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RULES OF ORIGIN and the Authorized Economic Operator
Darlan F. MARTÍ Trade Policy Specialist World Trade Organization (WTO) WCO Global Conference on the AEO - May 2014
Objectives of this Webinar
1. Why do we use rules of origin and how are they designed?
2. How do rules of origin affect trade and firms?
3. How can firms fully benefit from opportunities created by rules of origin and minimize related risks?
RULES OF ORIGIN: BACKGROUND
1.
Origin
• What is origin?
• Dictionary: The fact of being born from a particular ancestor or
race; parentage, ancestry, pedigree. More generally: the act or
fact of beginning, from something; source or cause; starting point
– Origin grants certain benefits: residency benefits,
work, access to social security, political rights, etc...
– Origin might change: marriage, prolonged residency
Rules of origin are those which determine the
framework for acquiring or changing origin
Why do they matter?
• They regulate the conditions of entry into foreign markets and may hence affect market access opportunities;
• They can have a significant bearing on the cost of a product and therefore its competitiveness;
• They are one of the considerations leading to foreign investment decisions;
• They may influence a firm’s choice of suppliers
They create both business opportunities and challenges
…WHAT ARE RULES OF ORIGIN USED FOR?
76%
Tariff treatment: trade Preferences
“General Duty”
0%
0%
16%
8%
0%
Boy’s pyjamas HS6207.22
ONLY ONE ORIGIN CAN BE
ADMITTED
NAFTA
US-Jordan FTA
MFN
US-Australia FTA
Lesotho US GSP (AGOA)
Rules of Origin Proof of Origin
Ex.1 - 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
Ex.3 - Anti-Dumping Duties
Antidumping duty likely on Chinese, Korean, Thai alloy wheels NEW DELHI: Government is likely to impose anti-dumping duty on a certain type of aluminium alloy auto wheels imported from China, Thailand and Korea, to protect domestic players 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.
Ex.4 - Sanitary restrictions
Customs treatment PREFERENTIAL
• Reciprocal Trade Regimes
• Bilateral FTAs: EU-Chile, US-Korea
• Regional FTAs: EU, NAFTA, CARICOM, EU-ACP EPAs, etc.
• Non-Reciprocal Trade Regimes
• Developed countries’ GSP schemes: US Caribbean Basin Initiative, EU GSP-plus, Canada’s General Preferential Tariff, etc.
NON PREFERENTIAL
• Regular duties (WTO’s Most Favoured Nation (MFN) Treatment)
Summarizing…
Customs treatment:
import duties
Also: quotas and quota allocations
Anti-dumping or countervailing
duties
Sanitary measures (inspection,
quarantine) etc… Trade statistics
Domestic uses: Labelling
Public procurement
HOW ARE RULES OF ORIGIN DESIGNED?
2.
How can origin be determined?
• Laws, regulations, any other legal provisions
• National (USA), bilateral (EU-CARIFORUM EPA), plurilateral
(CARICOM), multilateral (WTO)
• Sequence:
1. Identify the product (Harmonized System)
2. Identify the applicable rule (which Agreement?)
3. Apply the relevant rule, may seek exemptions
4. The Certificate of Origin demonstrates compliance with the rule
level 3
Supply chains: cotton pyjamas
Cotton: Malawi
Yarn: Pakistan
Fabric: South Africa
Dyeing: South Africa
Buttons: India
Cutting to parts
Printing: South Africa
Assembly: Malawi
Licenses (Copy Right): USA
Cotton pyjamas
Designing preferential rules of origin
Wholly Obtained Products
• A single country intervenes in the production process.
• Simple treatment: if the country is within the preferential region,
preferences will apply.
• If the country is located outside the region, no preferences apply.
Sustantial Transformation
• More than one country participates in the production process (either
successive stages of production or supply of inputs).
• Question: did the last production process occur in the region? If so, was it
substantial? Or, where did the last substantial transformation occur?
VALUE
TARIFF CLASSIFICATION
MANUFACTURING PROCESSES
Approaches to determining origin
“Substantial transformation”
Walk “backwards”, from the last country of production
Addition of «value»
• Origin is based on “value” thresholds (“local” or “regional” content).
Change in tariff classification
• Origin is based only on the classification of a product and its components in the Harmonised System (HS) of tariff nomenclature
Specific processes
• Origin is based on specific manufacturing steps or other specific processes which led to the production of a good
Approaches to Substantial Transformation
Approches - illustration
Fertilizers (SH 3105)
Value Added (VA)
• 30% of the regional value added
• Non originating materials must not be more than 70% of works price
Change of tariff classification
• Change of Tariff heading: all materials must be classified in a tariff heading different from that of the final product
Product – specific rule
• Origin is determined by the place where the ammonium was obtained or where the blending was performed
Direct consignment
• Goods must be transported directly from the last country of production to the importing country. If transhipment: proof of non-manipulation
• Underlying assumption is that the goods have not undergone any transformation during trans-shipment
Minimal Operations and Processes
• Some operations cannot confer origin (exclusions). Example:
• ensuring preservation of goods for transportation, packaging; removing dust, cleaning; affixing marks, labels; simple mixing, simple assembly of parts (e.g. kits); slaughter of animals; etc.
Other concepts related to origin
Other concepts related to origin
Packing and packaging
• Disregarded if classified in the same code as the good
Accessories and spare parts and tools
• Disregarded if items are sold with main good and correspond, in kind and number, to the normal equipment
De minimis
• A specified portion of non-originating materials may be disregarded in checking origin (value, weight)
• Across the board (all goods) or sector specific: textile goods, certain Agricultural products.
