Made in …?: Understanding Rules of Origin Market Access Division WTO 2014
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Course objectives At the end of this online course, you will be expected to: 1
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Understand why rules of origin are used in international trade
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Know how to distinguish preferential and nonpreferential origin
Be familiar with the main methods used to design rules of origin
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Understand the effects of rules of origin on trade and investment
Become familiar with the WTO disciplines on rules of origin
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Table of contents What are rules of origin? Why are rules of origin used in international trade? What is preferential and what is non-preferential origin?
Why do rules of origin matter? What is their impact on trade and investment?
How can rules of origin be designed?
WTO rules: the Agreement on Rules of Origin and the Ministerial Decision on rules of origin for least-developed countries level
1 WHAT ARE RULES OF ORIGIN? WHY ARE THEY NEEDED IN INTERNATIONAL TRADE? WHAT IS PREFERENTIAL AND WHAT IS NON-PREFERENTIAL ORIGIN? level
What is origin? •
According to the Dictionary, origin is the fact of being born from a particular ancestor or, more generally it is the act or fact of beginning from something; source or cause; starting point.
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For a person, origin is commonly thought to be your nationality. That may be determined by your place of birth, by the origin or your parents, by your marriage with someone or by your prolonged residency in a given country. Your origin (nationality) grants certain benefits like being able to live, work , access social security or run for elected posts.
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The origin of goods is similar: it is the “nationality” of a good, or the country where a good was obtained or where it was manufactured. …Depending on the country of origin of a good, some benefits may apply, such as being imported without paying any import duties (“duty free”).
Rules of Origin are the rules that determine where a good was obtained or manufactured, that is, its economic nationality. They set the conditions under which a good may be considered as having “originated” in a country.
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Cotton: grown in Malawi Fabric: weaved in South Africa
Many countries may participate in the manufacturing process of a good, but there must be only one country of origin.
Dyeing: South Africa
Printing: South Africa Yarn: from Pakistan Buttons: from India
A RULE is needed to identify that country.
Cut to parts in South Africa Assembly: Malawi
Licenses: USA
Cotton pyjamas level
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When are rules of origin used? Rules of Origin are used in international trade every time the treatment of an imported item varies depending on where it was produced; that is, every time there needs to be a distinction based on the country of origin.
Most commonly, this happens at the importation of a good, to determine which tariff rate should apply.
However, certain countries may also apply other trade policy measures which require the utilization of rules of origin for their implementation. level
Import duties Imports from Mexico, Jordan and Lesotho are imported duty free (import duty = 0%). Imports from Country X pay reduced duties because tariff reduction in an agreement could be “progressive” or because the rates in the agreement were reduced but not eliminated.
Countries with which the USA does not have an Agreement, such as Pakistan, pay the “regular” import duties.
MFN
Certificate of Origin
NAFTA
0%
US-Jordan FTA
0%
US GSP (AGOA)
0%
US-Country X FTA
16%
The import duties (tariffs) that a product will pay when it is imported often depend on the origin of the good. If the good is deemed to originate in a preferential country, it could be imported duty free. If it originates in a non-preferential country, it may have to pay import duties to be imported. The certificate of origin is what attests of the origin of a good. Based on it, customs will assess which duties apply.
8% Boy’s pyjamas HS6207.22 level
Preferential / Non-Preferential Treatment PREFERENTIAL Treatment: trade agreements facilitate trade among countries by reducing or eliminating customs duties. Because they create preferential relations, such agreements are in principle against the WTO’s Most Favoured Nation principle, but Articles XXIV of the GATT and the “Enabling Clause” authorize Members to conclude such agreements. Preferential trade agreements have several forms or names: •
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“Reciprocal” Trade Regimes: all parties reduce tariffs with respect to each other (“regional trade agreements” in WTO talk) –
Free Trade Agreements, Free Trade Zones, Economic Partnership Agreement, Customs Unions, etc.
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Bilateral Agreements (EU-Chile, US-Korea) or Regional Agreements (e.g. NAFTA, COMESA, MERCOSUR, ASEAN, GCC, EU-ACP EPAs, etc.)
