Rules Of Origin (RoO) PDF

International Trade Policy and Law Chapter 3: RoO Madzli bin Harun CHAPTER 3 Rules of Origin (RoO) 3.0. Brief of RoO  The objective of this chapter is to examine the role of Rules of Origin in Free Trade Area (FTA) and to expl...

International Trade Policy and Law Chapter 3: RoO Madzli bin Harun CHAPTER 3 Rules of Origin (RoO) 3.0. Brief of RoO  The objective of this chapter is to examine the role of Rules of Origin in Free Trade Area (FTA) and to explore the criteria applied to determine origin.  More specifically, the chapter mentioned the basic features of Rules of Origin that exist and the importance of trade and finally it offers some guidelines for increasing the compatibility and harmonisation of the different origin regimes. 3.1. The Role of RoO  Trade Agreements are the means through which countries grant each other different forms of Preferential Trade Treatment. To ensure these preference there must be 1 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun guideline to enable the origin of goods to be defined and to guarantee that the negotiated preference benefit only those product originating in the member countries.  Trade agreement terms, therefore, include origin regimes that stipulate the provisions and procedures for determining countries of origin.  Commercial exchanges in a FTA involve goods wholly obtained or produced in an exporting member nation, as well as a range of goods containing components from third countries outside the FTA.  For this latter type of merchandise it is necessary to define the conditions, types or amount of imported components that these goods can contain and still be considered as originating inside FTA.  In accordance with this need, origin regimes are essentially based on the idea of substantial transformation, which determines the minimum 2 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun level of processing and modification that components from third countries must undergo for the merchandise to be considered as originating in an exporting FTA member nation.  RoO exist to prevent what is technically known as trade deflection or tarns shipment- a phenomenon in which goods from third countries receive the benefit granted the trade agreement.  Trade deflection occurs when FTA member countries impose different tariff level on goods from third countries and when these third countries exploit this difference in order to bring merchandise into FTA through the member country with the lowest tariffs.  Requiring a minimum level of substantial transformation of goods aims to prevent such distortion by strictly limiting the applicability of the tariff advantages to those goods that meet the FTA RoO. 3 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun  If the aim of RoO is to prevent trade deflection, their stringency should be correlated to the difference between the national tariffs applicable to third countries: the greater the differential, the more demanding the requirements goods must meet in order to qualify.  Similarly, when they are relatively low- the need for RoO should be reassessed, particularly since the cost of administering and overseeing them can actually exceed the difference in individual tariffs.  If the goal of RoO is strategic- related to industrial development or trade policy, for example origin requirement can be set in independently of third country tariff differentials. A series of factor affects the restrictiveness of an origin regime- and, in addition to other effects, in practices hinder its predictability. 4 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun  These include components substitution within domestic production, depending on the components substation within domestic precaution, depending on components geographical origin; technological change; the supply from domestic industries that produce intermediate goods; the structure of the market for intermediate goods in the integrated zone, and the protection or promotion of output vis-a- vis third countries.  In turn , the origin regime can have a number of restrictive effects including inefficiencies if components are imperfect substitutes or if oligopolistic competition prevails ; discrimination between productive sector and types of producers, favouring those companies that are better able to adapt to and satisfy the requirements imposed by the origin regime; greater restriction on regional trade in downstream activities or later stages of 5 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun productive processes; and unequal distribution of benefits among factors of production, activities mad countries.  One of the clearest discriminatory effects occurs in the field of investment, particularly when requirements for qualifying as originating are more stringent.  Since multinational foreign investors frequently use inputs from outside the region or from their home countries, the existence of demanding rules about incorporating regional content or about technical requirements can severely restrict the implementation of their normal productive processes within an FTA.  Such a situation would, at least in principle, favour investors from the region member countries ad could even lead to a true diversion of investment.  Moreover, the modification required of extra regional company’s productive process to 6 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun operate in the region in compliance with the origin demands would negatively affect their efficiency and competitiveness.  It should be noted, however that in sub regional economics that are sufficiently large and dynamic and offer potential for economies of scale, the existence of relatively demanding RoO can act as an incentive for extra regional investment with the capacity to benefit from the FTA preferential access.  In recent years the importance of RoO within integration process has risen as a result of the growing internalisation of production- and, consequently of the increased number of countries supplying components for productive process.  