Rules of Origin and Development: Issues for the EPA Negotiations

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Rules of Origin and Development Issues for the
EPA Negotiations
Paul Brenton Trade Department, World Bank
May, 2006
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Key Messages

• Rules of origin govern the extent to which
  preferential trade agreements actual deliver
  improved market access
• The development objectives of EU preferential
  trade agreements are undermined by restrictive
  rules of origin
• An EPA with simple, non-restrictive ROO would
  help to enhance the impact on trade
• Simple, non-restrictive ROO are also crucial for
  regional agreements in Africa

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Rules of Origin and Development

• Increasing marginalisation of less developed
  countries in global trade
• Supply side constraints to trade must be
  addressed through
• Effective regional integration and cooperation
• Aid for trade
• Preferences can be enhanced with less restrictive
  rules of origin

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EBA has not slowed decline in African LDCs share
of EU imports
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Preferences have had little impact for most
countries
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ROO are a key trade policy issue!

• ROO are an essential element of PTAs to prevent
  trade deflection.
• However, ROO can be, and often are, designed in a
  way that restricts trade
• ROO have compliance costs and implications for
  customs the more complex the ROO the higher the
  compliance and administrative costs
• ROO are a key element determining the magnitude
  of the economic benefits of preferential trade
  agreements and who gets them.

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The Nature of Rules of Origin

• wholly obtained products and substantial
  transformation
• Three main criteria can be used to identify
  substantial transformation
• change of tariff classification, a value-added
  requirement, a specific manufacturing process
• Key issue how much processing must take place to
  prevent trade deflection? ROO which require more
  are restrictive on the sourcing of inputs.
• Example of restrictive ROO EU rule for pastry
  products imported flour cannot be used
• EU ROO are complex and restrictive with product
  specific rules

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Examples of Complex and Restrictive ROO EU
Imports of Fish

• To receive preferential access to the EU under
  the GSP all of the following must be satisfied
• The vessel must be registered in the beneficiary
  country or in the EU
• The vessel must sail under the flag of the
  beneficiary or of a member state of the EU
• The vessel must be at least 50 per cent owned by
  nationals of the beneficiary country or the EU
• The master and the officers must be nationals of
  the beneficiary country or an EU member
• At least 75 per cent of the crew must be
  nationals of the beneficiary country or the EU.

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Rich countries tend to impose more restrictive
rules of origin
Index of ROO Restrictiveness
Estevadeordal, 2004
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Restrictive ROO limit the impact of trade
preferences

• Under utilisation of trade preferences
• Utilisation rates measure the proportion of a
  countries exports that reach the EU customs
  border that actually request preferences
• Restrictive rules of origin can be prohibitive
• High utilisation rates do not necessarily imply
  that ROO are not a problem
• Complex rules limit the capacity of firms to
  participate in trade

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Rules of Origin raise the costs of trading and
can compromise trade facilitation

• For producers to obtain preferences
• May have to shift to more expensive sources for
  inputs (undermines competitiveness)
• Design different strategies for different markets
  
• an identical product may be eligible for
  preferences under one agreement but not another
• Will have to incur costs in proving compliance
  paperwork, validation (?3 of value of exports
  more complex rules higher costs)
• For customs to administer trade agreements
• Clearance of preferential imports requires more
  manpower
• Rules that differ across agreements and across
  products complicate verification and clearance

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Rules of Origin Key to Trade Response to
Preferences Example of clothing

• Key sector for LDCs
• Labour intensive, low start-up costs, simple
  technology, scale economies not important
• Expansion of clothing has had positive impacts on
  incomes, employment and poverty
• Preference margins remain substantial
• EU Rules of Origin Restrictive
• Imported fabrics cannot be used
• More restrictive for non-knitted than knitted
  products
• US rules under AGOA more supportive of trade
• Exporters can source their inputs globally

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Less restrictive rules of origin have stimulated
trade
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(Non) Arguments for more restrictive rules

• Restrictive ROO encourage the development of
  local input suppliers
• In the globalised world of today the market
  exacts a heavy price on those who do not use the
  cheapest and most appropriate inputs
• High ROO requirements are necessary to ensure
  that substantial activities take place in the
  partner (preferences must not benefit China!)
• Provisions for cumulation lessen the impact of
  restrictive rules and stimulate regional
  integration
• No evidence that cumulation has encouraged
  regional production networks

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Conclusions ROO should be clear, simple with
minimal costs of compliance

• The burden of costs of complying with ROO fall
  particularly heavily upon small and medium sized
  firms and upon firms in low income countries
• Complex and restrictive rules of origin
  discriminate against small low income countries
  where the scope for local sourcing is more
  limited.
• Simple, consistent and predictable rules of
  origin are more likely to foster regional
  integration through the growth of cross-country
  production networks.

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EU is reviewing its rules of origin.

• Commission accepts that current ROO have not been
  conducive to development objectives
• Current proposal is for use of a value-added
  requirement for all products BUT requirement will
  vary across sectors
• Plenty of scope for sensitive sectors to lobby
  for restrictive rules
• Commission still asserts that cumulation is an
  effective mechanism for development and regional
  integration.

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EPAs must allow for less restrictive rules of
origin

• Exporters should be able to choose between
  satisfying either a 10 value-added requirement
  or a change of tariff heading (at 6 digit level
  of HS)
• Would support expansion of exports of labour
  intensive products
• Would facilitate inclusion of African producers
  in global production chains
• No need for complicated cumulation provisions

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ROO within regional agreements in Africa should
be based on the same principles simple,
non-restrictive and easy to comply with.

• Common rule across all agreements in Africa would
  facilitate African integration
• Common rule for trade with EU and trade with
  regional partners
• would facilitate global export strategies and
  broad based expansion of exports
• Would limit compliance costs certificate of
  origin should be accepted throughout Africa and
  the EU