Fundamentals of Rules of Origin 5th Edition Module 1. The Role of the Origin Regime
Fundamentals of Preferential Rules of Origin, 5th Edition
Module 1
Author: Inter-American Development Bank (IDB) (www.iadb.org), through its Integration and Trade Sector (INT) Course coordinators: Inter-American Development Bank (IDB) (www.iadb.org), through its Integration and Trade Sector, the Institute for the Integration of Latin America and the Caribbean (www.iadb.org/en/intal/), the Inter-American Institute for Economic and Social Development (INDES) (www.iadb.org/en/indes/). Module authors: Jeremy Harris, Specialist at the Inter-American Development Bank, Integration and Trade Sector, Lautaro RamĂrez, Consultant at the Inter-American Development Bank, Integration and Trade Sector, and Rafael Cornejo, Consultant at the Inter-American Development Bank, Integration and Trade Sector. Teaching and editing coordination: The Inter-American Institute for Economic and Social Development (INDES) (www.iadb.org/en/indes/), jointly with the Economic and Technological Development Distance Learning Centre Foundation (CEDDET) (www.ceddet.org)
5th Edition 2017
Publication property of the Inter-American Development Bank (IDB). All rights reserved. Any partial or total reproduction of this document must be reported to: BIDINDES@iadb.org The opinions expressed herein are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank.
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Contents Contents ........................................................................................ 3 List of Figures................................................................................. 4 Glossary ........................................................................................ 5 Presentation of the Module .............................................................. 9 General Objective of the Module ....................................................... 9 Guiding Questions for Learning........................................................ 10 Unit I. Characteristics of Preferential Rules of Origin .......................... 11 I.1. Purpose of the Rules and the Origin Regime ............................. 11 I.2. Structure of an Origin Regime ................................................. 14 I.3. Benefits of Originating Products .............................................. 18 I.4. Scope and Impact of the Origin Status of a Product .................. 21 I.5. Economic Purpose of Preferential Rules of Origin ...................... 23 I.6. Offensive and Defensive Use of Rules of Origin in Trade Policy ... 26 I.7. General vs. Specific Rules ...................................................... 27 I.8. Wholly Obtained vs. Produced from Non-Originating Materials .... 29 Unit II. International Context and the Agreement on Rules of Origin ... 32 II.1. Preferential vs. Non-Preferential Rules .................................... 32 II.2. Background to the Agreement on Rules of Origin ..................... 39 II.3. The WTO Agreement on Rules of Origin .................................. 41
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List of Figures Figure No. 1.1. Objective of the Rules of Origin Figure No. 1.2. Objective of an Origin Regime Figure No. 2.1. Origin Regime Structure Figure No. 2.2. Impact of Rules of Origin Figure No. 2.3. Features of Origin Regimes Figure No. 3.1. Preference Access Requirements Figure No. 3.2. Benefits of Originating Products Figure No. 3.3. Trade and Rules of Origin Figure No. 4.1. Origin Status Figure No. 7.1. Trade Triangulation Figure No. 9.1. Negotiation and Structure of Rules Figure No. 5.1. Anti-dumping Figure No. 5.2. RoO Features
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Glossary Accumulation: Disposition that permits inputs imported from other member countries of the free trade area to be considered as originating when determining
the
origin of the
good
into which they are
incorporated. Agreement: A treaty among countries that establishes both the elimination of tariffs on the trade among them and the regulations for the determination of which products qualify as originating in these countries such that they may benefit from the preferential tariff treatment. Certificate of Origin: Specially emitted document to certify that a good is originating in a member country of a free trade area. Final Good: The good that is the subject of the commercial operation for which determination of its originating status is required so as to be able to gain access to the negotiated tariff preferences. Imported Input: Input that has been produced in a country different from the country in which it is used in the production of another good. Input of any origin: Includes originating inputs and non originating inputs Non-Originating Good: A good that, by not meeting the requirements of the Origin Regime, is not considered originating in the country in which it has been produced, and therefore may not take advantage of the negotiated tariff preferences.
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Fundamentals of Preferential Rules of Origin, 5th Edition
NON-Originating
Inputs:
Inputs
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from
countries
outside
the
agreement or from member countries that do not meet their respective rules of origin under the agreement. These inputs, even if they have been purchased in the territory of a member country, having paid their import duties, remain non-originating. For example, this means that if the incorporation of these inputs in a production process does not result in the required change of tariff classification, the final good will not be originating in the country of production. Likewise, the sum of the values of non-originating inputs in excess of the level permitted by the rule of origin for the final good will impede the latter from being considered originating. Non-Permitted Input: An input that, when not originating, the rule of origin indicates may not be used in the production of a good without that good losing its originating status and, therefore, losing access to the negotiated tariff preferences. Origin Regime: Set of rules that sets forth the scope, criteria, requirements, and obligations that the agreement establishes with respect to the origin of goods. Originating Good: Good that by fulfilling the requirements of the Origin Regime is considered originating in the country in which its production has taken place, regardless whether imported inputs have been used in its production, and therefore may take advantage of the negotiated tariff preferences. Originating Inputs: Inputs that, by fulfilling the requirements of the Origin Regime, are considered originating in the country in which they were produced, regardless of whether in their production materials imported from non-member countries were used.
