taxpayers use.

This feature means that classical VAT regimes have an automatic mechanism that tends to eliminate tax avoidance or evasion. In other words, if VAT is not paid on a business input, for whatever reason, the VAT liability for the product, which it is used to produce, is increased by the amount of any unpaid tax. In other words any VAT that is not collected at an earlier stage of production would be expected to be collected by the time the final product is sold to the consumer or end user.

This means that the only VAT revenue that is forgone by raising a de minimis threshold relates to the merchandise, which is imported by or on behalf of households. All the available evidence suggests that this is a clear minority of the aggregate value imported as low value consignments.

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5. Conclusions & Recommendations

We estimate that a minimum threshold of USD200 would generate a net benefit of USD5.4 billion a year for the APEC-12 economies, equivalent to about 0.034% of their GDP. Extrapolation of this to the rest of APEC implies a net benefit of USD11.9 billion for all 21 economies.

Decreasing the minimum threshold reduces the extent of the net economic benefit the APEC-12 and does so more than proportionately. It remains true, nevertheless, that any increase in the threshold in any of the 12 economies is better than none.

Around 98% of the net benefit to the APEC-12 from the USD200 threshold is accounted for by resource savings in government administration and business compliance. These savings have, nevertheless, been conservatively estimated based on the level of fees and charges for the relevant services that apply in Australia where they are generally considered to be delivered efficiently. While these have been adjusted to reflect differences in labour costs with Australia, no allowance has been made for differences in processing efficiency.

The balance of the net economic benefit received by the APEC-12 economies is a relatively modest saving in merchandise transit time. Taxation revenue forgone is generally a minor consideration, amounting to no more than 4% of all the economic benefits. The same broad pattern was evident across the great majority of the APEC-12.

Although it was not possible to model the impact of de minimis thresholds on VAT/GST revenues, a sensitivity test based on the maximum possible revenue loss did not qualitatively change the results. The actual impact is likely to be much less than this maximum — which is equivalent to less than 8% of the total benefits. The vast majority of low value imports are business inputs and under classical VAT regimes any revenue that is not collected at the border is likely to be collected at a subsequent stage of production. Moreover these maxima make no allowance for the significant economic cost of public revenue in the form of foregone output — the so called ‘deadweight’ losses.

Our conclusions on beneficial direction of de mimimis policy have been strongly reinforced by the Productivity Commission, the Australian Government’s independent economic advisory body. The Commission is reviewing the de mimimis threshold that is applied in Australia. Although Australia has the highest threshold in APEC and a 10% rate of GST, the Commission has concluded that any reduction in the threshold would impose a net cost on the economy, and a substantial one at that.

Notwithstanding the severity of the information constraints on our analysis, these orders of magnitude are unlikely to change with the application of more information or better quality data. At this level we judge the results to be robust, at least for the great majority of economies that we have examined. Indeed the

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conservative nature of our approach should mean that any more refined estimation is likely to yield higher net benefits than what we have estimated here.

For a start, the estimates in this report have made no allowance for any behavioural response to any increase in thresholds. Competition will ensure that the resource savings in transit time and business compliance costs generated by higher thresholds will eventually be passed on to domestic users and consumers in the form of lower prices and higher quality products. These changes will, in turn, stimulate increased output by downstream industries and increased consumption by households. Neither impact has been accounted for here but both would add to the net benefit to the community as a whole.

The size of these behavioural benefits would be significantly increased by a co-ordinated approach within APEC to raising de minimis thresholds and broadening their coverage across the region. The leverage that is available in this regard is similar to what multilateral liberalisation of trade barriers through the WTO can achieve compared to unilateral liberalisation. A co-ordinated increase in de minimis thresholds is functionally and economically equivalent to a co-ordinated cut in trade barriers to intermediate goods, which are the fastest growing component of global trade.

The overall policy implications of our results are quite straightforward. A commercially attractive de minimis arrangement makes sound economic sense for all economies. While the optimal level of the threshold for any economy remains somewhat of an open question, the beneficial direction of policy change in APEC is quite clear. This is strongly underlined by our estimated benefit-costs ratios, which put the total benefits for the great majority of the APEC-12 economies at many multiples of the total costs.

Most, if not all, APEC economies would benefit by increasing their existing thresholds, and by a substantial amount. APEC could assist this process by agreeing to recommend a minimum threshold level to its members with the option of a higher level to better suit individual circumstances.

Where the prospective revenue losses are seen as being unacceptable, there is the possibility of expanding the ‘informal’ clearance arrangements or establishing such regimes where they do not exist. Doing so, would provide border clearance procedures that were more streamlined than the general customs channel but less so than the de mimimis one but no tax exemptions. This option represents a middle way between de minimis expansion and the status quo.

At the same time there is a clear need for further research to reduce the uncertainty that remains about the optimal level of de minimis thresholds generally and to refine our understanding of the economic trade-offs that are involved in the design of a de minimis regime. This is particularly true for the minority of cases where our evaluation results were not so clear cut

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PSU [Policy Support Unit], 2010, Reducing trade transaction costs in APEC economies by 5% — Progress with achieving the goals of TFAP II: Interim Assessment of TFAP II, APEC Secretariat, Singapore

PSU [Policy Support Unit], 2011, Aggregate Measurement of Trade Transaction Costs in APEC 2007-2010, APEC Secretariat, Singapore [Accessed at: http://publications.apec.org/publication-detail.php?pub_id=1212]

RSM Sawamura & Co, 2008, Japanese Consumption Tax, Tokyo, Japan [Accessed at: http://www.iadvisory.gov.sg/upload/JapaneseConsumptionTax.pdf]

Simpson, J, 2009, ‘A Tour of the Ongoing Work of the World Trade Organization on Trade Facilitation: The Traders’ Perspective’ in WEF, 2009, The Global Enabling Trade Report, World Economic Forum, Davos, Switzerland [Accessed at: http://www.weforum.org/s?s=global+enabling+trade+report]

Ueki, Yasushi, 2011, ‘Intermediate Goods Trade in East Asia, in Kagami, Mitsuhiro, (ed.), 2011, BRC Research Report, No. 5, Bangkok Research Centre, IDE-JETRO, Bangkok [Accessed at: http://www.ide.go.jp/English/Publish/Download/Brc/pdf/05_chapter2.pdf]

Walkenhorst, P. and Yasui, T., 2003, Quantitative Assessment of the Benefits of Trade Facilitation, TD/TC/WP(2003)31/Final, OECD, Paris, 13 November [Accessed at: http://www.oecd-ilibrary.org/trade/overcoming-border-bottlenecks/quantitative-assessment-of-the-benefits-of-trade-facilitation_9789264056954-2-en]

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World Bank, 2010b, ‘Connecting to Compete: Trade Logistics in the Global Economy’, The Logistics Performance Index and its Indicators, The World Bank Group, Washington D.C. [Accessed at: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTTRANSPORT/EXTTLF/0,,contentMDK:21514122~menuPK:3875957~pagePK:210058~piPK:210062~theSitePK:515434,00.html]

WCO [World Customs Organization], Revised Kyoto Convention on the Simplification and Harmonization of Customs Procedures; Chapter 4 (Duties and Taxes); Transitional Standard 4.13, Brussels [Accessed at: http://www.wcoomd.org/Kyoto_New/Content/content.html]

