Rules Of Origin And Its Application In Regional Trade Agreements

The most commonly used definition of ROO is the set of rules that determine the"nationality"of a product traded in international commerce. The GATT Agreement defines Rules of Origin as "...those laws, regulations and administrative determinations of general application applied by any Member to determine the country of origin goods, provided such rules of origin are not related to contractual or autonomous trade regimes leading to the granting of tariff preferences going beyond the application of paragraph I of Article I of GATT 1994". In general, ROOs exist as an essential part of trade rules since there is a need to distinguish between different foreign sources of a given product.The history of"rules of origin"is at least as old as the practice of discriminatory commercial policy by nation states. Beginning in the early twentieth century, ROO developed gradually with the development of differentiated tariffs and other trade measures. Originally, rules of origin were designed as an uncontroversial, neutral device essential to implementing discriminatory trade policies, compiling economic statistics, and marking a good. Once the origin of a good is known, the importing country can apply any country-specific or trade area-specific trade preferences or restrictions to the imported good, such as duty-free entry for goods originating in a free trade area, quantitative restrictions on goods originating in a country subject to a quota, or anti-dumping duties on goods from the targeted company that originate in the targeted country. In recent times however, ROO have become more of a tool in implementing discriminatory trade policies and has become trade policy instruments per se. ROO has become a critical and to some extent, a"dragging point"in the negotiation process of recent regional trade agreements(RTAs).The rise of multinational corporations and the production of goods in multiple stages using parts produced in different places around the world provided an opportunity to use rules of origin as an effective means of protection. In a world where goods are produced from different parts from around the world, there is no single, correct definition of origin. Instead, the origin of a product depends on the formulation and application of the applicable rules of origin. As such, rules of origin can serve as an extremely effective means of protectionism. Currently, developing and developed countries have undertaken the arduous task towards the simplification, harmonization and liberalization of rules of origin. However, until this becomes a reality, the rules of origin remain fragmented.Although WTO set general principles on the elaboration and use of rules of origin applied by WTO Members in the context of goods trade, they do not introduce detailed harmonised rules of origin to be used by WTO Members. The WTO Agreement on Rules of Origin provided for harmonisation to be undertaken by the WTO Committee on Rules of Origin (CRO) and the WCO Technical Committee on Rules of Origin (TCRO). Work on harmonisation, initially due to be completed by July 1998 but extended since, has mainly focused on the concepts of"wholly obtained", for goods produced in a single country, and of"last substantial transformation", if more than one country is involved in the production of the good. Three main criterions to be used for defining substantial transformation: (i) the change of tariff heading (CTH), based on the harmonised system (HS) nomenclature; (ii) the degree of value-added (VA); or (iii) the use of a specific process (SP) used as a supplementary criteria.No one method dominates others. Each has its advantages and disadvantages. However, it is clear that different rules of origin can lead to different determinations of origin. Thus, producers who are eligible for preferential access to different markets under different schemes with different rules of origin may find that their product qualifies under some schemes but not others. There are also several other typical features of the rules of origin of preferential trade schemes which can influence whether or not origin is conferred on a product and hence determine the impact of the scheme on trade flows, such as accumulation rules, De Minims rules and Intermediate materials rules.Rules of origin are divided into two categories: preferential and non-preferential rules of origin. Preferential rules of origin are used to determine whether certain products originate in a preference-receiving country or trading area and hence qualify for the trade preference. Rules of origin are contained in all regional trade agreements providing for preferential treatment among members. Such preferential rules of origin are aimed at distinguishing products that are entitled to preferential tariff treatment from products that are not. They are an essential component of free trade areas, such as NAFTA, COMESA or ANZCERTA, or customs unions that have not yet completed the transition toward a common external tariff, such as Mercosur. These RTAs use rules of origin to avoid free riding of their regional preferences (trade deflection), by stopping third parties from shipping to the FTA entry with the lowest external tariff for a given product. They are less important for accomplished customs unions, which have a common external tariff, but nevertheless keep their relevance for the administration of external trade preferences, such as GSP schemes, or preferential agreements concluded with third countries. For instance, the existence of a common EU external tariff and a common EU external policy makes the choice between different EU entry points irrelevant. EU preferential rules are thus used to distinguish between goods from various non-EU origins and not between EU and third country origins.RTAs have varying impacts on tariff policy toward nonmember countries. In order to better understand RTA approaches with respect to tariffs and assess their effect on trade liberalisation it is necessary to also consider rules of origin in RTAs. One of the criticisms often made of RTAs is that they necessarily lead to the proliferation of preferential rules of origin and so add complexity to the trading system and potentially make harmonization more difficult. It is not uncommon for a single country to apply several different sets of rules, depending on the RTAs the country belongs to. For instance, certain types of goods produced in Mexico, both a NAFTA member and a partner in the EU-Mexico agreement, may be subject to two rather different origin determination mechanisms depending on whether they are shipped to North America or Europe, although the Mexican