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Permitted Input: An input that, when not originating, nonetheless may be used in the production of a good without that good losing its originating status and, therefore, the good gains access to the negotiated tariff preferences. Productive Requirements: Requirements of the rules of origin that specify certain processes in the elaboration of a good that must be carried out in the territory of a member country of an agreement, or that specify certain inputs that must be originating, or both, in order for the good to be considered originating. Regional Content: Share of the value added in member countries of the agreement in the value of a good. There are several methods of calculation in different agreements, but in general the regional content includes the costs of originating inputs, labor, and other production costs. Regional Materials: Materials produced in a country that is a member of the free trade area, and that fulfills the rule of origin. Rule of Origin: Requirements that a good produced in a free trade area must fulfill in order to be considered originating, and thereby benefit from the preferential tariff treatment. Shipping and Repacking Costs: Costs incurred in the preparation and transport of the good. Short Supply List: In cases where there is not adequate supply within the member countries of the agreement of certain inputs that the rule of origin requires be originating, the agreement may establish an exception known as the Short Supply list. The inputs that appear on this list, of any origin, may be used in the production of a good without the good losing its originating status. 7
Fundamentals of Preferential Rules of Origin, 5th Edition
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Subheading: The first six digits of the tariff classification number under the Harmonized System. Tariff Preference: Reduced import duty negotiated in the agreement applicable to goods originating in member countries of the free trade agreement. Value Test: Criteria used for origin qualification of a good. Requirement established to measure the national or imported contributions that a good contains in order to determine if, despite containing imported inputs,
it
fulfills
the
established
requirements
to
be
considered
originating. Wholly Obtained: Good that does not contain any imported inputs and that has be entirely produced in a member country of the agreement.
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Presentation of the Module This module is the starting point of the basic course on Preferential Origin
Regimes
that
the
Integration
and
Trade
Sector
of
the
Inter-American Developing Bank will be conducting online. Reading this document is a requirement in order to participate in the other activities and fora of this module. Furthermore, the knowledge acquired in each module will be essential to make the most of the rest of this course. Please do not hesitate to ask questions on any matter needing clarification for proper interpretation and learning during this course. The instructors Jeremy Harris and Rafael Cornejo will be available to answer questions according to schedule.
General Objective of the Module To provide the basic principles of Preferential Origin Regimes in Preferential Trade Agreements, and to disseminate knowledge among participants on the features of such agreements, their inception, aim, development, and relevance to international trade.
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Guiding Questions for Learning •
What is the rationale behind rules of origin?
•
What is the context of international agreements in terms of rules of origin?
•
What is the impact of including rules of origin in international agreements?
•
What types of products are subject to rules of origin?
•
What types of rules of origin are there?
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Unit I. Characteristics of Preferential Rules of Origin
I.1. Purpose of the Rules and the Origin Regime The main purpose of establishing rules of origin requirements is to lay down the conditions of production that a good should fulfil to qualify for the tariff preferences negotiated in a trade agreement, and to be included in every trade facility and obligation included in the various chapters of the agreement. Examples of other circumstances in which rules of origin apply include the chapter on government procurement, the safeguard clauses negotiated in the agreement, if any, and the allocation tariff quotas, among others. A product will be granted originating status if it meets the requirements that are set forth differently in each trade agreement. However, such different requirements have something in common. Through them, all agreements seek to ensure that the goods that are granted benefits do not originated in non-member countries, and that member countries contribute to manufacturing these goods. In addition, production requirements established by the rules of origin may be used as an incentive to employ certain inputs produced in the member countries of the agreement. Thus, such requirements become a mechanism ensuring or increasing the demand for those inputs required by the rule within the member countries.
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Rules of origin for textiles in agreements signed by the United States are a suitable example. Stating in the rule of origin that manufacturers of originating garments or clothing products in member countries cannot use certain fibres or fabrics from third countries means, in fact, that those fibres or fabrics must be supplied by parties to the agreement. An undesired objective of origin regimes is that sometimes they restrict the effective application of preferences, by laying down rules of origin requirements that cannot be met by producers in member countries. In this way, the concession granted by the tariff elimination schedule of the agreement is indirectly cancelled out in the origin chapter.