“Non-Reciprocal” or “Unilateral” Trade Regimes: only one of the parties reduces or eliminates its tariffs with respect to imports from the other parties, while the others continue to maintain tariffs (“preferential trade agreements” in WTO talk) –
Developed or developing countries’ “General System of Preferences”, GSP (e.g. US African Opportunity and Growth Act (AGOA) for Sub-Saharan African countries, EU “Everything But Arms (EBA)”, China’s preferences for least developed countries, etc.
NON PREFERENTIAL Treatment: trade among Members of the WTO is usually conducted on the basis of the “Most Favoured Nation” principle. In respect to import duties, this means that WTO Members must, in the absence of preferences or exceptions, apply to each other the same import duty for like products. level
Preferential vs. Non-Preferential
Preferential Rules of Origin (“reciprocal” and “nonreciprocal” or unilateral trade regimes)
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The rules of origin which apply to an international transaction are always that of the IMPORTING country: it is the importing country that sets the conditions for entry of goods in its territory. This is why rules of origin have a direct impact on MARKET ACCCESS conditions.
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ALL preferential trade agreements have rules of origin. In that context, rules of origin ensure that the benefits of an agreement are only given to those products which “originate” in one of the parties to the agreement.
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In fact, accepting NOT TO CHARGE import duties on an imported item is a real benefit! And a concession.. since it means foregoing revenue. And let’s not forget that most Customs authorities report to the … Ministry of Finance!
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The purpose of preferential rules of origin is therefore not so much to determine the “real” origin of a good.. but rather to CONFIRM that a good claiming preferential status actually MEETS the conditions set in the agreement.
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Preferential vs. Non-Preferential
Non-Preferential Rules of Origin (MFN treatment)
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Not all countries use non-preferential rules of origin (since no tariff concession is involved).
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Non-preferential rules of origin ARE NOT used to implement trade preferences. Instead, they are used in the context of OTHER TRADE POLICY MEASURES such as quotas, anti-dumping, food and health (sanitary) measures, etc. They are also used to indicate the country of origin on labels (consumer policies) and to collect trade statistics. Not all countries apply non-preferential rules of origin.
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Import Quotas EUROPEAN UNION High Quality Beef import Quota Allocations 2012-13 Exporting Country
Quota 2012-13
Quantity issued
% allocated
Argentina
30,000
24,336
81.1
Australia
7,150
6,441
90.1
Uruguay
6,300
6,289
99.8
Brazil
10,000
2,978
29.8
New Zealand
1,300
1,281
98.5
Paraguay
1,000
0
0
United States
11,500
432
3.8
Total
67,250
41,757
62.1
Source: EU Commission
In the European Union, the importation of meat is regulated by a quota. Each country may export meat to the EU until a maximum volume (number of tonnes) is reached. Rules of Origin are needed to track imports and control the extent to which the quota allocated to each country is being used (distinguishing the meat by country of origin). level
Anti-Dumping Antidumping duty likely on Chinese, Korean, Thai alloy wheels NEW DELHI: The Indian Government has announced that, following investigations, it is likely to impose an anti-dumping duty on a certain type of aluminium alloy auto wheels imported from China, Thailand and Korea, to protect domestic producers from below-cost imports. In its preliminary findings, the Directorate General of Anti-dumping and Allied Duties (DGAD) has recommended imposition of duty ranging between USD 1.18 and USD 2.15 per kg on imports of cast aluminium alloy wheels from the three countries, the Commerce Ministry said in a notification.
If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product. The WTO “Anti-dumping Agreement” regulates how governments can or cannot react to dumping, for instance, by imposing an additional tax on the importation of dumped goods. Rules of origin will allow customs officers to levy the additional tax only on imported items from specific countries in which dumping was found, but not on like products from other countries.
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Sanitary inspections, embargoes If a disease found in meat from Brazil requires the prohibition of such imports, a ban should not penalize imports from other countries where no disease was found. Rules of origin will allow a customs officer to know which items may be imported and which may not.
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Trade statistics TABLE 8. VALUE OF IMPORTS, TOTAL EXPORTS AND BALANCE OF VISIBLE TRADE WITH PRINCIPAL COUNTRIES FOR YEAR TO DATE $000 T.T. JANUARY - MARCH 2011
COUNTRIES
COLOMBIA U. S. A. GABON BRAZIL CHINA RUSSIAN FEDERATION REST OF THE WORLD CANADA GERMANY CARICOM UNITED KINGDOM JAPAN THAILAND MEXICO SPAIN KOREA, REPUBLIC OF
IMPORTS (C.I.F.)