WCO [World Customs Organization], 2007a, Guidelines for the immediate release of consignments by Customs, Brussels, Belgium, July [Accessed at: http://wcoomdpublications.org/downloadable-publications/guidelines-for-the-immediate-release-of-consignments-by-customs.html?___store=english&___from_store=french]

WCO [World Customs Organization], 2007b, WCO SAFE Framework of Standards, Brussels, Belgium, June [Accessed at: http://www.wcoomd.org/files/1.%20Public%20files/PDFandDocuments/SAFE%20Framework_EN_2007_for_publication.pdf]

WEF [World Economic Forum], 2009, The Global Enabling Trade Report, World Economic Forum, Davos, Switzerland [Accessed at: http://www.weforum.org/s?s=global+enabling+trade+report]

WTO [World Trade Organization], 2005a, Communication from Malaysia, Negotiating Group on Trade Facilitation, Document TN/TF/W/50, Geneva, Switzerland, 14 June [Accessed at: http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm]

WTO [World Trade Organization], 2005b, Trade Policy Review: the Philippines, Report by the Secretariat, Document WT/TPR/S/149, Geneva, Switzerland, 7 June [Accessed at: http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm]

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WTO [World Trade Organization], 2007a, Trade Policy Review: Indonesia, Report by the Secretariat, Document WT/TPR/S/246, Geneva, Switzerland, 4 May [Accessed at: http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm]

WTO [World Trade Organization], 2007b, Trade Policy Review: Peru, Report by the Secretariat, Document WT/TPR/S/189, Geneva, Switzerland, 12 September [Accessed at: http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm]

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WTO [World Trade Organization], 2007c, Trade Policy Review: Thailand, Report by the Secretariat, Document WT/TPR/S/191, Geneva, Switzerland, 22 October [Accessed at: http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm]

WTO [World Trade Organization], 2008, Trade Policy Review: Mexico, Report by the Secretariat, Document WT/TPR/S/195, Geneva, Switzerland, 7 January [Accessed at: http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm]

WTO [World Trade Organization], 2009a, Trade Policy Review: Chile, Report by the Secretariat, Document WT/TPR/S/220, Geneva, Switzerland, 2 September [Accessed at: http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm]

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WTO [World Trade Organization], 2010a, Trade Policy Review: China, Report by the Secretariat, Document WT/TPR/S/230, Geneva, Switzerland, 26 April [Accessed at: http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm]

WTO [World Trade Organization], 2010b, Trade Policy Review: Papua New Guinea, Report by the Secretariat, Document WT/TPR/S/239, Geneva, Switzerland, 12 October [Accessed at: http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm]

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Yang, D., 2008, ‘Can Enforcement Backfire? Crime Displacement in the Context of Customs Reform in the Philippines’, The Review of Economics and Statistics, 90(1): 1-14

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Annex A: Methodology & Approach to the Study

There are three components to the study:

• Component 1: An analysis of the current de minimis regimes in APEC;

• Component 2: An analysis of the factors that shaped the current de minimis regimes in APEC;

• Component 3: An economic analysis of the current de minimis regimes and the alternatives to them.

The study was undertaken in two stages.

• The Conference of Asia Pacific Express Carriers (CAPEC) commissioned and the first stage, which covered Canada, Indonesia, Japan, Malaysia, the Philippines, and Thailand. It was completed in August 2011.

• CAPEC and its sister organisations in the Americas -- the Express Association of America (EAA) and the Latin American Association of Express Delivery Companies (CLADEC in Spanish) -- commissioned the second stage. This stage covered Chile, the People’s Republic of China, Mexico, Papua New Guinea, Peru and Viet Nam and was concluded in May 2012.

Collectively these economies are termed the APEC-12 economies for the purposes of this report, while the full membership is referred to as APEC-21. The APEC-12 economies were chosen for the study as they were considered to be broadly representative of the APEC region as a whole, measured in terms of merchandise trade, geography and stage of economic development. In 2010, for example, the APEC-12 economies collectively accounted for 48% of regional merchandise imports, and 45% of the regional gross domestic product (GDP). The group’s GDP per capita averaged USD 7,300 per head of population, which may be compared to the average for all 21 APEC economies of USD 12,900 per head.40

The Centre for Customs and Excise Studies (CCES) at the University of Canberra completed Components 1 and 2. For its part, ITS Global Asia Pacific (ITS) was responsible for Component 3 and for the preparation of the report as an integrated whole.

40 These estimates are based on the April 2011 edition of the World Economic Outlook database (IMF 2011).

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A.1 Components 1 & 2

Component 1 sought to establish the basic details of the de minimis arrangements in each of the APEC-12 economies for the purposes of this study. The details sought included the level of the threshold in national currency, its equivalent USD value, the types of merchandise covered by the threshold, and the nature of the tax exemptions available under it.

Component 2 was aimed at establishing the reasons each economy chose their current de minimis arrangements, particularly the level and coverage of their threshold. Among other things, this involved an assessment of the:

• efficiency of their customs clearance processes;

• speed and reliability of of business transactions — especially for ‘just in time’ business models in manufacturing, services and the logistics supply chain;

• administration and compliance costs in the supply chain — including for logistics providers, importers, small- to medium-sized business users, and consumers;

• facilitation of trade and commerce — including electronic commerce; and

• cost to government — including customs infrastructure and administration resources versus customs revenue foregone.

This work involved desktop research supported, as necessary, by direct enquiry of the relevant customs administration. This approach was considered to be the best option given the time constraints on the study and the need for early inputs for the economic analysis in Component 3.

The research involved seeking facts, general information, historical background, relevant research results, etc., that have been published or are in the public domain. This information was obtained from libraries, newspaper archives, government, university, websites, non-governmental organisations (NGOs) and CBOs etc. For example, most research undertaken by public agencies is easily accessible on the internet or from government offices.

The initial research focussed on each economy’s relevant laws and legislation and any supporting policy documentation that provides the rationale for the threshold. This policy and legislative context formed the basis for comparative analysis inter se and also with the results of recent research on these issues by the Organisation for Economic co-operation and Development (OECD), the World Bank, the World Trade Organisation (WTO), and more recently the Peterson Institute for International Economics in Washington, DC.

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The subsequent analysis examined the implications of adopting a particular de minimis threshold and thereby identified the key variables that need to be factored into the economic analysis. Where there were gaps in the documentation available to inform this process, the relevant customs administration was approached for information to fill those gaps and/or to test any assumptions.

With this in mind the CCES:

• Identified and examined the previous research on de minimis thresholds and policies;

• Identified, clarified and documented the de minimis threshold and regulatory framework in the economies selected for the case studies;

• Analysed the research data and developed recommendations;

• Prepared draft conclusions and recommendations and discussed with key stakeholders; and

• Wrote up the analysis, assumptions used, conclusions reached, and recommendations proposed for inclusion in the reporting to CAPEC.

 A.2 Component 3

Drawing on the outputs from Components 1 and 2, ITS developed a model in Microsoft Excel and applied it to estimate the net economic benefit to each of the APEC-12 economies of their adopting less restrictive de minims arrangements to facilitate trade. The less restrictive arrangements include higher threshold values, broader product coverage, and faster clearance of eligible imports.