Their importance has also increased due to the notable increase in trade agreements established during the 1990’s and the strategic nature of the preferential lifting of tariffs that 7 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun has been part of some of the FTA agreements negotiated by countries in the regional trade blocs.  In addition, it is important to mention the potential magnitude of the operational and administrative cost of certifying and verifying the specific RoO and regimes for both domestic customs and the manufacturing firms themselves.  This would heighten the losses in efficiency that the system as a whole could suffer. In theory, net operating cost can be expected to rise with increase administrative complexity, lack of transparency, multiple qualification criteria and the proliferation of RoO families becoming more critical.  This is all more likely given the growing international integration of production. As an example, in Europe the cost of collecting, managing and storing the information needed 8 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun for origin verification and administration have been calculated at around 3 percent of product prices.  Given these potentially restrictive effects on international trade, origin regimes should be designed to be transparent, objective, and predictable and to be easily administered.  Rules that are so complex or so costly to implement that they prevent economic agents from enjoying the commercial advantages introduced by an FTA should be avoided.  Given the dimensions and the diversity of the problem with applying RoO, the questions arises whether it would be better to adopt for a common external tariff (CET) within the framework of a custom union (CU) instead of for an FTA wherein member nation have different national tariffs. 9 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun 3.2. Criteria for Origin Qualification  Origin regimes define a good as originating inside an FTA when it is produced or obtained entirely within the member nations. If it uses imported components from third countries, compliance with the required levels of substantial transformation is determined by applying criteria from among the following;- i. Change or Shift in Tariff Classification ii. National or Regional Value Added iii. Use of Given Technical Process or Components in manufacturing 3.2.1. Change or Shift in tariff Classification;  This involves meeting a minimum requirement for changes in the tariff classification between a finished good and the foreign components or materials (from third countries outside the 10 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun integrated area) used in the production process.  For example, a change in the tariff heading that is in the first four digits of the tariff classification determined by the Harmonised Commodity Coding and Classification System (HS Code) is the basis for the Preferential Rules of Origin System used by such organisations.  Amongst the main problems with the application of this criterion is the difficulty in determining those specific changes in tariffs classification that guarantee equivalent substantial transformation in the production of all goods covered by tariffs.  This is basically because the HS was designed not to serve as the sole instrument for determining the Origin of goods but rather to be used in classifying merchandise in terms of other criteria. 11 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun 3.2.2. National or Regional Value Added  This is defined as the maximum level of components and raw material from third countries a good can have and still be considered as originating inside the integrated area or alternatively as the minimum value that must be added during intraregional processing for the good to qualify as originating in the FTA.  This criterion suffers from several shortcoming , including the following;- a. It is highly sensitive to changes in the factors that determine countries production costs; b. Such as relative exchanges rates, inflation rates, interest rates, commodity prices, wages and workers benefits; c. It can increase the cost of administering compliance in light of the need for laboratories and demanding accounting, 12 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun operational , and financial procedural both at domestic customs stations and within manufacturing companies themselves; d. And it tends to sustain imbalance in the distribution of benefits amongst countries , not only by favouring those with more vertically integrated and complex productive apparatuses (such as those of industries nation), but also by penalising , irrelative terms, those with low wages and salaries such as countries with lower relative levels of development.  There is also a problem with reliable classifying, by specific origin, the intermediate materials and components used in the production process and exactly calculating their corresponding values within a finished goods regional content value and also with classifying all 13 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun components as of either regional content value, and also with classifying all components as of their regional or extra regional origin- concepts known as roll- up and roll-down.  Roll up applies when a manufactured good contains imported parts from third countries that do not satisfy the origin requirements, thus preventing the end product from being classified as originating in the exporting country.  In contrast roll up, Roll down occurs when a manufactured good contains parts imported from third countries that satisfy the requirements of origin. In this case, the product is considered to have originated from the region.  