EXPORTS (F.O.B.)
BALANCE
(1) (2) (3) 2,644,073.8 334,960.6 -2,309,113.2 2,156,776.9 8,447,529.7 6,290,752.8 1,450,660.0 0.1 -1,450,659.9 1,339,390.3 465,743.1 -873,647.2 442,457.3 68,281.6 -374,175.7 405,465.7 0.0 -405,465.7 352,623.0 241,211.2 -111,411.9 257,346.3 424,964.3 167,618.1 223,709.1 135,109.9 -88,599.2 182,364.6 2,933,838.1 2,751,473.5 162,691.4 885,948.6 723,257.1 159,917.5 1,030.1 -158,887.4 The application of Rules of Origin also allow 119,837.9 3,106.4 -116,731.4 111,226.0 22,339.4 statistics, which -88,886.6 the compilation of national 102,970.7 1,449,636.0(or exported) 1,346,665.3 indicate what is imported from 93,734.4 4,327.5 -89,406.9
various countries.
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Country of origin marking (labels)
Many countries have consumer legislation indicating the information that should be contained in labels. Country of origin is a very common item which labels may need to contain. level
Summarizing… • •
Rules of Origin are used to determine the country of origin of imported goods so that they receive the appropriate treatment at their importation. But the country of origin will also matter for statistics and for consumers! (health and labels)
NON PREFERENTIAL Purpose is to identify the “final” country of origin
Used for MFN trade
Determine Statistics, Quotas, Antidumping, Licences, Labels…
Derive from National legislation (+ WTO Agreement)
Determine Import duties (tariffs)
Derive from Regional Or Preferential Trade Agreements
ORIGIN PREFERENTIAL Purpose is to verify that an imported good conforms with the conditions set in an RTA
Used for Preferential trade
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Test your knowledge Select the correct answer. 1. Preferential rules of origin:
2. Non-Preferential rules of origin:
a)
Are negotiated in the context of regional trade agreements;
b)
Are adopted unilaterally by governments which maintain preferential trade schemes for developing or least-developed countries;
a) Are used to differentiate goods on the basis of their country of origin: such as for anti-dumping, licenses or quotas;
c)
Aim at ensuring that only goods which meet specific origin criteria can benefit from tariff preferences;
d)
All of the above.
b) Must be complied with for a good to benefit from tariff preferences; c) Must be applied by all countries that engage in international trade; d) All of the above.
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Test your knowledge 3. Match the policy instruments on the right with the types of origin on the left.
Non Preferential Origin Duty Free treatment
Free Trade Agreements
Customs Unions
Product labeling
Anti Dumping duties
MFN tariffs
Preferential Origin
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Test your knowledge - Answers 1. Preferential rules of origin: d)
All of the above.
2. Non-Preferential rules of origin: d)
Are used to differentiate goods on the basis of their country of origin: such as for anti-dumping, licenses or quotas.
3. Match the policy instruments on the right with the types of origin on the left. Non Preferential Origin: Anti Dumping duties, Product labeling, MFN tariffs Preferential Origin: Free Trade Agreements, Duty Free treatment, Customs Unions
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2 HOW DO RULES OF ORIGIN AFFECT BUSINESSES? HOW DO THEY AFFECT INTERNATIONAL TRADE? WHAT IMPACT DO RULES OF ORIGIN HAVE ON INVESTMENT? level
Rules of Origin can… encourage foreign and domestic investment where the rules facilitate international trade
influence the ability of firms to benefit from regional or preferential trade agreements
influence the capacity for firms to integrate international value chains
encourage or discourage linkages between export sectors and national industries
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Why do Rules of Origin matter? Because they set the CONDITIONS OF IMPORTATION into national markets, rules of origin affect MARKET ACCESS OPPORTUNITIES. •
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In the context of trade preferences, goods which do not conform with the rules of an agreement will be denied preferential benefits (that is, they will still be imported… but not at reduced or zero duty rates).
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Adjusting to such requirements is not always easy or doable for firms.
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This means rules of origin could have a significant impact on the cost of producing a good and might therefore affect its competitiveness and trade opportunities.
If the conditions set are stringent, rules of origin may require producers to change their suppliers to qualify for regional or preferential trade agreements.