Other concepts: Cumulation
• Or “accumulation”
• Definition: Inputs originating in qualifying countries are regarded as domestic - not as foreign input
• E.g. EU-ACP Economic Partnership Agreement (EPA)
• EU-ACP, ACP-ACP, ACP-OCT, ACP-neighbouring countries*
• Example: ROO: 40% local content
China 45%
Jamaica 20%
Barbados 10%
Mexico 15%
EU 10%
Value
Extremely relevant; only for Preferential Trade Agreements
WTO RULES RELATED TO RULES OF ORIGIN
…
level 3
WTO Agreement on ROO: summary
Rules of origin: laws and regulations of general application used to identify the country of origin of a good
NON PREFERENTIAL ROO
• “MFN” trade relations
• The Agreement requires WTO Members to harmonized these rules (Art. 9)
• Minimum disciplines for the transition period (e.g. appeal)
• “Advance Rulings”
PREFERENTIAL ROO • “Contractual “relations (FTAs)
• Need not be harmonized
• Minimum requirements: clear, published promptly, transparent, appeal…
• “Advance Rulings”
Trade in goods only (based on the HS)
level 3
WTO Agreement on TF: summary
Importation and exportation requirements, import clearance, transit of goods
ASPECTS RELATED TO ROO
• Increased transparency regarding ROO (publication and availability through the Internet and national “Enquiry Points”
• Greater opportunity to comment on new legislation or new requirements
• Reiteration of the obligation to provide “advance rulings”
• Encouragement to establish regimes for Authorized Economic Operators: possible reduction of requirements related to origin certification
• Encouragement to establish a single window for the submission of import, export, transit documents
NOT BEING IMPLEMENTED YET! Individual conditions depend on current legislation
HOW DO RULES OF ORIGIN AFFECT TRADE AND FIRMS?
3.
Firms and Rules of Origin
• Typically, exporters come across Rules of Origin:
– When seeking to obtain a Certificate of Origin: Chamber of Commerce, Ministry of Commerce, Customs (challenges are mostly procedural in this case)
– When seeking to benefit from trade preferences (the challenges then relate to identifying the relevant rules and being able to comply with them)
As May 2014, 88* Members
had notified Rules of Origin
to the CRO
*Total 131 Members. The EU(28) is counted as one member
Members having submitted notifications to the CRO
A third of WTO Members have
non-preferential rules of origin in
effect (41 Members).
Another third of Members do not
(45 Members)
APPLY NP ROO
APPLY P ROO
ROO affect business operations.. but also business decisions
Investment decisions
Trade opportunities
Choice of suppliers
Production networks
How businesses make decisions regarding sourcing?
Business opportunity
Produce or import finished goods
Where to produce?
Buy inputs and components locally or
choose suppliers abroad
Firm
REGIONAL Value Chains
GLOBAL Value Chains
level 3
Trade and investment impact
EU
USA
Madagascar
Secondary beneficiaries of preferences: consequence of ROO (suppliers)
Capacity to utilize preferences: consequence of ROO (compare with ROO with no cumulation)
level 3
Economic impact
• Madagascar: apparel and clothing export boom 1990s
• Economic Processing Zones (EPZs)
• Investors: France, Mauritius, China, Ch. Taipei
• 50% of exports (2006)
• Sewing, cutting, spinning, weaving
• High utilization: Cotonou (88%) + AGOA (97%)
•Input sourcing:
95% Mauritius (EU – selective cumulation)
90% China (US - 3rd country fabric rule)
Local cotton (?)
Examples of value chains
Examples of value chains
Warwick Business School 2013
Global Value chains: sectors
Source: WTO calculations from the OCED WTO Database of Trade in Value Added (TiVA), 2013
Intermediate imports embodied in exports (% of total intermediate imports, 2009)
HOW CAN FIRMS FULLY BENEFIT FROM OPPORTUNITIES CREATED BY RULES OF ORIGIN AND MINIMIZE RELATED RISKS?
4.
Challenges
Higher transaction costs
• Understand the requirements, problems related to tariff classification
• Demonstrate compliance
• Keep separate books and records
• Increased paperwork
• Uncertainty regarding acceptance of goods and or tariff treatment
Higher production costs
• Meet different rules at the same time
• Source switching (find new suppliers) - adapt production methods (specific processes)
• Separate / parallel production lines to segregate suppliers
• Risks related to labelling (branding related to “made in”
Compliance costs for enterprises:5-15%
Effect on ability to utilize trade preferences
• Firms’ ability to export under the PTA may be diminished: low “utilization rates”
• Government support, information and experience
• SMEs vs. large firms
• Average firm size (2011): • Using PTAs: 30,104 workers (Japan), 3542 (China)
• Not using PTAs: 7,020 (Japan), 2,226 (China)
Source: WTR 2011, p.85
Effect
• The greater the reliance on foreign intermediate goods, the greater the (negative) effect of conflicting / multiple ROO:
• Thailand: centre of production networks in the automobile and electronics sectors: 22% of firms reported that ROO was an obstacle to using PTA preferences in 2010
• Smaller countries / Smaller firms face problems in a more acute manner
Some thoughts
• Incorporate “regulatory compliance” (or customs regulations) into business planning as early as possible
• If possible, have a focal point specialize in that area : minimize risks but also identify opportunities (trade preferences)
• Examine regulations before making business and investment decisions to minimize risks
• Seek “Binding rulings” (advance rulings) on origin in case of doubt
THANK YOU! [email protected]