Income loss

World OECD Non-OECD

Agricultural policy of World 128.2 97.8 30.4

OECD 101.4 92.7 8.7

NonOECD 26.8 5.1 21.7

Forgone export revenue

World 378.0 255.8 122.2

OECD 257.7 234.9 22.8

NonOECD 120.3 20.9 99.4

Source: Hans Peter Lankes, “Market Access for Developing Countries,” Finance & Development (September 2002): 8–13.

EXHIBIT 3.1 SOFTWARE CLASSIFICATION AND VALUATION

Do all countries classify software for customs pur- poses in an identical manner? Many countries, includ- ing the USA, will classify software products under an identical Harmonized Tariff System (HTS) category. However, software classification poses similar chal- lenges that arise with other products. Since only the first six digits of the HTS code are harmonized glob- ally, a country may designate a more specific classifi- cation beyond those six digits. In rare cases, the customs authority in another country may dispute the general classification of a product altogether based on interpretation of its purpose and use.The rapid evo- lution of information technology (IT) products is making the process of determining classification more difficult for this sector. Advancements in technologies are outpacing updates to the existing HTS. Therefore, it is prudent to check with the customs authority in the recipient country to ensure proper classification of a product.

How is software valuation determined? Countries vary in their methods for the valuation and assessment of software duties on imports. Under Article VII of the 1984 General Agreement on Tariffs and Trade (GATT), it was declared that software valuation may either be inclusive or exclusive of the cost or value for the intellectual property component of the product. However, it was recommended that software valuation be based on the value or cost of the carrier medium (i.e., optical disk) rather than the “intellectual prop- erty” embedded on the medium. This decision was based on the premise that the cost or value of the intel- lectual property is distinguishable from the value of the medium.This requirement is satisfied if the cost or value of either the medium or the intellectual property is identified separately on the commercial invoice. It is important to note that this GATT ruling does not cover software that includes features such as sound,

cinematic, or video recordings. Software incorporating these features (e.g., game software) will be subject to a separate valuation policy. For example, India differ- entiates entertainment software, health care software, and telecom software from standard software.

This decision has granted customs authorities broad latitude in determining software valuation. Therefore, one may expect to encounter different software valuation regimes. The USA maintains the practice of valuing software on the carrier medium. In general, Canada, Western Europe and many Asian countries also adhere to this method of valuation. In the Middle East, the method of valuing software on its full value or cost is frequently applied. Africa and Latin America are regions where no defined trend for software valuation exists.

An additional consideration with software is the assessment of taxes on the product. Unlike tariffs, taxes on imports from the USA (e.g., value-added taxes imposed at the border) are always assessed on the full value of the software, including intellectual property, unless the USA has a special tax treaty with a particular country.

Is customized software treated differently than packaged software? In most cases, the answer is no. Packaged software is defined as software that is gen- erally available to the public by sale from stock at retail selling points or directly from the software developer or supplier. The vast majority of customs agencies do not treat customized software differently from packaged software. To confirm that the soft- ware’s destination does not treat the two types of soft- ware differently, contact the Trade Information Center or the customs authority in the recipient country.

Source: Dava Kunneman and Jim Golsen, “Issues With

Software Exploration,” Export America (August 2001):

16–17.

processing units” (computers) classification, there would be no import tax.¹⁸

Valuation

Regardless of how products are classified, each product must still be valued. The value affects the amount of tariffs levied. A customs appraiser is the one who determines the value. The process can be highly subjective, and the valuation of a product may be interpreted in different ways, depending on what value is used (e.g., foreign, export, import, or man- ufacturing costs) and how this value is constructed. In Japan, a commodity tax is applied to the FOB factory price of Japanese cars.Yet American cars are valued on the CIF basis, adding $1000 more to the final retail price of these cars.

Documentation

Documentation can present another problem at entry because many documents and forms are often necessary, and the documents required can be com- plicated. Japan held up Givenchy’s import applica- tion because the company left out an apostrophe for its I’Interdit perfume.

Without proper documentation, goods may not be cleared through customs. At the very least, such complicated and lengthy documents serve to slow down product clearance. France, requiring customs documentation to be in French, even held up trucks from other European countries for hours while looking for products’ nonFrench instruction manuals which were banned.