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Why do Rules of Origin matter? •
In the context of non-preferential trade, rules of origin determine whether a product will be subject to anti-dumping duties, embargoes or sanitary restrictions, licences, etc. They may dictate which country of origin should be indicated in labels.
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If the rules of not clear, exporters and importers may have great difficulty predicting which treatment their goods will receive, making it more difficult to make business plans and decisions. If the rules are complex, companies may need to hire and dedicate staff specifically to understand them and reduce the risks associated with regulatory uncertainty, which increase their costs.
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Rules of origin may also be one of the considerations leading to foreign investment decisions.
Rules of origin create both opportunities and challenges for firms.
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Effect on international trade •
Preferential rules of origin set the conditions that a good must meet to be imported under the benefits of a preferential or regional trade agreement (particularly the ability of a good to be imported duty free).
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If the rules are adapted to the productive and industrial capacity of a country, they will encourage preferential trade. But if the rule is too “strict” (that is, its requirements are difficult or even impossible to comply with for a country), a firm’s ability to export under preferences may be diminished. In this cases, we refer to a low or high “utilization rate” of an agreement (how much trade between two countries actually is done on the basis of a preferential agreement between them).
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There are hundreds of regional and preferential trade agreements, each with its own set of rules of origin. This means that companies need to understand, comply and prove compliance with sometimes very different rules.
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The WTO 2011 World Trade Report contains additional information on how rules of origin may discourage preferential trade flows (Chapter II-B.4., pages 83-85).
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Economic effect Strict Rules of Origin
Flexible Rules of Origin
Encourages the choice of local or regional suppliers and the use of inputs originating from within from preferential partners.
Do not restrict the choice of suppliers so have a more moderate impact on trade and business choices.
Can promote local industries and incentivise the emergence of regional supply chains / added value and encourage regional integration.
By allowing to chose inputs globally, more flexible rules can boost the competitiveness of local or regional products.
Can be difficult or costly to comply with if companies cannot find the inputs they need locally. If cannot be complied with, companies will not always be able to claim the benefits of the agreement (“under utilization”).
However, local companies or small firms supplying inputs could find it harder to compete with competitors abroad. Because the rules are easier to comply with, they may encourage trade and lead to a higher utilization of the benefits of the agreement. But, what may be strict or flexible for one country might not be for another… level
The clothing sector accounts for about 60% of exports from Lesotho. The sector grew rapidly particularly to take advantage of trade preferences in the EU and the USA. More recently, firms also produce to supply the South African market.
Consider this example
Country
A
PREFERENCES Rule of origin to qualify for preferences in country A is: 40% of the final value of the garment must be added locally. Non-originating materials (“imported fabrics”) can come from any country. The rule is flexible and allows producers to buy cheap fabrics and be competitive. However, the exporting sector might have little linkages with other sectors of the economy of Lesotho and local or regional cotton producers may find it hard to compete in supplying fabrics.
The cutting and sewing of the garment are done in Lesotho, where labour costs are low. The cotton fabric used needs to be imported as there is no local production. So the possibility to import fabrics and the price and quality of the fabrics used have a direct impact on the competitiveness of exports.
The rule is more strict and force local producers to find suppliers in Country B or within Africa. Finding competitive suppliers could be a challenge, which would undermine the competitiveness of final garments. However, local and African producers of cotton would find it easier to integrate into this value chain. Rule of origin to qualify for preferences in country B is: 50% of the final value of the garment must be added locally. Non-originating materials (“imported fabrics”) can come only from country B or an African country. Country
B
PREFERENCES level
Summarizing… •
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Rules of origin are a necessary component of international trade and particularly in the context of preferential trade agreements. Because each preferential or regional agreement contains its own rules of origin, there are hundreds of different sets of rules of origin currently being applied in the world. If companies wish to export their products duty free, they need to comply with the origin requirements laid out in each individual agreement. If the rule is simple, predictable and easy to comply with (that is, no particular adjustment to production is needed), complying with the rule will be easy and the products will become eligible for preferences. If, however, the rule is complex and impose adjustments to the supply chain of a company (the way it structures its production), complying with the rule could be difficult or costly. So much so that certain companies may simply not be able to comply with them. In this case, they may export, but will not be able to claim preferences (that is, export duty free). Therefore, there should ideally be a match between origin requirements and the productive capacity of the companies and countries. Where there is no match, the rules may influence business choices and have an impact on competitiveness, the utilization of preferential agreements and generally on trade. It is in this context that rules of origin create both opportunities and challenges for companies and countries. level
Test your knowledge Select the correct answer. 1. Preferential rules of origin: a)
Impose procedural requirements, such as a certificate of origin but are a mere formality in international trade;
2. Rules of origin have an impact on trade because: a) They determine the eligibility of products for trade preferences;
b)
Have been harmonized internationally so the same rules are applied by all nations;
b) For firms that wish to claim trade preferences, they may constrain their choice of suppliers and inputs;
c)
Can influence the choice of suppliers and therefore impose adjustments to the way companies structure their businesses;
c) They may increase production costs by forcing companies to understand and comply with a multiplicity of different rules;
d)
All of the above.
