LDCs encourage WTO members to design more effective preferential Rules of Origin

5 November 2014

The Least Developed Countries (LDCs) Group at the WTO presented a report to the multilateral organisation’s Committee on Rules of Origin (CRO) on 30 October, calling for a more effective design of preferential rules of origin. The discussions are part of the work mandated by trade ministers at their last WTO ministerial conference in Bali, Indonesia in this area.

In the report, the LDC Group encourages WTO members to allow for changes in their rules of origin, or RoO, by taking into account the needs of low-income countries to source foreign inputs in today’s global value chains and the trade challenges faced by landlocked and island LDCs. 

RoO confer an economic nationality on products traded across borders, defining how much processing must take place locally before goods are considered to be the product of the exporting country and benefit from preferential treatment.

LDCs have repeatedly voiced concerns that these preferential RoO are often too restrictive and impose onerous compliance burdens, making it difficult for LDCs to take full advantage of existing preferential margins. Furthermore, they say, such rules are currently designed on a unilateral basis, without any harmonised standard.

However, some experts say that even though well-designed rules of origin are a potentially powerful tool for LDC industrial development, there is a risk that the immediate benefits arising from more flexible rules are offset by longer term costs, specifically those associated with keeping LDCs in low value-added segments of production enjoying preferential market access.

In the report, the LDC Group underscores that existing preferential RoO are old and have not followed evolutions in world trade.

“The present rules were initially drawn up in the 1970s and they have not materially changed much since, whereas the commercial world has,” the paper says, while referring to the emergence of global value chains.

The report also explains that preferential margins have been eroded as a result of the proliferation of trade agreements, whereas the costs of compliance with RoO have increased significantly. These two factors combined render “preferences unattractive.”

EU, Canada as role models

In their paper, the LDCs use the examples of RoO reforms in Canada and the EU to illustrate how a shift towards more lenient and flexible RoO is conducive to development in preference-receiving countries.

“The results achieved by these two preference giving countries… show that a change in RoO reflecting global value chains generates a market response in terms of investment and trade flows,” the document states.

Consequentially, the paper calls upon WTO members, particularly the United States and Japan as major LDC trading partners, to review the substance and form of their RoO systems which “have not materially changed” since the 1970s.  

In this context, the document states that “simple and transparent rules of origin for LDCs are those rules of origin permitting a full utilisation of trade preferences.”

In subsequent paragraphs, the report discusses how the EU and Canadian RoO reform efforts impacted trade with LDCs.

In the case of the EU, which upgraded its allowance for non-originating material to 70 percent in many sectors – from the previous 40 percent – and retained a single instead of a double processing stage for clothing in 2011, the paper finds that reform efforts helped increase the utilisation rates of preferential margins by LDCs from 89 percent in 2010 to 99 percent in 2013, excluding fuel and agricultural products.

With respect to Canada, where the government implemented more lenient RoO including greater opportunities for cumulation in 2003, the report argues that the LDC garment industry has reaped substantial benefits.

After the reform, utilisation rates are documented to have reached immediately 100 percent and, in the example case of knitted and crocheted garments, export volumes skyrocketed from US$17.8 million in 2002 to US$966 million in 2013, equalling a more than 50-fold increase.

Concerning US preferential RoO, the report highlights that “the US rules of origin seem to have been so far unable to trigger a diversification of exports and the value of trade covered by the US GSP is abysmally low.”

Preference-receiving LDCs such as African countries in the context of the African Growth and Opportunity Act (AGOA) reveal high utilisation rates only in a few sectors – particularly clothing – and would benefit from a revision of the US RoO scheme. The report makes a similar point for the preference-giver Japan, where LDC utilisation rates have stagnated.

The reform and policy changes witnessed in the EU and Canada “have yet occur in the case of the US and Japan,” concludes the LDCs Group.

 

Moving forward with the LDC agenda at the WTO  

The continuation of work on preferential RoO in the context of the CRO was well received in the Geneva-based trade community, sources say, particularly given the persistent stalemate at the WTO on the implementation of two other Bali decisions relating to the Trade Facilitation Agreement and public food stockholding, respectively.

The identification of specific challenges facing LDCs in complying with existing RoO is part of a broader agenda launched under the WTO Ministerial Decision on preferential RoO in during last December’s Bali ministerial conference.

This Decision mandated the CRO to “annually review developments in preferential rules of origin applicable to imports from LDCs… [and] report to the General Council.”

In this context, WTO members also took note of the LDCs’ case for rules on a more generous sourcing of foreign inputs “in order for a good to [still] qualify for benefits under LDC preferential trade arrangements.

In the report presented at the latest CRO meeting, the LDC Group reiterated its calls for more lenient RoO. Among other proposals, and in light of the increasing global fragmentation of value chains, it argued for greater flexibility for LDCs to source inputs from abroad.

Specifically, the group said that LDC exports should be conferred domestic origin by preference givers even when these exports feature a share of non-originating materials as high as 85 percent. In this context, the report states that “the LDCs will further engage in research to identify appropriate level of percentages.”

The LDC Group also argues that preferential RoO should take into account the costs of freight and insurance when it comes to determining the value of materials, particularly from landlocked and island LDCs, which have to ship goods through transit countries and overcome significant hurdles to integrate into global value chains.

Sources familiar with last week’s CRO meeting indicate that when presented with the report and the above-mentioned reform proposals, Brazil, India, Switzerland, Canada, and the EU were among those who welcomed the effort but asked for additional time to study the document in detail. Subsequently, Ken Chang-keng Chen of Chinese Taipei, who chairs the CRO, said that discussions in this regard would continue at the committee’s next meeting in April.

During last week’s meeting, the Swiss delegation reportedly affirmed that it is vital to move forward on least developed country issues at the WTO, without allowing the difficulties facing other areas of the organisation to slow down the committee’s work.

 

From Singapore to Bali

WTO negotiators first attempted to address the issue of preferential RoO in the context of the Duty Free Quota Free (DFQF) initiative, which was introduced at the WTO's First Ministerial Conference in Singapore in 1996.

Little progress was made in the following decade, although the 2005 Hong Kong Ministerial Declaration does feature a brief reference calling upon developed countries and developing countries in a position to do so to design “simplified and transparent rules of origin so as to facilitate exports from LDCs.”

The RoO debate gained momentum in the run-up to the Bali Ministerial Conference in December 2013 and culminated in the adoption of a set of guidelines setting out technical aspects of preferential RoO. The guidelines also discuss different methodologies to determine when substantial or sufficient transformation has taken place, as well as possibilities for cumulation of inputs that would enable LDCs to source material competitively and integrate into regional and global value chains.

Though being a “step in the right direction,” as some trade delegates have said, many observers were quick to mention that the Bali decision was mainly in in the form of non-binding guidelines, implying that developed country members are free to choose whether to adopt these guidelines.

ICTSD reporting.

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