License or permit

Not all products can be freely imported; controlled imports require licenses or permits. For example, importations of distilled spirits, wines, malt bever- ages, arms, ammunition, and explosives into the USA require a license issued by the Bureau of Alcohol, Tobacco, and Firearms. India requires a license for all imported goods. An article is consid- ered prohibited if not accompanied by a license. It

is not always easy to obtain an import license, since many countries will issue one only if goods can be certified as necessary.

Japan simplified its licensing procedure in 1986. Previously, a separate license application had been required for any new cosmetic product, even when only a change in shade was involved. The new requirements categorize cosmetics into seventy- eight groups and list permitted ingredients. A mar- keter simply notifies the government of any new product using those ingredients.

Inspection

Inspection is an integral part of product clearance. Goods must be examined to determine quality and quantity.This step is closely related to other customs and entry procedures. First, inspection classifies and values products for tariff purposes. Second, inspec- tion reveals whether imported items are consistent with those specified in the accompanying docu- ments and whether such items require any licenses. Third, inspection determines whether products meet health and safety regulations in order to make certain that food products are fit for human con- sumption or that the products can be operated safely. Fourth, inspection prevents the importation of prohibited articles.

Marketers should be careful in stating the amount and quality of products, as well as in pro- viding an accurate description of products. Any deviation from the statements contained in invoices necessitates further measurements and determina- tion, more delay, and more expenses.

Inspection can be used intentionally to discour- age imports. Metal baseball bats from the USA, for instance, are required to carry a stamp of consumer safety, and this must be “ascertained” only after expensive on-dock inspection.

Health and safety regulations

Many products are subject to health and safety regulations, which are necessary to protect the public health and environment. Health and safety

regulations are not restricted to agricultural prod- ucts. The regulations also apply to TV receivers, microwave ovens, X-ray devices, cosmetics, chemi- cal substances, and clothing.

Concern for safety was used by Japan against alu- minum softball bats from the USA. The manufac- turing process leaves a small hole in the top which is fitted with a rubber stopper. Japan thus bans the bats on the ground that the stopper might fly out and hurt someone. According to US manufacturers, this fear is unfounded.

Product requirements

For goods to enter a country, product requirements set by that country must be met. Requirements may apply to product standards and product specifications as well as to packaging, labeling, and marking.

Product standards

Each country determines its own product standards to protect the health and safety of its consumers. Such standards may also be erected as barriers to prevent or slow down importation of foreign goods. Because of US grade, size, quality, and maturity requirements, many Mexican agricultural com- modities are barred from entering the USA. Japanese product standards are even more complex, and they are based on physical characteristics rather than product performance. Such standards make it necessary to repeat the product approval process when a slight product modification occurs (such as color), even though the performance of the product in question remains the same. Furthermore, these standards are frequently changed in Japan in order to exclude imports.

Packaging, labeling, and marking

Packaging, labeling, and marking are considered together because they are closely interrelated. Many products must be packaged in a certain way for safety and other reasons (see It’s the Law 3.1).

Canada requires imported canned foods to be packed in specified can sizes, and instructions contained within or on packages must be in English and French.The Canadian Labeling Act also requires all imported clothing to carry labels in both languages.

Product testing

Many products must be tested to determine their safety and suitability before they can be marketed. This is another area in which the USA has some trouble in Japan. Although products may have won approval everywhere else for safety and effective- ness, such products as medical equipment and phar- maceuticals must go through elaborate standard testing that can take a few years – just long enough for Japanese companies to develop competing products. Moreover, the reviews take place behind the Health and Welfare Ministry’s closed doors. In 1995, Japan’s Ministry of International Trade and Industry started requiring imported software products to be certified by agents of the Japan Accreditation Bureau. The accreditation require- ment may reveal how US software is designed while delaying US bids on public contracts.

The EU’s global approach to testing and certifi- cation for product safety provides manufacturers with one set of procedures for certifying product compliance with EU health, safety, and environ- mental requirements. The various means by which manufacturers can certify product conformance include manufacturer self-declaration of confor- mity, third-party testing, quality assurance audit, and/or approval by a body authorized by an EU member state and recognized by the EU Commis- sion. The mark CE on the product signifies that all legal requirements concerning product standards have been met. To be legally marketed in the European Union, more than half of American prod- ucts must bear the CE mark. Unfortunately, certi- fication of product tests and registrations for information technology, medical devices, and certain products can only be carried out in Europe, and the practice is costly and uncompetitive.