Figure No. 1.1. Objective of the Rules of Origin
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To implement these requirements, origin regimes establish a number of conditions and procedures that jointly regulate the application of, and access to, their benefits. Since their content and impact are closely related, these provisions are not independent but interrelated. For that reason, the origin chapter must be considered as a whole made up of several interrelated parts –like in any mechanism– and must be applied in an integral fashion.
Figure No. 1.2. Objective of an Origin Regime
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I.2. Structure of an Origin Regime In most Latin American and Caribbean preferential trade agreements, origin-related issues are structured on the basis of two components: on the one hand, a normative text, referred to as the origin chapter, consisting of a variable number of provisions determining and defining the scope of the various concepts, the criteria, flexibility, obligations and rights regulating the operation of rules of origin in an agreement; and, on the other hand, the specific conditions governing the production and use of inputs that each product negotiated in the agreement must comply with to qualify for the trade benefits under the agreement. Such requirements are very frequently called “product-specific rules of origin�. Concerning the normative text, agreements generally include clauses dealing with the criteria to qualify goods as originating, the treatment of certain goods, and the trading requirements. The set of rules also comprise all requirements governing the declaration, demonstration, and control of origin; the responsibilities or obligations of producers, exporters and importers; and procedural aspects. The more substantial information in the origin chapter includes the origin qualification criteria and the accumulation rule. Additionally, there is also more specific supplementary information providing details producers need to make a suitable choice of all raw materials required for producing goods. The chapter also generally includes origin-related procedures. These mainly comprise items related to certification and verification, plus certain administrative issues and aspects that help to apply the origin regime. 14
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The fact that some concepts are listed and emphasised should not be interpreted
as
meaning
that
only
those
concepts
influence
the
determination of origin, or that no other requirements exist; on the contrary, there are other mandatory requirements, which, if not complied with, may result in the loss of the originating status of a good.
However, the qualification, accumulation, certification, and verification criteria are stressed because their scope and manner of implementation represent very distinctive features of the origin regime as a whole. Another aspect to bear in mind is that trade agreements have different ways of grouping provisions. Some agreements include them all in a single chapter or legal provision; others distribute their clauses in two or more chapters, one of which is devoted to listing the production requirements that goods and their inputs have to comply with, and the other to describing procedural aspects. A frequent division consists in inserting special clauses for certain production sectors, such as textiles or the automotive industry, in one chapter, and establishing the rules generally applied to all remaining products in other chapters. The length, precision, and scope of these chapters vary according to the agreement. Resolution 252, which updated the Latin American Integration Association’s (LAIA) system of origin rules, is an example of how all origin-related matters can be grouped in a single provision, while the origin regime of some European Union countries or the United States are examples of rules distributed in several chapters or sections of an FTA. Finally, there is an alternative way of organising or compiling texts dealing with the origin regime, such as the case of 15
Fundamentals of Preferential Rules of Origin, 5th Edition
certain
sub-regional
agreements
in
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Mercosur.
Mercosur
member
countries negotiate their agreements under the aegis of the integration scheme of the Latin American Integration Association. Mercosur’s origin regime is implemented through a decision, and additional protocols are subsequently issued to change or amend specific aspects of the scheme, both with respect to procedures and products. The difficulty with this system is that it requires reviewing several documents to determine and identify the agreement’s current origin regulations.
Figure No. 2.1. Origin Regime Structure
• Regulatory text • References to annexes • Definitions
• Specific rules • Certificate Origin, etc.
of
• Optional • Examples: textiles, cars, Customs procedures
The product-specific rules of origin are the second component of an origin regime; they set forth specific conditions for production using inputs from third countries specifying whether they qualify for use in the manufacture of an originating good.
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All agreements contain rules of origin for each of the products for which tariff preferences have been negotiated. The reason for imposing this comprehensive and specific requirement is that rules of origin help to determine, in light of an agreement, when a product originates in a third country or in one of the parties to the agreement. Only products or goods originating in the agreement parties qualify for tariff preferences or benefits.
Figure No. 2.2. Impact of Rules of Origin
Trade agreements where preferential access conditions for goods are negotiated include clauses relative to the origin of such goods. These conditions arise from specific negotiations conducted by the parties for each agreement. As a result, origin regimes vary across agreements not only in terms of their structure and contents but also in the ways in which the origin status of each product is defined.
