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October 19/05 12:41 pm - Bicycle Tariffs Make No Sense-An Editorial


Posted by Editor on 10/19/05
 

Bicycle Tariffs Make No Sense - An Editorial

Earlier this month, the Bicycle Trade Association of Canada (BTAC) became the latest organization to oppose recommendations from the Canadian Intenational Trade Tribunal for a Global Safeguard Action to protect domestic Canadian bicycle manufacturers. The full text of the BTAC release can be found Here (PDF).

In the interests of full disclosure, I should point out that I appeared as an expert witness at the CITT hearings in June, and have worked with BTAC as a consultant throughout the entire Inquiry (including assisting them with the writing of their release and surveying their membership).

For those unaware of the details of the CITT Recommendations, in brief a tariff of 30% will be applied to bicycles (assembled and unassembled) with an FOB price on or below $225 Canadian. (See our Daily News item from September 2nd - CITT Releases Report on Global Safeguard Regarding Bicycle Imports, or view the full report (which runs to 70 pages) Here). The Recommendations have been sent to the Minister of Finance, who can reject, modify or implement them.

The $225 FOB price refers to the price the importer pays from the manufacturer. The CITT picked this amount because they wanted to provide relief to domestic manufacturers in the high-volume, mass merchant market (eg, Wal-mart, Canadian Tire, etc.), where domestic manufacturers (Procycle and Raleigh Canada) have lost significant market share in the last 3-5 years. The CITT refers to this as " OPP " - Opening Price Point - and identified it as bicycles selling on or below $400 retail. The CITT believes that a $225 FOB translates to $400 retail.

Unfortunately, this is one of many flaws contained in the CITT Final Report. A $225 FOB may translate to $400 retail for a Wal-mart, with a supply chain straight from manufacturer to store, and no R&D costs, marketing support, trained staff to assemble bikes, etc. The reality for the Independent Bicycle Retailer (IBD) channel is that this will translate to a 30% duty on bicycles that currently sell for as much as $700.

The CITT did not accept that there are significant differences between the bicycles sold in the IBD channel and those sold at the mass level. Some specific examples of this include:

- Lumping all bicycles together as "like goods", regardless of the materials that the frame is constructed of. They did not recognize or acknowledge that frame material is an important consideration, and that the domestic manufacturers supporting the application do not have the technical ability to produce bicycles made of composites, titanium or aluminum (with the exception of Procycle's Rocky Mountain division). Specifically, that the domestic manufacturers cannot produce the lower priced aluminum frames that the mass market demands.

- Translating a $225 FOB into $400 retail, despite overwhelming evidence to the contrary by IBD suppliers and IBD's themselves for this channel.

- Not recognizing the inherent costs of R&D and brand support by name brands such as Trek, Specialized, Kona, Norco (and Canadian brands such as Cervelo, Devinci and Rocky Mountain).

- Not accepting that consumers in the IBD channel base purchases on factors other than just price, such as brand, store support and expertise, and technology.

- The impact on employment in the IBD channel. The CITT is issued these recommendations to protect 600 seasonal jobs, and did not assess the potential employment damage to the 1000-plus IBDs across Canada, nor the IBD suppliers.

A further flaw of the CITT recommendations is that they did not recognize that the IBD channel considers the $300-$700 price range the highest volume segment of their business, and that a significant increase in costs for this segment will result in lower quality bicycles at these price points. In addition, the Report allows the tariff to be apply to 20 inch wheel models (such as BMX), which will result in significant price increases (and product quality reductions) for children and youth bicycles.

The impact of these recommendations, if implemented, reaches far beyond the areas noted above. It sends a serious message to China (one of the major supplier countries that would be affected), with whom Canada is currently trying to increase trade relations. It flies in the face of environmental and Kyoto goals by taxing a non-polluting transportation alternative. It also runs contrary to increasing concerns over child obesity, by taxing a product whose use encourages fitness!

Readers may not be aware, but Canada already has some of the highest duties on bicycles in the world, with anti-dumping duties ranging from 3% to 64%, and tariffs of 13% that have been in existence for over 15 years.

There is no doubt that domestic manufacturers catering to the mass market have been hit hard in the past few years, losing tremendous market share (up to 60%). However, some Canadian companies - such as Cervelo, Devinci, Norco and Rocky Mountain - have performed well by differentiating themselves and providing unique offerings. The mass market is one that treats a bicycle as a commodity, with brand names (such as Schwinn and Mongoose) bought and sold, and slapped on bikes made by the lowest cost producer. Canadian manufacturers cannot realistically compete against developing countries such as Vietnam, Thailand, the Philippines and China in labour-intensive industries such as commodity bicycle manufacturing.

If the CITT wishes to protect domestic industries by allowing them the breathing space and opportunity adapt to changing global market conditions, it needs to do so in a rational and targeted manner; not just by slapping on arbitrary and punitive duties which hurt other viable industries and the consumer. The Bicycle Global Safeguard Inquiry has been watched with interest by many domestic industries who are facing the impact of global supply chains and the CITT has just released Recommendations to protect the domestic barbeque industry - a 15% duty across the board for barbeques coming out of China. The causes of the loss of market share follow a similar pattern: demand has shifted to stainless steel barbeques (from cast ones) and the domestic industry does not have the capability to produce the desired products at a competitive price.

The Bicycle Recommendations provided are short-sighted, damaging and, ultimately, will not protect the domestic manufacturers. If we do wish to protect certain industries, we need to do so in ways that make sense. We urge the Minister of Finance to reject the current recommendations.


If you are interested in signing petitions opposing the CITT Recommendation, you can find them at

One Retailer's Petition
Canadian Association of Speciality Bicycle Importers

 


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