LDCs prompt WTO discussions on rules of origin

6 May 2015

The Least developed countries (LDC) group at the WTO presented on 30 April a paper aimed at stimulating a discussion among WTO members with regard to the implementation of the Bali ministerial decision on rules of origin in order to ultimately enhance market access for their products.

The submission of the paper entitled “Elements for a discussion on preferential rules of origin for LDCs” was submitted by Bangladesh on behalf of the LDC group during the WTO Committee of rules of origin held on 30 April.

Rules of origin specify how much processing must take place locally before goods are considered to be the product of the exporting country. They are often considered to be overly restrictive and inflexible; making it difficult for LDCs to take full advantage of the preferences they are granted.

Currently, these rules are designed on a unilateral basis without any harmonised standard, which critics say creates additional problems for the WTO's poorest members, forcing them to adapt to a range of rules depending on the intended export market.

A priority since Bali

The 2013 Bali ministerial conference adopted a package of decisions of importance for LDCs including the first set of multilateral guidelines on preferential rules of origin in response to their demand. The decision formally requests members to take into account certain guidelines contained in the decision to develop their rules of origin frameworks for LDCs.

Trade experts however were quick in noting that the decision is not legally binding and therefore it does not oblige members to follow the provisions strictly.

Since then, the LDC group have considered the implementation of the Bali decision on preferential rules of origin as one of their priorities in the WTO’s post-Bali work.

In October last year the LDC group presented a substantive report  to the WTO Committee on Rules of Origin, calling for a more effective design of preferential rules of origin. (See Bridges Africa, 5 November 2014)

Reforms to reflect value chains requirements

The paper presented last week outlines six questions targeted to preference giving countries in order to better understand how they intend to address the various elements contained in the Bali decision related to rules of origin.

Speaking for the group, Bangladesh said it recognises that no single system of rules of origin used by preference-giving countries is better than the other.

However, members recognised “unequivocal evidence” that, under certain conditions, the reform of rules of origin to reflect current global value chains and commercial realities could generate benefits for LDCs. 

The issue of adoption of a lower percentage requirements in case of percentage calculation of domestic content or greater allowance of non-originating materials to allow insertion of LDCs into global value chains was raised among other elements.

Regarding the value addition threshold, the document reiterates that "the value addition threshold should be kept as low as possible". On this aspect, the LDC group  suggests allowing foreign inputs to a maximum of 75 percent of value in order for a good to qualify for benefits under LDC preferential trade arrangements.

Some observers consider however that  ≤75 percent non-originating material ( or ≥25 percent originating material) is in fact still prohibitive, given modern manufacturing methods based on global value chains which require in some cases only very little domestic content.

Limited productive capacity

The paper suggests  that specific  manufacturing  or  processing  operation rules  should take into account the productive capacity in LDCs and members should apply specific processing rules when they are beneficial to the LDCs.

“Considerable progress” in the textile and clothing sector by the allowance of a single stage process was noted by the LDC group. The Group however noted that a number of rules in other sectors like steel and metals still require double processing requirements which contradict LDC countries’ limited productive capacity.

EU, Canada as role models

The paper also acknowledges that RoO reforms in Canada and in the EU respectively contributed to a higher utilisation rate as well as “relocation of factories to LDCs”, “increased manufacturing capacity”, “more skilled jobs” and “backward linkages.”

The EU 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 report presented in October last year finds that such 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 same  report argues that the LDC garment industry has reaped substantial benefits.

Triggering some answers

At the meeting, Canada said its rules of origin system were generally consistent with the Bali Decision guidelines.

The EU announced they would shortly send replies to the LDC Group’s six questions and that it was looking forward to discussions on the paper.

The United States noted that legislation reinstating Generalized System of Preferences for LDCs was working its way through the US Congress.

China highlighted recent changes to its duty-free benefits programme that have already led to a 27 percent increase in LDC imports in the first quarter of 2015.

ICTSD reporting.

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