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Figure No. 2.3. Features of Origin Regimes
I.3. Benefits of Originating Products For a given good to be traded with the preferences provided for in a trade agreement, it must be an originating good. While this is perhaps the most straightforward or significant benefit the good obtains, it is not the only one. For a product to be eligible for preferences it is also a necessary prior condition that, in addition to being originating, the product has been negotiated and included in the tariff elimination schedules – typically incorporated in trade agreements under the Market Access chapter. Being previously negotiated is a sine qua non. Therefore, if a product is not negotiated in the tariff elimination schedules, it will not qualify for any tariff preference, even though it may be an originating product, wholly manufactured in or obtained from an agreement party. Consequently, it is important to always bear in mind that a product will not qualify for preferential tariff treatment solely because one of the parties is the country of manufacture.
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Figure No. 3.1. Preference Access Requirements
There are other benefits offered to originating goods under an agreement, such as inclusion in tariff quotas, national treatment in government procurement of other partner countries, eligibility for the dispute
settlement
system
provided
for
in
the
agreement,
or
applicability of safeguard clauses, among others.
Figure No. 3.2. Benefits of Originating Products
• TARIFF PREFERENCE • TARIFF QUOTA
•
RECEIVES NATIONAL TREATMENT IN GOVERNMENT PROCUREMENT
• NEGOTIATED AND GRANTED IN THE AGREEMENT
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Therefore, it may be concluded that rules of origin impact strongly on trade among the parties to a trade agreement. However, noncompliance will not necessarily prevent the product from being traded. Goods can still be traded without access to any benefit, with the same treatment as that accorded to the products originating in any other country.
Figure No. 3.3. Trade and Rules of Origin
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I.4. Scope and Impact of the Origin Status of a Product Let us assume that three countries (A, B, C) have three bilateral agreements in place governing their trade flows (agreements AB, AC and BC); that under similar conditions the three agreements have completely eliminated tariffs on a given product following their entry into force, and that the rule of origin for this product in the three agreements is the same. Hence, the product receives the same treatment in the three countries, in terms of tariffs and origin.
In this context of equal treatment, if a product is traded as originating by two countries under one agreement, can it be regarded by the importing country as originating for subsequent transactions performed under the two remaining agreements? Or, in other words, is the originating status of a product under one agreement transferable to other similar or different agreements?
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Figure No. 4.1. Origin Status
The answer is NO. Unless the agreement contains specific provisions whereby extended accumulation is allowed, in all other cases1 and circumstances, the answer is always the same, as the originating status of a product under a given agreement is not transferable to other agreements. Preferential tariffs arise from market access arrangements negotiated by agreement member countries. Products are distributed into different tariff elimination baskets. Each basket groups a set of products sharing the same tariff reduction program causing each basket to have its own tariff elimination schedule. Some tariffs are eliminated forthwith, while others are phased out, sometimes linearly and other times irregularly. Some programs may even reach a zero tariff level (that is, they completely remove the tariffs levied on the product) or the tariff 1
To learn about extended accumulation see Module IV.
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reduction may be only partial since a residual tariff persists. This residual tariff will always be lower than or equal to that charged to third countries. The number of baskets is agreement-specific, and it is exclusively up to the countries negotiating the agreement to define the tariff elimination conditions. This preferential access is the most direct benefit given to an originating product, but it is not the only one. In fact, it will enable the originating product to access other benefits depending on the scope of the agreement, as already stated. Preferential tariffs have been used to categorise rules of origin (RoO), which may be classified as preferential or non-preferential.
I.5. Economic Purpose of Preferential Rules of Origin Preferential rules of origin pursue economic objectives, such as curbing triangulation, also known as trade deflection. As trade agreements create free-trade areas, the origin requirements prevent goods from being imported into the country with the lowest tariffs in order to freely circulate within the bloc and thus circumvent the higher tariffs applied by other member countries. In other words, without preferential rules of origin, third-party countries that are not members of a given free-trade area might introduce goods into the bloc through the country with the lowest external tariffs, and from there these products could be reexported to member countries with higher tariffs applicable to third parties. Rules of origin preclude these manoeuvres by requiring that any product comply with the origin standards before being imported and exported among the parties to a preferential trade agreement. The triangulated
commercial
transaction,
being
a
simple
case
of 23
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re-exportation, will not meet the origin requirements, so the goods will have to pay again the third-party tariffs in the second member country. For the sake of clarity, Figure 7.1 below shows how triangulation operates. Likewise, there could be triangulation of reciprocal trade between WTO members vis-Ă -vis a third non-member country.
Figure No. 7.1. Trade Triangulation
Source: Prepared by the authors.
Figure 7.1 shows that countries A and B have created a free-trade area eliminating tariffs on all goods.