d) All of the above.
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Test your knowledge - Answers 1. Preferential rules of origin: c)
Can influence the choice of suppliers and therefore impose adjustments to the way companies structure their businesses.
2. Non-Preferential rules of origin: d)
All of the above.
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3 HOW CAN ORIGIN BE DETERMINED? WHAT ARE THE MOST COMMON METHODS USED TO DESIGN RULES OF ORIGIN? level
How are rules of origin designed? •
Rules of origin will set the conditions according to which a product can be considered to originate in a country. The rule will therefore entail some understanding about how goods are obtained, produced, manufactured, processed, etc. This is why negotiating or implementing rules of origin may be a complex exercise: not only does it require some experience in drafting the rules themselves, but it also entails legal skills and an understanding about industrial or manufacturing processes.
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Rules of origin derive from national legislation, international agreements (for instance, regional trade agreements) or from a multilateral agreement (for instance the WTO Agreement on Rules of Origin or the Kyoto Convention).
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They can be general (and apply to all products) or specific to some sectors or goods only (product-specific rules). When a rule is specific, it will typically identify goods on the basis of the Harmonized System.
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The certificate of origin proves or demonstrates the origin of a good (in fact, a good is not necessarily shipped from its country of production, or the last place of production is not necessarily where it gained its essential characteristics).
Watch Mr Stefano Inama, of the UNCTAD, speak about the difficulties in drafting rules of origin.
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Reminder: HS •
Most commonly known as the Harmonized System of Nomenclature, of “the HS”.
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International convention elaborated to make it easier to identify products (goods) and facilitate international trade.
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Used by more than 200 countries.
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Developed and maintained by the World Customs Organization (headquartered in Brussels, Belgium).
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Regularly updated to keep pace with modern technology and new patterns of trade.
HS Codes are built with sequential codes. The greater the number of digits, the more specifically an item is identified. Example:
Section: Textiles and Textile articles Chapter 62: Articles of apparel and clothing, not knitted or crocheted Heading 62.07: Men's or boys' nightshirts, pyjamas, etc. Line 6207.21 Pyjamas: Of cotton Line 6207.22 Pyjamas: Of man-made fibres Line 6207.29 Pyjamas: Of other textile materials Find out more about the HS and the work of the World Customs Organization.
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Rules of Origin divide goods into 2 main categories depending on how they are produced
(1) “Wholly Obtained” Goods and (2) “Substantially transformed” Goods
VALUE
TARIFF CLASSIFICATION
MANUFACTURING PROCESS
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Wholly Obtained Goods •
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• •
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The origin category of “Wholly obtained goods” covers the cases in which a good is entirely obtained, extracted, or manufactured in a single country without using inputs imported from other countries. Attributing origin in these cases is simple because only one country is involved in the production process. In any set of rules of origin, specific provisions describe or enumerate these goods. It is mainly used for natural products and for goods made from natural products which are entirely obtained in one country. Common examples are products extracted, harvested, hunted or captured in a country: mineral products extracted from a country’s soil, vegetables harvested or gathered in that country; live animals born and raised in that country or captured or fished in that country, products obtained by maritime fishing taken from the sea by a vessel of that country or produced in such a vessel, etc. In addition, any good produced in a country exclusively from other wholly obtained goods will also be deemed to have been wholly obtained in that country (for instance sausages from meat obtained in that country or fruit jam from fruits and sugar obtained in that country). level
Substantially Transformed Goods •
• •
Substantially transformed goods are those which are produced FROM or WITH imported inputs or those which require processing in different countries. Attributing the origin of a good to a single country can be a complex exercise in these cases because several materials, parts, processes or a large number of countries may be involved. The rule of origin will therefore need to clearly identify when exactly a transformation occurs, that is, when the final product resulting from a process is sufficiently different from the inputs used to manufacture it. 3 approaches to determine whether substantial transformation has occurred.