Authorities have made sure that similar principles are applied in the context of both RTAs. Meanwhile, viewed from the perspective of RTAs participants, the proliferation and overlap of differing systems of rules of origin is perhaps less a problem of systemic incompatibility than of increased transaction costs for involved traders. For RTA members a question arising is whether expected benefits from preferential access in other partners'markets will outweigh the inconvenience. Related production and sourcing decisions by companies already established or considering investing in participating countries may vary accordingly.From the perspective of non-participating countries the stakes are obviously different than for participating countries. Although the increased transaction costs arising from the proliferation of rules of origin affect third country traders too, for them there is the added question of the more or less restrictive character of the rules in discouraging external sourcing. Most RTA members make sure that RTA provisions, including rules of origin, are appropriately published and publicly disseminated. If, however, such rules are not sufficiently transparent or predictable, they can represent a trade barrier in their own right. This may also be the case if their discretionary character is subject to protectionist capture.Moreover, where the rules of origin allow minimal or no third country inputs (as is the often the case with respect to sensitive sectors), producers in RTA members have a strong incentive to avoid such inputs so as to preserve the preferential status of their own products. In this case third country supplies are not simply denied the preferential access provided for by the RTA, in practice they often lose access altogether. In addition to the resulting diversion of trade flows, this situation may provide a considerable incentive for potential investors to establish within the RTA region, rather than at its periphery.Non-preferential rules of origin are used for all other purposes. The WTO Agreement on Rules of Origin applies to non-preferential rules of origin used in commercial policy instruments such as the application of MFN treatment under GATT Articles I, II, III, XI and XIII; anti-dumping and countervailing duties; safeguard measures; origin marking requirements; discriminatory quantitative restrictions or tariff quotas; or in the context of government procurement. Preferential rules of origin are not covered by those provisions, although in a Common Declaration annexed to the Agreement WTO Members agree to observe the same principles when they use rules of origin to determine whether goods qualify for preferential treatment (with the obvious exception of principles that are incompatible with the concept of a preferential trade regime, such as the principle of non-discrimination).Most RTAs leave non-preferential rules outside their coverage: each RTA member country maintains its domestic system of rules of origin for administering anti-dumping and countervailing duties, marking requirements, or quantitative restrictions and quotas. The WTO Agreement on Rules of Origin thus goes beyond most RTAs in this area. The only RTA that has common non-preferential rules of origin, in addition to its preferential rules, is the European Union, which, as a customs union, has a common external trade policy. EU non-preferential rules are relatively simple, considering product transformation to be substantial if it is"economically justified"and results in a new product or represents an important stage of manufacture, but the criterion is not further defined. Interpretation of the criterion as applied in each case or policy area belongs to the relevant EU institution and leaves certain room for discretion depending on the policy measure for which origin needs to be determined. The criterion is supplemented by an anti-circumvention provision, which denies origin to products transformed solely in order to circumvent anti-dumping or other trade policy measures against specific countries.Although it appears that RTA preferential systems contain more restrictive rules than non-preferential systems adopted domestically by the Parties to an RTA, it is not clear that domestic preferential schemes, such as the GSP schemes, are less restrictive than comparable RTA schemes. Indeed, it has been argued that the potential advantage of such domestic preferential schemes is seriously curtailed by the complication of applicable rules of origin and the difficulty in qualifying under those rules. There seems therefore to be an increase in complexity when moving from non-preferential to preferential schemes, be they regional or domestic.ROO, which are part of both F T As and customs union agreements, play very different roles under these two arrangements. In a customs union, members have a common external tariff so that there are no rents to be obtained from trans-shipment. Therefore, when a ROO is agreed upon, its purpose is simply to determine the extent of preferential treatment for fellow members. In an F T A, members maintain their own external tariffs. Hence, tariffs may differ between member countries. In this setting, ROO assume a function additional to that under customs unions: ROO prevent the import of any particular commodity from entering through the country (which gets the tariff revenue) with the lowest duty on the item in question and being re-exported to other countries in the F T A. ROO thus might prevent or reduce such re-export waste, thereby raising welfare.WTO provisions on rules of origin do not cover rules on services or investment. However, GATS Article XXVII acknowledges the right of Members to deny the benefits of the agreement to"non-originating"services or service providers. By virtue of this provision, such services or service providers include services supplied from or in the territory of a non-Member; maritime transport services by vessels registered under the laws of non-Members; or juridical persons that are not service suppliers of another Member.The harmonization to be undertaken in the WTO may lessen the risks inherent in rules of origin by serving as a model for RTAs negotiated in the future. But at the same time, WTO activity will inevitably be influenced itself by the approach to rules of origin contained in existing RTAs, particularly by the models promoted by the major trading partners. A question arising is whether any move to simplify or lessen the restrictive effects of preferential rules of origin is more likely to result from the establishment of a world-wide harmonized system of rules of origin per se, or rather from further liberalization of trade at the multilateral level.