Component 3 sought to estimate:

• the net economic benefit in USD to the APEC region from APEC economies adopting a minimum baseline threshold value;

• the increase in APEC and intra-Asian trade in USD from APEC economies adopting a recommended baseline threshold; and

• the net economic benefit in USD to individual APEC economies from their adopting the recommended baseline threshold or some lower threshold.

A.2.1 Overview of Approach

Raising the de minimis threshold in an economy will increase the volume of imports that enter under this arrangement and will simultaneously decrease the volume of imports that continue to enter under the general clearance regime, other things being equal.

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The extent of the switch will depend on the extent of the increase in the de minimis threshold, the regulation and administrative practice that determine the merchandise that may use the de minimis channel, and the customs procedures that apply to the de minimis and general clearance channels.

The economic benefit of the switch is the sum of the following:

• Time savings in the delivery of imported merchandise to the end-users;

• Savings in resources by logistics services providers and importers; and

• Savings in the public costs of customs administration.

Netting out the public revenue foregone from the elimination of tariffs and other indirect taxes gives the net economic benefit of the change.

Estimates of each of these impacts were made on an ad hoc basis. The information required to do so was sourced from:

• a review of the relevant economic literature on the economic benefits and costs associated with low value imports;

• data on relevant import transactions that are being collected from each CAPEC member specifically for this study; and

• public sources of data on low value imports, the customs and tariff

treatment of different types of imports, the costs of customs administration .

The literature reviewed was found through searches of bibliographical databases in the public domain — such as the Econlit database of the American Economic Association. Google Scholar was used to identify other research that has been published on the World Wide Web. The review sought to identify the key relationships that influence the importation of merchandise through the de minimis channel.

The results were used to choose the values to be assumed for the estimation process. The key ones included the:

• unit value of the transit time taken by low value merchandise in international trade;

• product composition used to calculate weighted average tariff rates for different types of imported products;

• amount of time taken by importers in completing customs clearance and border screening procedures; and

• unit cost of customs administration for the different clearance channels.

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Information was collected from each of the companies represented by the EAA, CAPEC and CLADEC by way of a sample of air express consignments that each brought into each of the economies selected for the study. The sample consisted of the transactions for the week beginning 1 June 2011, which was considered to be broadly representative of a year’s business.

The data collected included:

• the declared value of each import valued at up to USD200 that entered the economy in question during the week beginning 1 June 2011;

• the nature of each consignment, as declared by the consignee;

• the origin of each consignment;

• the average time taken to deliver such imports that enter each of the six economies under any de minimis arrangements;

• the average employee time spent on such imports that enter each of the six economies under any de minimis arrangements;

• the average time taken to deliver such imports that enter each of the six economies under their general customs clearance arrangements; and

• the average employee time spent on such imports that enter each of the six economies under their general customs clearance arrangements.

In most economies, particularly developing ones, air cargo is only used for a relatively small minority of import transactions and for a minority of products; their relatively high cost means that air transport is economic only for products with a relatively high value to mass ratio.41 Most low value imports enter through the postal system or as sea cargo (Productivity Commission 2011). For these reasons one cannot rely on data on air express transactions to describe the nature or extent of all low value imports.

With that in mind ITS approached Trade Data International (TDI) with a view to obtaining detailed customs data on all import transactions of USD200 or less for each of the APEC-12 economies. In the event TDI was only able to provide such data for Indonesia. It appears that, in the interests of economy, the customs agencies of the other economies do not collect data on such low value transactions or did not publish the data it if they collected it.

41 The clear exception to this is the United States (see Hummels 2001a).

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The data covered all imports cleared by Indonesian customs with a landed value of USD200 or less for each month of 2009 and 2010. The number and value of the transactions in question were disaggregated by their country of origin and by their four- and six-digit codes on the Harmonized Commodity Description and Coding System (HS) of tariff nomenclature. The data set was also partitioned into sub-sets — namely consignments that were valued at USD150 or less, USD100 or less, and USD50 or less.

The method and approach used for each element of the estimation process is outlined below.

A.2.2 Value of savings in merchandise transit time

This study used the same approach used to estimate the economic value of transit time in international merchandise trade for the APEC Secretariat (PSU 2010 & 2011). This used valuations of time for 175 countries published by Professor David Hummels of Purdue University (Hummels 2007). This work was based on his previous estimates of the ad valorem tax equivalent of a day’s transit time for products classified at the two-digit level in the Standard International Trade Classification (SITC) (Hummels 2001a & 2001b).

For each economy the transit time savings from increasing the share of import transactions entering via the de minimis channel was calculated as the product of:

the Hummels’ ad valorem tax equivalents of transit time;

the increase in the aggregate value of de minimis imports as a consequence of an increase in the threshold to the given level; and

an estimate of the average time saving from increasing the de minimis threshold to the given level.

The Hummels’ ad valorem tax equivalents of time were converted from a SITC basis to a HS basis by aligning the two classification systems. A weighted average of the ad valorem tax equivalents was then estimated based on the four-digit HS composition of low value imports. The latter was estimated from the composition of Indonesian import transactions of USD200 or less in 2010.

This weighted average ad valorem tax equivalent was used for each of the six economies in the study. Multiplying this by the increase in the aggregate value of imports for each of the economies in question gives estimates of the economic value of a saving of one day in transit time across all their low value imports.

The proportionate increase in de minims imports for each economy was taken to be the increase in the USD value of its existing de minimis threshold, based on a series of progressively higher alternative thresholds — namely USD50, USD100, USD150 and USD200. At present the de minimis thresholds in the six economies range from 35 US cents to USD150 based on prevailing exchange rates.

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The estimates of the increase in the aggregate value of de minimis imports and the average saving in transit time for each economy were based on the transaction data collected from CAPEC members.

A.2.3 Savings in business compliance costs

For consignments valued at between USD200 and USD800 that were imported into the United States, the Petersen Institute has estimated that the customs paperwork alone costs around USD33 million a year (Hufbauer & Wong 2011). This estimate was based on the wages and labour on-costs for the employee time that was estimated as being employed in completing the official documentation that was required.

ITS used the same approach to estimate the savings in handling costs to the express delivery carriers in each of the selected APEC economies. For this purpose it collected data from each CAPEC member on the extent of the employee time that is involved in handling consignments that enter through the de minimis and the general customs clearance channels in each of the six APEC economies.

ITS identified the opportunity cost of the labour skills that are required for this work. This information will be used to estimate the unit labour cost for the employee time spent in handling consignments through the two customs clearance channels for each of the economies.

The product of the employee time and the unit labour cost provided the estimate of the handling costs for each customs clearance channel in each APEC economy. The difference between them gave the saving from expanding the coverage of the de minimis channel.

A.2.4 Savings in customs administration costs

The more streamlined customs procedures that are associated with the de minimis channel means that any increase in the share of imports entering through that channel should allow the operating and capital costs of customs and border administration to be reduced. A de minimis regime saves the public purse from having to collect public revenue where the cost of doing so is high compared to the revenue actually received. The collection cost per unit of revenue is generally very much higher for ad valorem indirect taxes than for most other taxes.