“Percentage” or “value” criterion
“Tariff classification” criterion
“Specific processes” criterion
Origin is based on a product characteristics, such as its final price (“value”), the price and the proportion of foreign or local inputs
Origin is based only on the tariff classification of a final good and the components used using the Harmonised System (HS)
Origin is based on specific manufacturing or other specific processes which were necessary to produce a good level
Illustration of substantial transformation •
Chemical fertilizers (SH 3105) are composed mainly of 3 elements: ammonium nitrate, potassium chloride, and ammonium phosphate. The compounds are blended together in different proportions and then granulated or diluted in water and packaged.
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Assume a producer imports these 3 elements from 3 different countries and uses his expertise to blend them. The fertilizer is then exported to another country. Here are illustrations of what the rule of origin could look like:
“Percentage” or “value” criterion At least 30% of the final value of the good must have been added locally Non originating materials (imported inputs) must not be more than 70% of final price
“Tariff classification” criterion
“Specific processes” criterion
Change of Tariff heading: all materials used (inputs) must be classified in a tariff heading different from that of the final product (fertilizer).
Origin is determined by the place where the ammonium was obtained or where the blending was performed
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Additional provisions •
•
• •
Several other provisions complement and help clarify the basic rules of origin. Several of these provisions can help make the rule of origin more flexible or more strict or restrictive. One important concept is that of “CUMULATION”. While, in principle, all processes for origin purposes must have been carried out in a single country to be considered as “originating”, sometimes the rules may accept the use of imported inputs from selected countries. That is, imported inputs would be considered to be domestic for origin purposes. Several regional or preferential trade agreements contain this type of flexibility. This is a flexibility of great use for many developing countries with a limited productive capacity because it allows producers to import the materials they need without loosing access to trade preferences.
Illustration of “Cumulation” “Ready made Beef Stew”
In the EU-CARIFORUM Economic Partnership Agreements, parties to the agreement may source their inputs from any other Caribbean, EU or ACP country, as well as from selected neighbouring countries. In this example, the rule of origin would deem that 55$ in the value of this “Beef Stew” come from Jamaica.
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Summarizing… •
Rules of origin will set the conditions according to which a product can be considered to originate in a country. Rules of Origin divide goods into 2 main categories depending on how they are produced: 1. “Wholly obtained goods” (typically those occurring naturally); and, 2. Substantially transformed goods (most other products).
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The rule of origin will identify exactly when a “new” final product was obtained because a substantial transformation or sufficient processing has occurred. The rule does so by: 1. Assessing the value that was added locally or the value which was imported (if that value meets minimum or maximum percentages, the origin will be deemed to have changed); 2. Comparing the tariff classification of the inputs used and that of the final good (if the classification is sufficiently different, the origin will be deemed to have changed); 3. Identifying a very specific industrial process which, if accomplished, will change the origin of the final good.
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Rules can be general or product-specific. Several other provisions complement the rules, making them more flexible or more restrictive.
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Cumulation, for instance, allows to consider imported materials from certain other countries as being obtained locally. It is an important flexibility for developing countries as it allows producers to source the materials they need from firms abroad.
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Test your knowledge Match the policy instruments on the right with the types of origin on the left.
Wholly obtained goods Change of Tariff Heading (CTH)
Substantial Transformation (value added rule) Substantial Transformation (tariff classification rule)
Regional content of at least 40% Animals born and raised in that country Country where refining occurred
Substantial Transformation (specific process rule) level
Test your knowledge - Answer Match the policy instruments on the right with the types of origin on the left.
Wholly obtained goods: Animals born and raised in that country Substantial Transformation (value added rule): Regional content of at least 40% Substantial Transformation (tariff classification rule): Change of Tariff Heading (CTH) Substantial Transformation (specific process rule): Country where refining occurred
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4 WHAT ARE THE RULES THAT WTO AGREEMENTS CONTAIN WITH RESPECT TO RULES OF ORIGIN? WHAT WORK ARE WTO MEMBERS CURRENTLY UNDERTAKING IN THE AREA OF RULES OF ORIGIN? level
WTO Agreement on Rules of Origin •
In the early 1980s, several WTO Members became increasingly concerned with the utilization of rules of origin in the in the context of the application of quotas and of anti-dumping duties. Members decided that WTO disciplines regulating the use of rules of origin would be useful.