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As this free-trade area is not a customs union with harmonised third-party tariffs, each country applies its own tariffs, which may differ depending on the product. Let us assume that on a given product country A levies a 10 % MFN tariff, whereas country B imposes a 20 % MFN tariff. Exporters in country C want to do business in country B by paying the lowest possible tariff. Should there be no rules of origin, exporters in C would be able to export their products into country A by paying only a 10 % tariff and, subsequently, re-export them into country B without paying any further tariff under the A-B free-trade agreement. This triangulation, which harms country B, is precisely what rules of origin seek to prevent pursuant to the A-B preferential agreement. In fact, rules of origin will require that, in order to enjoy the tariff benefit, the goods exported by C should undergo a substantial transformation in A, in accordance with the criteria defined in the agreement.
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I.6. Offensive and Defensive Use of Rules of Origin in Trade Policy Rules of Origin are trade policy tools that countries can use for offensive purposes. Offensive rules are primarily designed to enable a country's producers to readily comply with the rules and thus take advantage
of
the
preferences
in
the
partner's
market.
This
is
accomplished by defining rules allowing greater use of the materials that these producers need to obtain from third countries. In addition, rules of origin may be used for defensive purposes. This happens where the rules of origin require that a considerable portion of inputs be sourced in signatory countries. Thus, producers are protected from competitors' inputs in third countries. Example
of
defensive
rule:
common
case
in
USA-Canada
agreements for the apparel industry, where all textile inputs are required to be originating in member countries. Example of offensive rule: the Colombia-Chile agreement, whose sole requirement is that fabrics be transformed into clothing (through a change in heading).
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I.7. General vs. Specific Rules The rules of origin are the second component of any origin regime, the first component being the chapter containing the tariff elimination provisions. Rules of origin set out specific production and input conditions. All agreements contain rules of origin for each of the products for which tariff preferences have been negotiated. The reason for imposing this comprehensive and specific requirement is that rules of origin help to determine, in light of an agreement, when a product originates in a third country or in one of the parties to the agreement. Depending
on how preferential rules of origin are
defined
and
established, they can be classified as general or specific rules. General rules lay down the overall rules applicable to all negotiated products, except to those goods for which trading parties prefer to set a different origin requirement, in which case separate rules of origin are negotiated. This general rule most often offers two alternatives: a change in tariff and a change in value. In these agreements, once the general rule has been established, negotiators concentrate their efforts on setting out the rules to be applied to the products not included in the general treatment. Agreements using this system generally contain the general rule in the regulatory chapter within the body of the agreement, while exceptions are listed in an annex. In
some
agreements,
these
exceptions
are
known
as
Specific
Requirements of Origin (SROs) and, regardless of their denomination, they always prevail over the general rule.
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Specific rules define product-specific requirements, which may or may not be similar to those applicable to other negotiated products. A distinguishing feature of these rules is that product-specific origin requirements are listed in an annex.
Figure No. 9.1. Negotiation and Structure of Rules
Before analysing different origin requirements and the criteria they are based on, it is important to make it clear that there is not a single or specific way of setting these requirements correctly; on the contrary, they can be defined in several ways and all may be “correct�. This flexibility, for instance, enables countries in their respective agreements to establish different origin requirements for any given product, with none of them being wrong or incorrect and with all of them being properly specified. Finally, it is worth bearing in mind, as mentioned above, that the WTO lays down certain principles that must be taken into account when 28
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designing and drafting the rules of origin in preferential origin regimes. In general, these principles are recognised and adopted by trade agreements.
I.8. Wholly Obtained vs. Produced from Non-Originating Materials Several criteria have been set to determine the origin of goods, whether they are produced from originating inputs or manufactured from materials originated in third countries. From this perspective, the rules of origin are to determine the location where a certain good has been manufactured or obtained. The first applicable criterion is that of wholly obtained goods, whereby any product manufactured from originating inputs and produced entirely in the parties to the agreement is to be regarded as originating in the exporting country. These inputs may originate in the territory of the parties provided that non-originating components, either manufactured in the parties or in third countries, are excluded. The following shall be taken to be produced wholly in a given country: •
vegetable products harvested or gathered in that country;
•
live animals born and raised in that country;
•
products obtained from live animals in that country;
•
products obtained from hunting, trapping, fishing conducted in that country, or in its territorial waters and exclusive economic zones;
•
minerals and other natural resources;
•
fish, crustaceans and other marine species obtained from the sea;
•
goods obtained from the seabed or beneath the seabed; 29
Fundamentals of Preferential Rules of Origin, 5th Edition
•
scrap
and
waste
from
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manufacturing
processes
and
consumption collected for the recovery of raw materials; •
goods produced wholly in that country , i.e. made only and exclusively of materials wholly originating in the member countries.