The literature review sought to identify reliable sources of data on the unit costs of custom clearance for each of the entry channels. The search concentrated on economies with similar customs arrangements and economic development status as the six economies selected for this study. This information was intended to be used to estimate the savings in public administration from increasing the share of imports that enter via the de minimis channel.

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In the event this approach proved to be unproductive, therefore ITS has inferred the unit costs involved from the schedule of user charges and fees that are levied by the customs and border agencies. This approach was used by the Centre for International Economics (CIE) to estimate the saving in customs administration costs from the relatively less onerous clearance procedures that are applied to low value imports in the Australian context (CIE 2011).

The General Agreement on Tariffs and Trade (GATT) expressly requires that fees and charges levied for any services that are rendered in respect of imports (or exports for that matter) are limited to the approximate cost of the services in question and may not represent an indirect protection to domestic goods or taxation of trade for fiscal purposes.42 This means that, on average, the fees and charges that WTO members impose on importers probably do not recover all of the costs of customs administration and border protection so it was important to select fee rates that are set explicitly to recover all customs clearance costs.

A.2.5 Revenue foregone from tax exemption

Generally speaking the taxation treatment of the type of low value imports that might benefit from a higher de minimis threshold will vary with the nature of the good in question, the economy from where it originated, the tariff and indirect tax rates that apply in such cases, and the nature and extent of the taxation exemptions that are available in the economies in question.

ITS analysed the transaction data obtained on low value imports by Indonesia in terms of its product shares in terms of the WCO Harmonized Commodity Description and Coding System. The Harmonized System forms the basis for the Tariff Schedules that the 12 economies use to classify their imports for the purpose of calculating customs duties.

Using these Indonesian product weights, ITS estimated a weighted average ad valorem tariff for low value products that are being imported by each of the selected economies up to the proposed baseline de minimis threshold. This weighted average was based on the assumption that the origins of low value imports by Indonesia are similar to those of similar imports by the other five economies. This approach was a direct consequence of the absence of any reliable and detailed customs data on the composition of low value import consignments that enter the other 11 economies in the study.

To estimate the tariff revenue lost from raising the de minimis threshold in each case, ITS multiplied the weighted average tariff rate by the increase in the value of de minimis imports under each of the modelling scenarios, which was the difference between:

the projection of the aggregate value of import consignments that would be eligible for de minimis treatment under the scenario; and

42 General Agreement on Tariffs and Trade (GATT 1954), Article VII.1

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an estimate of the aggregate value of import consignments that currently enter the economy in question under its existing de minimis arrangements.

The estimate of the current value of de minimis entry was inferred from the four low value import projections that were prepared for each of the economies in the study. In extending this study from the original six to a total of 12 economies, ITS significantly refined the approach that it used to estimate the aggregate value and number of import consignments that entered each economy under its existing de minimis arrangements.

The change in approach involved summing:

projection of the consignment value that was ranked next in value below the current de minimis threshold (the lower scenario); and

a percentage of the increase in aggregate value between the projection in the lower scenario and the next ranked projection in terms of consignment value (the higher scenario).

The percentage in question was the difference between the level of the current de minimis threshold and the level of the threshold assumed in the lower scenario, expressed as a proportion of the USD 50 increment in threshold level, which is involved when moving from the lower to the upper scenarios. To illustrate, if the current de minimis threshold is USD 75, the aggregate value of exempt consignments is assumed to be the aggregate value projected under the USD 50 scenario plus half the difference in aggregate value projected under the USD 100 and USD 50 scenarios.

In the case of the VAT/GST revenue, ITS multiplied the nominal tax rate by the relevant increment in aggregate value under each of the scenarios. This only gave an estimate of the maximum possible revenue loss in each case, as it made no allowance for gaps in product coverage, variations in the rates applied, and any rebates for tax revenue collected on business inputs. Our ability to allow for such variations is severely constrained by the complexity of the taxation regimes in question and the paucity of reliable information on the details of their operation, which is available to the public. The latter problem has been extensively highlighted and documented by others, including most recently by the Australian Productivity Commission (2011).

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Annex B: Results of Economic Evaluation

Table B.1: Net economic benefit of alternative de minimis thresholds in APEC-12 (a), USD million per year

Component of Net Economic Benefit

Alternative Threshold

USD50 USD100 USD150 USD200

Saving in transit time 9 24 44 53

Saving in public administration 1,512 2,439 3,294 4,150

Saving in private compliance 467 753 1,014 1,275

Total benefits 1,987 3,217 4,353 5,478

Less Tax revenue foregone 33 78 102 121

APEC-12 Net Economic Benefit 1,954 3,138 4,251 5,357

Benefit-cost ratio 59.8 41.1 42.8 45.3

NEB as % of GDP 0.012 0.020 0.027 0.034

APEC-21 Net Economic Benefit (b) 4,342 6,974 9,446 11,903

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM) (b) Extrapolation of the net economic benefit for the APEC-12 economies as share of APEC-12 GDP.Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

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Table B.2: Net economic benefit of alternative de minimis thresholds in APEC-12 (a), VAT/GST sensitivity test, USD million per year

Component of Net Economic Benefit

Alternative Threshold

USD50 USD100 USD150 USD200

Saving in transit time 9 24 44 53

Saving in public administration 1,512 2,439 3,294 4,150

Saving in private compliance 467 753 1,014 1,275

Total benefits 1,987 3,217 4,353 5,478

Less Tax revenue foregone 118 317 429 519

APEC-12 Net Economic Benefit 1,869 2,899 3,924 4,958

Benefit-cost ratio 16.8 10.1 10.2 10.5

NEB as % of GDP 0.012 0.018 0.025 0.025

APEC-21 Net Economic Benefit (b) 4,154 6,442 8,720 11,018

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM) (b) Extrapolation of the net economic benefit for the APEC-12 economies as share of APEC-12 GDP.Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

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Table B.3: Net economic benefit of a de minimis threshold of USD200, by APEC economy (a), USD million per year

Net Benefit Component CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Saving in transit time 21.2 1.0 16.8 2.0 1.9 0.3 2.7 0.069 1.0 1.6 1.9 2.15

Saving in public administration 3,346.5 41.8 328.6 10.9 244.4 19.7 76.5 0.163 16.5 17.7 37.6 9.64

Saving in private compliance 1,029.2 12.8 101.1 3.3 74.3 6.0 23.4 0.050 5.1 5.4 11.6 2.91

Total benefits 4,396.9 55.6 446.5 16.3 320.5 26.0 102.7 0.281 22.6 24.7 51.1 14.70

Less Tax revenue foregone 26.2 2.2 60.2 2.9 2.5 3.4 4.2 0.092 2.1 4.1 7.7 5.30

Net economic benefit (NEB) 4,370.6 53.4 386.3 13.3 318.0 22.5 98.4 0.189 20.5 20.6 43.4 9.40

Benefit-cost ratio 167.7 24.8 7.4 5.5 128.2 7.6 24.3 3.1 10.8 6.0 6.6 2.8

NEB as % of GDP 0.278 0.026 0.007 0.002 0.006 0.009 0.009 0.002 0.013 0.011 0.014 0.009

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

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Table B.4: Net economic benefit of a de minimis threshold of USD150, by APEC economy (a), USD million per year