Institutions The Agreement creates: A WTO Committee on Rules of Origin (Geneva, Switzerland): open to all WTO Members. It usually meets twice a year and ensures transparency with respect to rules of origin (reviews notifications). This is also where the negotiations for the harmonization of rules of origin are conducted (Article 4:1).
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They then adopted the WTO Agreement on Rules of Origin which applies to all WTO Members.
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In it, Members commit to negotiate common rules of origin for all non-preferential trade purposes. The Agreement does not contain those rules, but rather, launch the negotiations for the harmonization of non-preferential rules of origin.
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Once Members agree these “harmonized rules”, all Members should apply them. However, these negotiations are still ongoing, so, for the moment, there are no common rules of origin at the WTO.
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In the meantime, not all Members apply non-preferential rules of origin. If they do, they must respect some “provisional” obligations contained in the Agreement.
A Technical Committee on Rules of Origin at the World Customs Organization (Brussels, Belgium). It usually meets once a year to support the harmonization negotiations and to discuss technical problems related to rules of origin (Article 4:2 and Annex I).
Find more about the work of the WTO on rules of origin in the WTO website. level
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Structure of the WTO Agreement 1. 2. 3.
4. 5. 6. 7. 8. 9.
Definition of rules of origin and scope of the Agreement Transitional disciplines Disciplines after negotiations for the harmonization of rules of origin are completed Institutions (Committees) Notification obligations Review of the Agreement Consultations Dispute Settlement Objectives and guidelines of the harmonization of non-preferential rules of origin
Annex I: Technical Committee on Rules of Origin Annex II: Disciplines regarding Preferential Rules of Origin
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NON PREFERENTIAL Rules of Origin Apply MFN trade relations Must be “harmonized”: work programme (negotiations) launched (Art. 9) Harmonized rules must be applied to all trade policy instruments that require the utilization of rules of origin (Art.1, Art.3) Disciplines for the transition period (Art.2) Must be notified to the Committee
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PREFERENTIAL Rules of Origin Apply to Regional and Preferential trade Agreements Need not be harmonized (Annex II) Some disciplines apply Transparency: notified to the CRO
• • •
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“Transitional” Obligations Article 2 of the Agreement on Rules of Origin sets out a number of obligations which WTO Member governments must respect when applying rules of origin. “Members shall”:
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Clearly define their rules of origin and publish them promptly (see Article X of the GATT).
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Not use rules of origin in a way that restricts, distorts or disrupts international trade and administer their rules in a consistent, uniform, impartial and reasonable manner.
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Not apply rules of origin to import or exports that are more restrictive than the rules applied to domestic products or that are discriminatory.
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Base rules of origin on a positive standard (that is, the rule must say what does confer origin).
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Upon request of an interested party Members must provide Advance Rulings on Origin.
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Not apply changes retroactively.
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Make available an independent mechanism to review decisions related to rules of origin to give interested parties the possibility of asking for a review of decisions if they feel their rights were denied.
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Treat all information confidentially.
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Advance Rulings on Origin •
“Advance rulings” or “Binding Origin Information” or “Binding Origin Ruling” gives companies or an exporter to ask the competent authorities (typically, customs) what rules of origin would apply to an import. On the basis of the description of the products, customs inform the exporter which rules of origin would apply and what the country of origin would be. With that information in hand, companies, importers and exporters can make decisions about where to source their products and inputs and can foresee which import duties, licences, quotas, taxes, etc. would apply at the moment of importation.
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Advance rulings are a very effective trade facilitation tool.
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The WTO Agreement on Rules of Origin requires all WTO Members to offer advance rulings (Article 2(h) and Annex II, article 3(d)). The recent WTO Agreement on Trade Facilitation reiterates that obligation for all Members.
Find more on advance rulings on origin at the WCO website level
What other work does the WTO undertake with respect to Rules of Origin? •
In addition to the work that Members undertake in the WTO Committee on Rules of Origin related to notifications and to their work for the harmonization of non-preferential rules of origin, Members adopted, in December 2013, a Ministerial Decision on rules of Origin for LDCs.