This eligibility criterion has been adopted by most agreements, for both preferential and non-preferential rules of origin. A second eligibility criterion is applicable when inputs from third countries are used. For a product manufactured from originating and non-originating materials to be regarded as originating, those inputs must undergo a modification or transformation to an extent such that the product acquires a new entity. These rules are grounded in the notion of "substantial transformation." As a matter of fact, specific
rules
prescribe
the
type,
quantity
and/or
quality
of
non-originating inputs that are allowed for each product, and the production process that these inputs must undergo for the product to be regarded as originating. The substantial transformation criterion involves other components for measuring
or
defining
the
substantial
transformation
that
each
non-originating input should attain in order to be used in manufacturing an originating good. These components, analysed in depth in module 2, include: tariff change or shift, regional value content, and technical tests.
Unit Summary In this Unit we have identified the purpose of rules of origin, how origin regimes are structured, and their economic purposes and forms of application. The existence of different treatments of imports according 30
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to their countries of origin, as is the case under preferential trade agreements, generates incentives for triangulation by exporters in coutries excluded from the agreements, and from this reality arises the need for criteria that allows administrators to distinguish between goods that are eligible for preferences and those that are not. These criteria are the rules of origin. These concepts serve as an introduction to the next Unit, in which we will analyze the role of rules of origin in the multilateral context.
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Unit II. International Context and the Agreement on Rules of Origin
II.1. Preferential vs. Non-Preferential Rules There are two types of RoO: A) Preferential Rules of Origin: These RoO are used to determine the country of origin of a specific good in order to establish the tariff benefits and other advantages and conditions negotiated in a Trade Agreement. In this case, it is the signatory parties to the trade agreement that set the necessary criteria to determine that goods qualifying for trade preferences have been obtained or sufficiently manufactured in such countries. Thus, they are called "preferential" because they govern the preferential trade as set forth in a trade agreement. In that vein, the products traded under the agreement must conform to these rules to be eligible for the negotiated preferential tariffs. If the RoO are not met, the goods in question will pay the regular tariffs applicable to trade with third countries. The category of preferential RoO also includes the RoO established in the Generalised System of Preferences (GSP). The GSPs are programs wherein developed countries grant unilateral, non-reciprocal preferential tariffs to developing or least developed countries in order to: 1. Increase their export earnings; 2. Promote their industrialisation, and
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3. Accelerate their rates of economic growth.2 By means of GSP schemes, developed countries determine unilaterally which goods will be granted such preferential tariffs when imported into their customs territories, thereby enabling access to their markets. However, the goods imported from GSP countries or blocs must comply with the preferential RoO to be elegible under these schemes. Therefore, when preferences are granted unilaterally, the RoO are also applied unilaterally, with no negotiation: rules have to be met in order to access the markets of the preference-giving countries. An example of these systems is the GSP granted by the European Union to
the
Andean
Community,
under
Council
Regulation
(EC)
No. 980/2005, whereby a 0% tariff was set on several goods imported from this trade bloc.3 Accordingly, compliance with the preferential RoO will allow goods imported into the EU from the Andean Community to enjoy the tariffs established for such products. In other words, under GSP schemes the importer will consider that those goods complying with the rules of origin and imported from the countries targeted by the scheme have originated in the exporting country; goods will, thus, enjoy the established preferential tariffs or tariff reductions.
Resolution 21 (II), adopted by the Second Session of the United Nations Conference on Trade and Development (UNCTAD II), held in New Delhi in 1968. 3 Among the goods covered by the EU-Andean Community GSP scheme, we can mention, for instance, flowers, tropical fruits, bananas, mandarins (higher tariff applied under the Droga scheme), onions, leeks, cabbages, cauliflowers, and other salad vegetables; shrimp (3.6%), tuna fish and fishing products, in general; coffee extracts, and decaffeinated, roasted, ground and lyophilised coffee; palm oil, tobacco, cocoa and fruit juices; (liberalised) leather, hides and skins; handbags, footwear; textiles, clothing, dry goods, underwear, velvet, stockings; polymers, polypropylene, tempered glass, herbicides, ornamental fish; and cat and dog food. 2
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B) Non-preferential Rules of Origin: As described on the Technical Information on Rules of Origin section of the WTO website, rules of origin are the criteria needed to determine the national source of a product. Their importance lies in the fact that duties and restrictions in several cases depend upon the source of imports. There is wide variation in the practice of governments with regard to rules of origin. In a globalising world it has become even more important that a degree of harmonisation is achieved in these practices of Members in implementing such criteria. Where are non-preferential rules of origin used? Rules of origin are used: •
to implement measures and instruments of commercial policy
such as anti-dumping duties and safeguard measures; •
to determine whether imported products will receive most-
favoured-nation (MFN) treatment or preferential treatment; •
for the purpose of trade statistics;
•
for the application of labelling and marking requirements; and
•
for government procurement.
It is vital to bear in mind that, should a preferential agreement be applicable, it shall prevail over the non-preferential rules of origin regime.