Net Benefit Component CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Saving in transit time 17.0 0.9 15.6 1.8 0.9 0 2.1 0.022 0.8 1.4 1.5 1.86

Saving in public administration 2,739.6 34.6 298.9 7.6 91.0 0 52.7 0.057 14.7 15.9 30.6 8.61

Saving in private compliance 843.9 10.6 92.1 2.3 27.7 0 16.2 0.017 4.5 4.9 9.4 2.60

Total benefits 3,600.5

46.1 406.7 11.7 119.6 0 71.0 0.095 20.0 22.2 41.6 13.07

Less Tax revenue foregone 21.2 1.9 55.6 2.5 1.2 0 3.4 0.029 1.8 3.6 6.1 4.45

Net economic benefit (NEB) 3,579.2

44.2 351.0 9.2 118.5 0 67.7 0.067 18.3 18.7 35.5 8.63

Benefit-cost ratio 169.5 24.5 7.3 4.7 103.1 n.a. 21.2 3.344 11.4 6.3 6.8 2.94

NEB as % of GDP 0.227 0.022 0.006 0.001 0.002 0 0.007 0.001 0.012 0.010 0.011 0.008

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

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Table B.5: Net economic benefit of a de minimis threshold of USD100, by APEC economy (a), USD million per year

Net Benefit Component CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Saving in transit time 9.9 0.4 8.5 0.9 0 0 0.9 0 1.0 1.4 1.1 0.33

Saving in public administration 2,057.9 26.7 266.1 3.9 0 0 27.4 0 12.8 14.0 22.9 7.60

Saving in private compliance 635.1 8.2 82.1 1.2 0 0 8.5 0 4.0 4.3 7.1 2.29

Total benefits 2,702.9

35.3 356.8 6.0 0 0 36.8 0 17.8 19.8 31.2 10.23

Less Tax revenue foregone 14.8 1.4 46.7 1.7 0 0 2.2 0 1.4 2.8 4.1 3.33

Net economic benefit (NEB) 2,688.1

33.9 310.1 4.3 0 0 34.6 0 16.4 17.0 27.0 6.90

Benefit-cost ratio 182.6 26.0 7.6 3.5 n.a. n.a. 17.0 n.a. 13.0 7.0 7.6 3.07

NEB as % of GDP 0.171 0.017 0.005 0.001 0 0 0.003 0 0.011 0.009 0.008 0.007

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

91

Table B.6: Net economic benefit of a de minimis threshold of USD50, by APEC economy (a), USD million per year

Net Benefit Component CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Saving in transit time 2.53 0.11 4 0 0 0 0 0 0.5 0.66 0.26 0.15

Saving in public administration 1,215.59 19.05 234 0 0 0 0 0 10.5 11.80 14.66 6.45

Saving in private compliance 375.16 5.88 72 0 0 0 0 0 3.2 3.64 4.52 1.94

Total benefits 1,593.28 25.04 311 0 0 0 0 0 14.2 16.09 19.45 8.53

Less Tax revenue foregone 3.91 0.42 25 0 0 0 0 0 0.6 1.29 0.88 1.51

Net economic benefit (NEB) 1,589.4 24.6 286.1 0 0 0 0 0 13.6 14.8 18.6 7.03

Benefit-cost ratio 407.7 59.3 12.6 n.a. n.a. n.a. n.a. n.a. 23.0 12.5 22.1 5.66

NEB as % of GDP 0.101 0.012 0 0 0 0 0 0 0.009 0.008 0.006 0.007

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

92

Table B.7: Minimum net economic benefit & maximum revenue foregone from a de minimis threshold of USD 200, VAT/GST sensitivity test, by APEC economy (a), USD million per year

Net Benefit Component CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Maximum VAT/GST revenue

foregone

2.53 0.11 4 0 0 0 0 0 0.5 0.66 0.26 0.15

Minimum net economic

benefit

1,215.59 19.05 234 0 0 0 0 0 10.5 11.80 14.66 6.45

Minimum benefit-cost ratio 375.16 5.88 72 0 0 0 0 0 3.2 3.64 4.52 1.94

Minimum NEB as % of GDP 0.101 0.012 0 0 0 0 0 0 0.009 0.008 0.006 0.007

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

93

Table B.8: Minimum net economic benefit & maximum revenue foregone from a de minimis threshold of USD 150, VAT/GST sensitivity test, by APEC economy (a), USD million per year

Net Benefit Component CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Maximum VAT/GST revenue

foregone

2.53 0.11 4 0 0 0 0 0 0.5 0.66 0.26 0.15

Minimum net economic

benefit

1,215.59 19.05 234 0 0 0 0 0 10.5 11.80 14.66 6.45

Minimum benefit-cost ratio 375.16 5.88 72 0 0 0 0 0 3.2 3.64 4.52 1.94

Minimum NEB as % of GDP 0.101 0.012 0 0 0 0 0 0 0.009 0.008 0.006 0.007

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

94

Table B.9: Minimum net economic benefit & maximum revenue foregone from a de minimis threshold of USD 100, VAT/GST sensitivity test, by APEC economy (a), USD million per year

Net Benefit Component CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Maximum VAT/GST revenue

foregone

2.53 0.11 4 0 0 0 0 0 0.5 0.66 0.26 0.15

Minimum net economic

benefit

1,215.59 19.05 234 0 0 0 0 0 10.5 11.80 14.66 6.45

Minimum benefit-cost ratio 375.16 5.88 72 0 0 0 0 0 3.2 3.64 4.52 1.94

Minimum NEB as % of GDP 0.101 0.012 0 0 0 0 0 0 0.009 0.008 0.006 0.007

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

95

Table B.10 Minimum net economic benefit & maximum revenue foregone from a de minimis threshold of USD 50, VAT/GST sensitivity test, by APEC economy (a), USD million per year

Net Benefit Component CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Maximum VAT/GST revenue

foregone

2.53 0.11 4 0 0 0 0 0 0.5 0.66 0.26 0.15

Minimum net economic

benefit

1,215.59 19.05 234 0 0 0 0 0 10.5 11.80 14.66 6.45

Minimum benefit-cost ratio 375.16 5.88 72 0 0 0 0 0 3.2 3.64 4.52 1.94

Minimum NEB as % of GDP 0.101 0.012 0 0 0 0 0 0 0.009 0.008 0.006 0.007

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

96

Annex C: Low Value Consignments to APEC-12 Economies

Table C.1: Projection of total value of imports with a consignment value of USD200 or less, selected APEC economies (a), USD million per year

Mode of delivery CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Air cargo 695.9 13.8 141.5 26.0 171.1 66.0 59.3 1.5 8.3 21.5 34.0 18.5

Mail & sea cargo 3,023.9 59.9 614.7 113.2 743.7 287.0 257.8 6.7 35.9 93.6 147.7 80.6

All modes 3,719.8 73.7 756.2 139.2 914.8 353.0 317.1 8.3 44.2 115.2 181.7 99.2

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

Table C.2: Projection of total volume of imports with a consignment value of USD200 or less, select APEC economies (a), million consignments per year

Mode of delivery CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Air cargo 11.47 0.38 5.35 0.79 4.71 1.16 1.33 0.03 0.20 0.56 0.84 0.56