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The Decision is actually a set of recommendations about ways in which preferential rules of origin could be reformed to help make it easier for LDC exports to qualify for preferential market access in developed or developing countries.
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The Decision recognizes that each country granting preferences to LDCs has its own method of determining rules of origin, but it invites Members to draw upon the elements in the decision to reform preferential schemes for LDCs.
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The objective is that rules of origin for the LDCs should be simple and transparent and that the rules should take into account the productive and industrial capacities of LDCs. In other words, that they should be flexible enough and only request processes which are likely to be undertaken in an LDC.
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The implementation of the Decision is reviewed annually in the WTO Committee on Rules of Origin. level
Summarizing… Covers trade in goods only All WTO Members must notify all their rules of origin to the WTO: non-preferential and preferential.
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NON PREFERENTIAL ROO MFN trade relations. Must be Harmonized: work programme to harmonize non-preferential rules of origin (Art. 9). Once harmonized, the rules must be applied by all WTO Members to all trade policy instruments (Art.1, Art.3). The negotiations still ongoing, so, for the moment, there are no common rules of origin at the WTO. Some disciplines apply meanwhile (Art.2).
Creates a Committee on Rules of Origin at the WTO (CRO) and a Technical Committee on Rules of Origin at the World Customs Organization (TCRO).
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PREFERENTIAL ROO “Contractual “relations (regional and preferential trade agreements). There is no mandate to harmonize preferential rules. However, these rules are also subject to some disciplines (Annex II). A recent Ministerial Decision calls for the simplification of rules of origin applied to LDCs so that they can more easily take advantage of existing trade preferences.
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Test your knowledge Select the correct answer. 1. The objective of the WTO Agreement on Rules of Origin is to: a)
b)
c)
d)
Encourage greater predictability and transparency with respect to rules of origin; Launch negotiations for the adoption of common non-preferential rules of origin by all WTO Members; Establish minimum requirements with relation to rules of origin that must be respected by WTO Members;
2. The WTO Committee on Rules of Origin: a) Ensures the implementation of the WTO Agreement on Rules of Origin; b) Reviews Members’ notifications regarding preferential and non-preferential rules of origin; c) Reviews the implementation of the WTO Ministerial Decision on rules of origin for LDCs; d) All of the above.
All of the above.
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Test your knowledge - Answers 1. The objective of the WTO Agreement on Rules of Origin is to: d)
All of the above.
2. The WTO Committee on Rules of Origin: d)
All of the above.
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“Take Away”
Rules of Origin determine the economic nationality of goods. They set the conditions under which a good may be imported.
Preferential rules of origin set the criteria for the importation of goods under trade preferences (e.g. regional trade agreements or preferential trade agreements). If a good meets the rule, it qualifies for duty-free treatment. If it does not, it may still be imported, but not under the preferences. If the rule is complex or impose adjustments to a firm, complying with the rule could be difficult, costly or even impossible. If trade cannot occur under preferences, rules of origin may lead to the “under utilization” or a “low utilization” of regional or preferential trade agreements.
Non-Preferential rules of origin are not applied by all countries, but are used to implement other trade policy instruments such as anti-dumping, quotas, licences, SPS measures, labeling, etc.
The WTO Agreement on Rules of Origin requires WTO Members to negotiate common rules of origin for nonpreferential purposes. These negotiations are conducted by the Committee on Rules of Origin and are still ongoing. Therefore, WTO Members do not have to apply common rules of origin for the time being. However, the Agreement requires each Member to respect minimum standards such as transparency, non-discrimination and impartiality.
Rules of origin create both opportunities and challenges for companies but the stringency of a rule depends on each product, each firm. What might work in the context of one country may prove unreasonable in another. This depends largely on the productive or industrial capacity of countries and the ability of firms to buy the inputs, components and materials they need locally or regionally.
Rules of Origin divide goods into 2 main categories depending on how they are produced: “wholly obtained goods” (typically those occurring naturally); and, substantially transformed goods (most other products). The rules are complemented by other important provisions, such as those on “cumulation”.
The negotiation and design of rules of origin may entail a difficult exercise as it requires a good knowledge about specific sectors and their industrial processes as well as good understanding about how local firms structure their production, which materials they use and where they source them from. level