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Products made in a country frequently contain inputs from other countries. A portion of the bilateral trade between any two countries takes place outside the framework of trade agreements, that is, without the application of any preference. In such cases, it is also necessary to determine the source of products, in order to avoid any triangulation seeking benefits through the application of an undeserved preference to the goods from other countries. For example, a country that is not a member of the WTO might try to avoid of tariffs by triangulating their goods through a WTO member country. In this case, an analysis is needed to find out to what extent the product should be transformed in the second country so as not to be considered a case of triangulation. These requirements are determined by nonpreferential rules of origin. A second application of non-preferential RoO is found in dumping cases. Dumping takes place when an imported product is sold for a lower price than normally charged in the manufacturing country, so that this lower price adversely affects or damages the industry producing this product in the importing country. Thus, by means of the RoO it is possible to identify the producing country and to apply an additional tariff on the exports of this product. However, the importing country must demonstrate the price differences and their impacts on the country's industry. As a general rule, the anti-dumping measure will impose an additional import duty to a certain export so that the product price will come closer to its “normal� price or in order to make up for the damage caused to the importing country's industry.
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Fundamentals of Preferential Rules of Origin, 5th Edition
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Figure No. 5.1. Anti-dumping
Source: Prepared by the authors.
Non-preferential RoO are not covered by trade agreements, but each country sets them out as part of their own trade rules. For that reason, the WTO has tried to start harmonising these non-preferential RoO, to render them clearer and more transparent and to lay down the same groundwork for every country. Accordingly, the WTO Agreement on Rules of Origin was reached during the last GATT Round of Negotiations, held in Uruguay. Nevertheless, the specific Agreement –in principle and as set forth in Article I– is applicable only in the case of non-preferential RoO, i.e. this agreement will not cover any integration process initiated under GATT Article XXIV or pursuant to the Enabling Clause (including GSPs).
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Fundamentals of Preferential Rules of Origin, 5th Edition
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For which purpose, the Agreement imposes on WTO members an obligation to make sure their RoO: • are transparent; • do not create restrictive, distorting or disruptive effects on international trade; • are
administrable
in
a
consistent,
uniform,
impartial
and
reasonable manner; • are based on a positive standard, meaning that they should set the standards granting origin instead of the standards not granting it (WTO, 2008:50). Lastly, it is worth keeping in mind that the WTO lays down some principles to take into consideration when designing and drafting preferential rules of origin –even though they are of a general nature and applicable to non-preferential rules of origin. These principles are usually recognised by and incorporated into trade agreements.
Figure No. 5.2. RoO Features
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Fundamentals of Preferential Rules of Origin, 5th Edition
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RoO should be understandable in terms of how origin requirements and flexibilities are defined in the origin chapter. Such definitions should be clear, accurate and free from ambiguities that might give rise to different interpretations. The rules should also be predictable to ensure that the origin regime is consistently applied in both parties to the agreement. This allows the operator to know beforehand their impact and the treatment its products will receive in the country of destination. A consistent and uniform interpretation of the rules by the authorities and operators of the agreement parties guarantees they will always be applied in the same manner and that the operator will be aware of such application beforehand. The rules should also be objective. This seeks to set out rules which strike a balance for the benefit of the operators in the member countries, thus avoiding requirements or demands that might benefit only one of the parties. The application of rules which are as objective, predictable and understandable as possible provides more transparency to the entire origin
verification,
demonstration
and
compliance
processes.
Transparency implies that the rules are easily defined and applied, with no room for additional or alternative interpretations. Thus, all the operators and authorities of the different signatory countries will be able to construe the same rules in the same fashion. Besides, this transparency facilitates trade, since a consistent and predictable interpretation will cause fewer disputes or controversies.
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Fundamentals of Preferential Rules of Origin, 5th Edition
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Another aspect the WTO takes into account regarding the drafting of rules of origin is that they should be based on a positive standard; that is, the rules should establish and specifically set the standards that grant origin to a product. Therefore, rules should not be laid down on the basis of the negative standards that do not grant origin to a product. This concept of positive standards contributes to predictability, as the requirements to determine an originating product may thus be more easily and accurately known. Additionally, the WTO considers that the rules should be administrable in a consistent, uniform, impartial and reasonable manner, taking as much care as possible that they do not create restrictive, distorting or disruptive effects on international trade.
II.2. Background to the Agreement on Rules of Origin Even though trade agreements contain provisions on the application of rules of origin, attempts have been made internationally to regulate this domain with a view to standardising the procedures used to determine the origin of goods. The first attempt traces back to the International Convention on the Simplification and Harmonisation of Customs Procedures (Kyoto Convention) –signed in September 1974– which laid down rules on the origin of goods. Although most of the Convention deals with customs procedures, some provisions address the question of origin. This Convention thus became the first attempt to develop some common ground for the adoption of rules of origin, as set out in Annexes D.1, D.2 and D.3, later incorporated into Annex K of the Revised Kyoto Convention.