Mail & sea cargo 77.74 2.55 36.28 5.36 31.93 7.90 9.00 0.19 1.37 3.79 5.67 3.82

All modes 89.21 2.92 41.64 6.16 36.64 9.06 10.33 0.22 1.57 4.35 6.51 4.38

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

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Table C.3: Projection of total value of imports with a consignment value of USD150 or less, selected APEC economies (a), USD million per year

Mode of delivery CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Air cargo 499.6 10.4 115.5 21.1 135.4 50.3 43.1 1.0 6.1 16.8 25.7 13.9

Mail & sea cargo 2,530.6 52.7 584.9 106.9 686.0 254.7 218.5 5.0 31.0 85.2 130.3 70.3

All modes 3,030.2 63.1 700.4 128.0 821.5 304.9 261.6 6.0 37.1 102.0 156.0 84.2

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

Table C.4: Projection of total volume of imports with a consignment value of USD150 or less, select APEC economies (a), million consignments per year

Mode of delivery CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Air cargo 10.36 0.36 5.20 0.76 4.50 1.07 1.24 0.02 0.19 0.53 0.79 0.54

Mail & sea cargo 66.04 2.27 33.16 4.87 28.72 6.85 7.88 0.16 1.21 3.40 5.04 3.42

All modes 76.39 2.63 38.36 5.63 33.23 7.92 9.12 0.18 1.40 3.93 5.83 3.96

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

98

Table C.5: Projection of total value of imports with a consignment value of USD100 or less, selected APEC economies (a), USD million per year

Mode of delivery CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Air cargo 308.9 6.9 85.2 15.0 94.3 28.3 28.1 0.6 4.2 11.9 17.2 10.0

Mail & sea cargo 1,856.2 41.4 511.7 90.3 566.9 170.4 168.7 3.7 24.9 71.5 103.5 59.9

All modes 2,165.1 48.3 596.9 105.4 661.2 198.7 196.7 4.3 29.1 83.4 120.7 69.9

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

Table C.6: Projection of total volume of imports with a consignment value of USD100 or less, select APEC economies (a), million consignments per year

Mode of delivery CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Air cargo 8.83 0.33 4.95 0.72 4.18 0.90 1.12 0.02 0.17 0.49 0.72 0.50

Mail & sea cargo 53.12 1.97 29.78 4.31 25.15 5.42 6.71 0.13 1.05 2.97 4.35 3.04

All modes 61.95 2.30 34.73 5.03 29.33 6.32 7.83 0.15 1.22 3.47 5.08 3.54

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

99

Table C.7: Projection of total value of imports with a consignment value of USD50 or less, selected APEC economies (a), USD million per year

Mode of delivery CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Air cargo 113.7 3.5 48.4 7.8 47.4 13.3 12.7 0.2 1.9 5.7 8.0 4.9

Mail & sea cargo 683.4 21.3 291.1 46.7 285.0 80.0 76.3 1.4 11.2 34.0 48.3 29.7

All modes 797.1 24.8 339.5 54.5 332.4 93.3 89.0 1.7 13.1 39.6 56.3 34.6

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

Table C.8: Projection of total volume of imports with a consignment value of USD50 or less, select APEC economies (a), million consignments per year

Mode of delivery CAN CHL CHN IDN JPN MYS MEX PNG PER PHL THA VNM

Air cargo 6.27 0.28 4.44 0.63 3.58 0.71 0.91 0.02 0.14 0.42 0.61 0.44

Mail & sea cargo 37.70 1.70 26.68 3.77 21.53 4.26 5.50 0.10 0.86 2.50 3.65 2.62

All modes 43.97 1.98 31.12 4.39 25.11 4.97 6.41 0.12 1.00 2.92 4.26 3.05

Notes: (a) Canada (CAN), Chile (CHL), the People’s Republic of China (CHN), Indonesia (IDN), Japan (JPN), Malaysia (MYS), Mexico (MEX), Papua New Guinea (PNG), Peru (PER), the Philippines (PHL), Thailand (TH) and Viet Nam (VNM).Source: EAA, CAPEC, CLADEC, Trade Data International Pty Ltd, CIE 2011, and estimates by ITS Global Asia Pacific

100

101

Annex D: Nature of Low Value Consignments to Indonesia

Detailed knowledge of the structure, commodity composition, and country of origin of low value imports and the countries from where they originate is necessary to calculate the value of the savings in merchandise transit time and the taxation revenue foregone that are generated by expansion of de minimis arrangements. This reflects the fact that the valuation of transit time and the rates of taxation can both vary with the nature of the merchandise, the size of the transaction and from where it has been imported.

In principle the border agencies collect extensive information on air and sea cargoes. This includes the classification of the merchandise under the Harmonized System, their countries of origin, and their declared values for customs purposes. In practice, this information is very costly for them to collect, check and validate, while the usefulness of the information varies to a considerable degree.

Both of these problems are likely to be most acute in the case of information on the value and the nature of the merchandise in question. Even basic data on transaction volumes is not comprehensively collected by many economies on certain types of imports because doing so is, often rightly, considered to be uneconomic.

Comprehensive information on each of these aspects, however, is generally scarcer and less reliable than the information that is publically available on the value and volume of the imports in this value category. This is true for the six economies in the study, as well as more broadly (see Productivity Commission 2011; CIE 2011; and Hufbauer & Wong 2011).

With these limitations in mind, we asked Trade Data International to see if it was possible to extract finely detailed customs data on low value import transactions in any of the six APEC economies selected for the study plus Australia.43 For this purpose low value transactions were specified as those with a landed value USD200 or less.

Although Trade Data International has access to the most detailed data that national customs agencies make available to the public, it was only able to provide such transaction data in respect of Indonesia. They were broken down by the country of origin and by the six-digit HS code of the merchandise. It appears that, in the interests of economy, the customs agencies of the other six economies do not collect data on import transactions under USD200 or do not publish such data it if in fact they collect it.

43 Australia was added as it applies the highest de minimis threshold in APEC.

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Given the severity of these limitations and the absence of clearly superior alternatives, we have relied on the detailed customs data provided to us by Trade Data International in respect of Indonesia. The data covered monthly merchandise imports by Indonesia for the 2009 and 2010 calendar years with a landed value of USD200 or less per consignment. In each case, the data are understood to cover all three modes of delivery — air, sea and international mail.

D.1 Volume & value of low value imports

Tables D.1 and D.2 respectively summarise the aggregate volume and value of those imports by Indonesia in 2009 and 2010 that had been declared to the customs authorities as having a consignment value of USD200 or less. In each case the table includes the distribution of the relevant values and volumes over USD50 intervals along the range of declared consignment values under examination — namely, from zero to USD200. Table D.3 has the average consignment values for the two years on the same basis.

