Preferential multilateral rules of origin for LDCs
A look into the least- developed countries (LDCs) proposal on preferential rules of origin
Rules of origin (RoO) define how much local processing takes place before a good can be considered to be a product of the exporting country.
Rules of origin underpin FTAs
Preferential RoO are the cornerstone of any free-trade agreement (FTA) and are meant to at least minimise trade deflection - which takes place when goods are shipped via the customs territory of a country having more favourable market access to the destination country.
However, a number of FTAs' RoO are used primarily as a means of protection and so are often stricter than they should be if the purpose was only to deter trade deflection and promote inter-FTA trade.
Rules of origin are also sometimes viewed as a way to promote industrialisation. The argument used is that if RoO are too liberal this will promote screwdriver operations; where there is limited job creation and insufficient processing to confer origin. However, as Brenton and Imagawa have noted in "Rules of Origin, trade and Customs": "There is no evidence that strict RoO over the past 30 years have done anything to stimulate the development of integrated production structures in developing countries."
A similar perspective is given by Stefano Inama in WCO news, where he states that "no matter how RoO are designed or drafted, they should respect global value chains. if not, trade will not be created and FTAs will be underutilised. RoO should not be used as a disguised regional integration policy or as a vehicle for infant industries."
The LDC preferential RoO were part of the 2005 Hong Kong Ministerial Declaration that committed developed country members of the WTO, and developing countries declaring themselves in a position to do so, to provide preferential market access to LDCs and to do this by using simplified and transparent RoO.
Recent LDC position on RoO
There has been a lot of discussion on both the provision of duty-free quota-free (DFQF) market access and the RoO that should govern DFQF market access. The latest position is contained in the draft decision on preferential RoO for LDCs (JOB/tnC/24) that was discussed at an informal trade negotiation Committee meeting on 24 October 2013.
This draft decision is in the form of non-enforceable guidelines. It states that "Members should endeavour to develop or build on their individual RoO arrangements applicable to imports from LDCs in accordance with the following guidelines. These guidelines do not stipulate a single set of RoO criteria. Rather, they provide elements upon which members may wish to draw for preferential RoO applicable to imports from LDCs under such arrangements." this implies that developed country members are at liberty to choose to adopt these guidelines or not, as they wish.
The draft decision has, as elements for preferential RoO, the following provisions: the text reiterates the Hong Kong Ministerial Declaration by stating "Preferential RoO should be as transparent, simple and objective as possible."
It is recognized that other than wholly obtained products, origin may be conferred by substantial or sufficient transformation, which can be defined in a number of ways, including through: (a) ad valorem percentage criterion; (b) change of tariff classification; and (c) specific manufacturing or processing operation. It is assumed that the ad valorem percentage criterion includes the value of local materials and of non-originating materials.
Also the draft decision proposes that "the value addition threshold should be kept as low as possible", but it suggests allowing foreign inputs to a maximum of 75 percent of value. it should be noted that ≤75 percent non-originating material (or ≥25 percent originating material) is still prohibitive, given modern manufacturing methods based on global value chains. As an example, only about 4 percent of the value of an iPad is added in the country of manufacture.
It is also recognised that the methods for the calculation of value should be as simple as possible, but there is no guidance given on what calculation of value should be used. This clause would be greatly strengthened if it stated that, if a percentage calculation is used, a method based on the value of materials, whether originating or non-originating, should apply.
A positive aspect of the guidelines is that they recognise that members may exclude costs related to freight and insurance as well as international transportation costs and recommend that, in case of methods used for calculation of local content, members may include national or regional inland transportation costs.
The draft decision also makes provision for the use of change of tariff classification (CTC) criterion in appropriate cases. it is not always appropriate to use CTC, as this criterion does not always imply substantial or sufficient transformation has taken place or, conversely, substantial or sufficient transformation can take place without a concomitant change in tariff classification.
The text 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, such as would be the case for articles of apparel and clothing.
It also makes provision for cumulation but, again quoting inama: "Cumulation is no substitute for liberal RoO. With liberal RoO, producers may source their inputs worldwide from the most competitive producer at the best price according to global value chains. The combination of restrictive RoO and cumulation bring about trade diversion whereby FTA partners use regional inputs instead of more competitive third country inputs."
With regard to "mutual customs cooperation and monitoring" it should be recognised that whatever the method of compliance used, the costs need to be kept to a minimum, with the trend in the rest of the world being the use of exporter declarations that are authorised by customs.
Finally, it is recommended that the Committee on rules of Origin shall annually review the developments in preferential RoO applicable to imports from LDCs and report to the general Council.
The guidelines described in the draft ministerial decision (JOB/TNC/24) will have a positive impact on LDCs if they are adhered to by developed country members and developing country members in a position to offer DFQF market access. However, it remains to be seen whether WTO members will use these guidelines to design preferential RoO for LDCs or whether they will be largely ignored as they are not enforceable. Adherence to these guidelines will be greatly enhanced with the requirement to notify preferential RoO and because the Committee on rules of Origin shall annually review the developments in preferential rules of origin applicable to imports from LDCs and report to the general Council, with the secretariat reporting on the outcome of the review annually.
Author: Mark Pearson is Programme Director at Trade Mark Southern Africa (TMSA).