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Fundamentals of Preferential Rules of Origin, 5th Edition
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Chapter 1 of Annex K of the Kyoto Convention defines several concepts so that all references to these terms within the framework of the agreement will be consistently interpreted by the Contracting Parties. The first concept defined in the chapter is “country of origin of goods”: “the country in which the goods have been produced or manufactured, according to the criteria laid down for the purposes of application of the Customs tariff, of quantitative restrictions or of any other measure related to trade.” Second, “rules of origin” are defined as “the specific provisions, developed from principles established by national legislation or international agreements (‘origin criteria’), applied by a country to determine the origin of goods.” Both concepts will help us to interpret these terms when used in the remaining text of the Annex and in the General Agreement. Annex K to the Kyoto Convention also sets forth a list of different procedures that should be applied to determine the origin of goods. Firstly, the Convention stipulates that in order to establish the origin of both imports and exports, Customs must apply the Annex provisions to harmonise origin verification procedures. Chapter 2 of the Annex sets out a regulatory framework for origin verification
by
means
of
recommended
practices
and
guidelines
regarding certificates of origin. These certificates are defined as “a specific form identifying the goods, in which the authority or body empowered to issue it certifies expressly that the goods to which the certificate relates originate in a specific country. This certificate may also include a declaration by the manufacturer, producer, supplier, exporter or other competent person.”
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Therefore, Chapters 2 and 3 of the Revised Kyoto Convention lay down a series of recommendations pertaining to origin certification, evidence of origin and origin verification. However, Annex K was ratified by few countries mainly because most of its standards are not mandatory –they are mere recommendations for the States– which is why the Convention has little binding force at the international level. Consequently, it was deemed advisable to negotiate a new agreement within the framework of the Uruguay Round, later leading to the creation of the World Trade Organisation (WTO) in 1995.
II.3. The WTO Agreement on Rules of Origin This Agreement was negotiated during the Uruguay Round, on the grounds that the expected international consistency and standardisation had never been attained, even though the Revised Kyoto Convention still remained in force. This lack of harmonisation thus led to the negotiations on the Agreement on Rules of Origin within the framework of the multilateral system. The Agreement on Rules of Origin, reached at the beginning of the 1990’s, would be applicable only to non-preferential reciprocal trade between WTO Member States. Consequently, this Agreement did not encompass preferential rules of origin set out in Trade Agreements falling outside the scope of the Most-Favoured-Nation (MFN) Treatment contemplated in Article I of the GATT. In other words, the regime laid down by the WTO Agreement on Rules of Origin would have a complementary nature and would only be applicable to those goods
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Fundamentals of Preferential Rules of Origin, 5th Edition
receiving
MFN
treatment.
This
Module 1
Agreement
sought
to
achieve
international harmonisation of non-preferential trade. Moreover, the Agreement also lays down an action plan to harmonise specific non-preferential standards for each product. These tasks should have been completed in 1998; however, the deadline has been extended and the relevant negotiations have not yet come to an end. This work programme falls under the responsibility of the WTO Committee on Rules of Origin and of a Technical Committee operating under the auspices of the World Customs Organisation. Despite the provisions in Article 9.2 of the WTO Agreement on Rules of Origin,4 the delay in reaching the expected harmonisation is due to the complexity of this issue. The Committee’s work is divided into sectors of products, as per the Harmonised
System
nomenclature.
Finally,
even
if
the
desired
harmonisation has not yet been embodied in a written agreement, in the last years the Committee has taken steps towards achieving this goal. For
example,
in
2012
some
progress
was
made
towards
the
transposition of draft, harmonised rules of origin –initially agreed in the 1996 version of the Harmonised System (HS)– into more recent versions of the HS.5
Article 9.2.a) of the WTO Agreement on Rules of Origin states that “the work programme shall be initiated as soon after the entry into force of the WTO Agreement as possible and will be completed within three years of initiation […]” 4
Report (2012) of the Committee on Rules of Origin to the Council for Trade in Goods (G/L/1016, dated 23 November 2012, No. 12-6484). 5
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Fundamentals of Preferential Rules of Origin, 5th Edition
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Unit Summary In summary, in this Unit we gave an overview of the context and application of rules of origin under multilateral disciplines. While the rest of this course is dedicated to the definition and application of rules of origin in the context of preferential trade agreements, it important to be aware of the non-preferential uses of these criteria, as many of the concepts can be translated directly to that context.
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