Table D.1: Total volume of imports by Indonesia with a consignment value of USD200 or less, by consignment value range, 2009 and 2010

Range of Declared

ValuesUSD

Volume of Consignments

in 2009million

Share of Total

Volume in 2009

%

Volume of Consignments

in 2010million

Share of Total

Volume in 2010

%

Change in Volume of

Consignments%

0 to 50 2.120 54.7 2.951 54.6 39.2

51 to 100 0.821 21.2 1.136 21.0 38.4

101 to 150 0.550 14.2 0.780 14.4 41.8

151 to 200 0.381 9.8 0.541 10.0 42.0

0 to 200 3.872 100 5.408 100 39.8

Sources: Trade Data International, estimates by ITS Global Asia Pacific

Table D.2: Total value of imports by Indonesia with a consignment value of USD200 or less, by consignment value range, 2009 and 2010

Range of Declared

ValuesUSD

Value of Consignments

in 2009 USD million

Share of Total Value

in 2009%

Value of Consignments

in 2010 USD million

Share of Total Value

in 2010%

Change in Value of

Consignments%

0 to 50 40.7 17.3 56.9 17.2 39.8

51 to 100 59.7 25.4 82.8 25.1 38.5

101 to 150 67.8 28.9 96.4 29.2 42.0

151 to 200 66.4 28.3 94.4 28.6 42.1

0 to 200 234.7 100 330.4 100 40.8

Sources: Trade Data International, estimates by ITS Global Asia Pacific

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Table D.3: Average value of imports by Indonesia with a consignment value of USD200 or less, by consignment value range, 2009 and 2010

Consignment ValueUSD

Average ValueIn 2009

USD per consignment

Average Value in 2010

USD per consignment

Change in Average Value

%

0 to 50 19.20 19.28 0.43

51 to 100 72.72 72.89 0.24

101 to 150 123.27 123.59 0.26

151 to 200 174.28 185.10 6.21

0 to 200 60.62 61.10 0.79

Sources: Trade Data International, estimates by ITS Global Asia Pacific

As is the case for the other economies where low value imports have been examined (e.g. CIE 2011; and Hufbauer & Wong 2011), transaction volumes are heavily concentrated at the bottom of the range of consignment values, with well over half of all consignments having a value of less than USD50 in both years. Despite the strong growth in aggregate consignment volume, there was little change in its distribution over the selected intervals of the valuation range that was studied.

In contrast the aggregate value of such consignments is much more evenly distributed and much less skewed over the valuation range in Indonesia, than appears to be the case for imports under a similar value threshold in Australia (CEI 2011) and the United States (Hufbauer & Wong 2011).

In the absence of detailed frequency distributions of these imports in each case — due to the extreme paucity of the distributional data — the most obvious manifestation of these differences is the relatively high average value of the consignments covered by the Indonesian customs data compared to the other data sources of which we are aware.

The Indonesian customs data implied average values of USD60.62 per consignment by all modes in 2009 and 61.10 per consignment in 2010.

In contrast our survey of the air express consignments carried by CAPEC members to Indonesia in the first week of June 2011 put their average value at USD32.92 per consignment. Given the much higher delivery cost of air express compared to the other modes of delivery, such as international mail and sea freight, this seems decidedly odd.

The results recently reported by the CIE for Australia suggest that in 2010 the average value of imports by all modes in this valuation category was AUD 22.08 per consignment (CIE 2011). In the case of the US the average value of air express consignments in this category has been estimated at USD15.34 per consignment (Hufbauer & Wong 2011).

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In the light of this we have attempted to isolate the problem by attempting a reconciliation of our projections for imports by Indonesia with the monthly customs data on imports by Indonesia for 2009 and 2010. As can be seen from Figure D.1 the monthly time series shows strong growth in the monthly value of imports with a consignment value of USD200 or less over the period from January 2009 to December 2010.

Figure D.1: Monthly value of imports by Indonesia with a consignment value of USD200 or less, 2009 & 2010, USD million

Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 110.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Source: Trade Data International & estimates by ITS Global Asia Pacific

This means that it is important to discount for the differences in timing between the two sources — the projections being based on the annualised results of our survey of CAPEC transactions in the first week of June 2011. For this purpose we have estimated the linear trend in the customs time series and extrapolated it to June 2011 to get a more or less comparable estimate of customs transactions to compare with for the projections.

The results of the reconciliation are set out in Table D.4.

After adjusting for the timing differences between the two data sources, as outlined above, it transpires that our projection of import consignment numbers by all mode for Indonesia is just 10% less than the numbers implied by the customs data This suggest that the projection methodology and assumptions are broadly reliable, if somewhat conservative.

On the other hand the projected annual value of import consignments by Indonesia based on the air express survey results is less than half the aggregate value suggested by the Indonesian customs data based on the same value threshold — namely, consignments of USD200 or less.

The frequency distribution of consignments in the Indonesian customs data is significantly less skewed towards lower consignment values than is the case for

105

the results of either our survey of air express imports entering Indonesia or research into low value imports by other APEC economies (CIE 2011 and Hufbauer & Wong 2011). This is puzzling and does not admit any easy conclusions.

Table D.4: Reconciliation of model projection & customs data for imports valued at USD200 or less by all modes, Indonesia

Component of the Reconciliation Value

Average consignment value in customs data for 2009 (USD per consignment) 60.62

Average consignment value in customs data for 2010 (USD per consignment) 61.10

Increase in average consignment value in customs data, 2009 to 2010 (%) 0.792Extrapolation of average consignment value to 30 June 2011 (USD per consignment) 61.58

Monthly value of imports for June 2011, based on extrapolation of linear trend estimated from monthly customs data for 2009 & 2010 (USD million) 35.0

Annual value of imports, based on extrapolation of customs data to June 2011 (USD million) 420

Annual volume of imports, based on extrapolation of customs data to June 2011 (million) 6.83

Model projection of annual value of imports, based on CAPEC survey for 1st week of June 2011 (USD million) 139

Model projection of annual volume of imports, based on CAPEC survey for 1st

week of June 2011 (million) 6.16

Source: Trade Data International & ITS Global Asia Pacific

D.2 Commodity of composition of low value imports

The Indonesian import data were broken down by the classification of the merchandise. The latter was at the four- and six-digit levels on the Harmonized Commodity Description and Coding System (HS).

Unfortunately in the time available it was not possible to extract useful information on the commodity composition of our sample of air express cargo transactions. (The details in the sample on country of origin were, however, able to be used.) This reflected the fact that the description of each transaction was as provided by the consignor and was not necessarily aligned to the HS or any other system that is used to classify imports for official statistical purposes. Moreover, the size of the sample and the breadth of the potential commodity coverage — see below — meant that the effort that would have been required to edit the sample down to a consistent set of descriptions would have taken much longer than was available for the study.

Table D.5 has the product breakdown of the aggregate value and volume of Indonesian import consignments with a landed value of USD200 or less in 2010. The transactions have been classified at the four-digit HS level. Table D.6 has the same consignments classified at the six-digit HS level. Both Tables have the value and volume shares for the ten most valuable HS classes at their level in 2010 — namely those that have the highest share of the total value for all the transactions of USD200 or less.

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Several features of the composition of this import category are worth highlighting.

The most valuable commodity imported in this category only accounted for 3.2% of the aggregate value of all such imports in both years.

There were over 4,300 six-digit HS codes represented in this category of imports. Every one of the two-digit classes (Chapters) that make up the Harmonized System was represented in the category, although not to the same extent.

There are few signs of significant specialisation in the transactions at the finest (six-digit) level of the HS. This is so from either an aggregate value or aggregate volume perspective.