In such circumstances the problem is identifying the ultimate country of origin of the good. This issue assumes even greater 14 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun importance if the goods are later used as components in the manufacture of other merchandise.  Only with the application of a strict classification of the origin of the various raw material and processed components used at the different stages of the production process can the generation of differing impacts on producers with different level of vertical integration be avoided. 3.2.3. Use of Given Technical Process or Components in Manufacturing.  Under this criterion specific technical operation must be carried out or specific components or raw materials must be used in production for a good to be classified as originating inside a region. 15 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun  In addition to the technical difficulties of keeping an updated, comprehensive inventory of the productive process available at any given time- arising , amongst other things , from the fact that they are constantly changing – specifications are still discretionary because of the absence of classification elements that objective guarantee the equivalent of different degrees of transformation in the production of different goods. Conclusion  The creation of regional trade agreements is a characteristics trend in the current phase of the economic globalisation process. 16 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun  Economic integration is taking place within a framework of open regionalism following liberalisation and economic reforms in the developing world and the expansion of the international market through the progressive freeing of flows of goods, services and capital.  The prevailing model for economic integration in the Western Hemisphere continues to be at least to date the creation of FTA but with a tendency towards the progressive incorporation of issue other than trade in goods such as investment, government procurement and so on.  In this context the question of RoO is of particular relevance in both theoretical and planning terms for the design of trade and integration policies. 17 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun  In light of the economic impact of RoO and the problems in predicting their restrictiveness, it is essential that clear cut principles and criteria for determining the origin of goofs be adopted in order to ensure that they are applied as transparently and objectively as possible and that they do not pose barriers to extending preferences under FTA.  As some degree of selectively in trade liberalisation policy is decided upon, there is a need to specify RoO that, in addition to preserving the advantages of transparency and simplicity that distinguish uniform regimes, can make good use of the effectiveness and details of selective origin regimes.  To date the FTA established between countries of the Western Hemisphere have not tended to use RoO to compensate for 18 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun the differences in member countries national tariffs vis- a-vis third countries in order to prevent trade deflection; instead, their design appears to have been more in response to different strategic goals.  It is therefore to be expected that RoO will tend to vary between FTA i accordance with their degrees of sensitivity to intraregional competition and with the member countries strategic goals.  Therefore the construction of the FTA face the problem of the multiple regimes and specific RoO that exist in the hemisphere current FTA and of their impact on the cost of origin regime administration.  This cost can be seen in terms of both financial costs-both for government and for individual manufacturing and exporting companies- and inefficiencies in resource location, specialisation patterns, and 19 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun decreased well being caused by the simultaneous application of RoO that differ according to the orientation of trade and are not necessarily mutually consistent.  It is therefore obviously appropriate to establish basic principles for adequate harmonisation between the rules of the hemisphere existing sub regional FTA and those to be agreed to for the FTA and by the WTO.  Difficulties in this harmonisation process can be expected to arise, at least initially, with the involvement of a wider variety of counters with varying levels of economic development, national tariffs policies, and degree of economic complementarily, geographical proximity, and other characteristics.  In any event, although not ignoring the complexity of this risk, it is worth 20 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun mentioning the possible usefulness of some basic transparent principles for the harmonisation process.  For example, the stringency of preferential rules of origin should be determined using the corresponding level of non-preferential rules to the classification criterion used.  As fast a possible, RoO should not be used when the differences between member third country tariffs are minimal or when their tariff level are low.  Emphasis should be place on establishing a partial Custom Union in those sectors or industries in which the nature of the production processes and the internationalisation of production make administering RoO sufficiently complex.  It is clear therefore that defining the origin regime for the FTA is a particularly important challenge in light of the wide 21 International Trade Policy and Law Chapter 3: RoO Madzli bin Harun range of the rules for determining origin in use in the hemisphere and the different characteristic of intercontinental trade seen today in first generation and new generation regimes.  There can be little doubt that RoO will be one of the most delicate issues in constructing a hemispheric market based on criteria of productive efficiency and equality amongst the region countries. 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