More signs of specialisation in the transactions emerge at the four-digit HS level, from both the value and volume perspectives, and particularly from the latter. Imports of USD200 or less have tended to be concentrated in the following seven HS Chapters:

o 39 (Plastics and plastic articles);

o 40 (Rubber and rubber articles);

o 49 (Printed books and newspapers);

o 73 (Articles of iron or steel);

o 84 (Nuclear reactors, boilers, machinery and mechanical appliances);

o 85 (Electrical machinery, sound and television equipment); and

o 87 (Motor vehicles and parts).

Commodities that are most likely to be used for business inputs dominated the category, rather than products for final consumption. Of the top ten six-digit HS classes only one — Books, brochures, leaflets and printed matter — obviously fell into the latter category and it was only ranked in 9th place by its share of aggregate value.

The strongest signs of specialisation are not, however, evident in the descriptions of the commodities or their organisation into groups. It is to be found in how long they take to get to the end user and the opportunity cost to them of that delay (Hummels, 2001a, 2001b & 2007).

Table D.5: Imports by Indonesia with a value of USD200 or less, by four-digit HS code, 2010, ranked by share of value of all consignments of that value

Rank by Share HS Description of HS Commodity Class Share of Share of

107

of Value of Imports Code

TotalNo. of Imports %

Total Value of Imports %

1 731815Screws, bolts, nuts, pins, washers and similar articles, of iron or steel 10.4 7.2

2 401693Parts and accessories of motor vehicles

6.8 6.6

3 870899Articles of vulcanised rubber

5.4 4.0

4 840999Parts for non-spark-ignition internal combustion engines 3.1 3.3

5 732690Electrical switches for a voltages of 1,000V or less; optical fibre connectors or cables 2.4 2.6

6 840991Ball or roller bearings

2.2 2.5

7 848410Metal gaskets and similar joints; and mechanical seals 3.1 2.4

8 731822Vulcanised rubber tubes, pipes, hoses, and fittings 2.1 2.2

9 490199Transmission shafts & bearings; gears & gearboxes; fly wheels & pulleys 1.8 2.1

10 843149Centrifuges; filtering or purifying machinery and apparatus, for liquids or gases 1.4 1.9

11 870829Articles of iron or steel not elsewhere specified 2.0 1.8

12 871419Parts for mobile industrial machines, such as forklifts & graders 1.6 1.8

13 853690Tube or pipe fittings of iron or steel

1.8 1.8

14 848790Taps, cocks, valves and similar appliances for pipes, boiler shells, tanks, vats or the like 1.4 1.8

15 392690Parts and accessories of cycles, motorcycles and invalid carriages 1.4 1.5

16 401699Books, brochures, leaflets & printed matter

1.7 1.4

17 730799Plastic articles other than sanitary-, table- & household-ware, builder's ware, packaging goods or floor, wall or ceiling coverings

1.3 1.4

18 853890Insulated wire, cable and other insulated electric conductors 1.1 1.2

19 731816Parts for electrical switches

1.0 1.2

20 400942Electrical resistors, other than heating resistors 1.5 1.1

Twenty most valuable classes by value 53.5 49.8

Sources: Trade Data International, estimates by ITS Global Asia Pacific

Table D.6: Imports by Indonesia with a value of USD200 or less, by six-digit HS code, 2010, ranked by share of value of all consignments of that value

Rank by Share of Value of

HS Code Description of HS Commodity Class Share of

TotalShare of Total Value

108

ImportsNo. of Imports %

of Imports %

1 7318 Threaded screws & bolts of iron or steel 4.8 3.2

2 8708 Gaskets, washers & other seals of vulcanised rubber 4.2 3.0

3 4016 Vehicle parts & accessories 3.1 2.8

4 8409 Parts for non-spark-ignition internal combustion engines 1.8 1.8

5 8536 Articles of iron or steel, not elsewhere specified 1.9 1.7

6 8482 Parts for spark-ignition internal combustion engines 1.3 1.5

7 8484 Metal gaskets & similar joints 2.0 1.4

8 4009 Washers of iron or steel 2.2 1.4

9 8483 Books, brochures, leaflets & printed matter 1.7 1.4

10 8421 Parts for mobile industrial machines, such as forklifts & graders 1.1 1.2

11 7326 Parts & accessories of motor vehicle bodies 1.4 1.1

12 8431 Parts & accessories for motorcycles & mopeds 1.1 1.1

13 7307 Electrical switches for a voltage of 1,000V or less 1.0 1.1

14 8481 Machinery parts, not containing electrical connectors, or other electrical features 1.3 1.1

15 8714 Articles of plastics and articles of other materials of HS 3901 to 3914 1.0 1.0

16 4901 Articles of vulcanised rubber not elsewhere classified 1.1 1.0

17 3926 Tube and pipe fittings not elsewhere classified 1.1 1.0

18 8544 Parts suitable for use solely or principally with the apparatus of HS 8535 or 8536 0.9 1.0

19 8538 Nuts of iron or steel 1.3 1.0

20 8533 Tubes, pipes and hoses of vulcanised rubber 0.9 1.0

Twenty most valuable classes by value 35.0 29.8

Sources: Trade Data International, estimates by ITS Global Asia Pacific

D.3 Origin of low value imports

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The story of the origins of these transactions has both similarities and differences with their commodity composition. Table D.7 has details of the shares of Indonesian imports of USD200 or less by region or country of origin.

Table D.7: Origin of low value imports by Indonesia in 2010 by mode of delivery, ranked by share of value of all consignments valued at USD200 or less

Rank by Total Value

for All Modes

Region or Country of Origin Share of Total Value by Air

Cargo%

Share of Total Value by All

Modes%

1 Japan 6.3 28.4

2 ASEAN-10 21.0 16.5

3 People’s Republic of China 21.2 16.2

4 European Union 8.8 13.3

5 North America (a) 15.9 11.5

6 Republic of Korea 2.7 5.2

7 Chinese Taipei 4.6 3.3

8 Hong Kong, China 13.6 1.8

9 India 1.5 1.1

10 Australia 1.9 0.8

Ten most valuable origins for all modes 97.5 98.1

Notes: (a) Canada, Mexico & the United StatesSources: Trade Data International, estimates by ITS Global Asia Pacific

They cover imports by all the modes of delivery, as well as just by air cargo. Trade Data International provided the data on import transactions by all modes, while the information on air cargo transactions was based on the results of the survey of CAPEC members that we have conducted for this study.

Indonesia’s sourcing of low value imports by all modes was relatively heavily concentrated. In 2010 it sourced 71.4% of imports in this category by value from the economies of North and East Asia — namely, Japan, the ASEAN member states, the People’s Republic of China, the Republic of Korea, Chinese Taipei, and Hong Kong, China. Just 13.3% came from the European Union (EU) and 11.5% from North America.

The results of the CAPEC survey suggest that this concentration was somewhat less pronounced for air cargo. Some 69% of Indonesian imports by air cargo originated in North and East Asia, 15.9% from North America, and just under 8.8% from the EU.

110

In each case the concentration is not just a matter of distance, even though previous research has consistently shown that distance is one of the most powerful determinants of the global pattern of all merchandise trade. If this were the case, of course, then other ASEAN member states would have had the largest share of the total for both the air cargo imports and the imports by all delivery modes.