Focus

Non-preferential Rules of Origin: “When you turn your back on an issue – it only gets bigger!”

By Brian Rankin Staples, Trade Facilitation Services

The following article is not intended to be a scholarly or even comprehensive review of past or current activities under the World Trade Organization’s Agreement on Rules of Origin, or a detailed analysis of the differences between preferential versus non-preferential rules of origin (which I am assuming most readers of this magazine already understand). Rather, this article offers more of a personal and subjective perspective on the problems associated with non-preferential rules, and humbly proposes possible approaches and options to minimize these problems, or at least stimulate discussions about potential remedies. These options are largely based on the perceived structure and architecture of the issues.

The Context

It is common knowledge that preferential and non-preferential rules of origin have this in common: they represent costly administrative challenges to both the private and public sectors. However, there are also significant differences between them.

For example, preferential rules, albeit complex, are “product specific” established rules and, in most cases, it can be determined that the product in question either originates or does not originate. Furthermore, it is usually safe to assume that product specific rules have been agreed upon by all the parties and, in this sense, they represent a negotiated agreement by at least two parties. Debate as one may about the economic benefits of bilateral or “mega-regional” preferential trade agreements, the very fact that they always feature relatively clear preferential rules of origin is one certain benefit.

By contrast, as it now stands, non-preferential rules are essentially unilateral and specific to a single country of import. Moreover, many lack the specificity of preferential product specific rules and, in a world of global value networks, economic operators dealing with products not wholly obtained in a single country face the challenges of identifying the country in which the “last substantial transformation” occurred. In other words, non-preferential rules do not feature the binary “originating or not originating” benefits of preferential rules of origin, nor are they the result of agreement between two or more parties.

In light of the above, preferential rules can be characterized as mutually agreed definitions that are complex, costly and clear, whereas non-preferential rules are generally unilateral, vague and more than just costly: they also feature high degrees of uncertainty and a lack of predictability that prevents strategic sourcing by origin stakeholders. In addition, in the absence of meaningful multilateral obligations or common definitions, non-preferential rules of origin are increasingly becoming the trade policy tool of choice in a world that seems to be increasingly fragmented and protectionist.

The Costs

Presenters at the recent WCO Global Origin Conference outlined many business challenges associated with the inherent uncertainty of non-preferential rules of origin and many of their financial and non-financial impacts (e.g. punitive taxes, sanctions, fines, penalties, shipment delays, and related administrative and compliance costs). Clearly, the costs and burdens to the private sector alone are not trivial.

Naturally, most of these costs, including the costs of uncertainty and unpredictability, could be eliminated or dramatically reduced if the WTO Agreement on Rules of Origin (ARO) was implemented effectively, or other less ambitious initiatives, presented at the Global Origin Conference and elsewhere, were introduced:

  • General guiding principles for non-preferential origin determination;
  • Development of related explanatory notes;
  • Coordinating the above under the auspices of the current efforts to update the Revised Kyoto Convention (RKC Annex “K” in particular);
  • Re-invigorating the ARO negotiations.

Question: Keeping in mind that hundreds of thousands, if not millions, of non-preferential origin declarations are processed and cleared every day at significant cost but without major controversy, what, specifically, is preventing the adoption of such reasonable and even self-evident solutions?

Answer: Trade policies and decisions made primarily (but not exclusively) by major markets. Trade wars, sanctions, anti-dumping and countervailing duties, protectionist measures and the retaliatory counter-measures they usually provoke are all taken to protect domestic markets (and are not necessarily illegitimate). More broadly adopted measures to influence social accountability and responsible business practices in global supply chains also often result in non-preferential origin requirements. These practices create non-preferential origin stakeholders who are simply unwilling to abandon these unilateral tools in order to introduce multilateral, international guidelines or product specific rules for non-preferential purposes. This is not a judgemental statement: it is simply a statement of fact that recognizes that almost all economies will use the tools to protect their markets and promote their interests with as little interference as possible. Unfortunately, however, as outlined above, these highly specified non-preferential origin definitions create serious complications not only for the trade they are intended to cover, but also for the majority of trade volumes that they do not cover and that remain essentially undefined.

What Can Be Done? Origin by Exception?

In addition to the approaches outlined above, an alternate approach, outlined below in point form, could be implemented in a staged process:

  1. Implement the existing ARO: By means of a convention, treaty or MOU, implement the elements of the revised Draft Consolidated Text of the ARO already agreed by the WTO Committee on Rules of Origin, while allowing WTO Members a caveat. If parties object to a non-preferential rule of origin in the ARO, they would be required to officially notify their objection and identify in detail the non-preferential rule they intend to replace it with, including the volume of trade this self-selected exclusion covers. This notification would also require parties proposing such exceptions to the ARO to make public any changes or rulings that apply to their exceptions. These exclusions would apply for a period of five years, with a possible two-year extension.
  2. Supplement ARO rules with preferential rules: For trade not covered by the agreed elements of the revised Draft Consolidated Text, the applicable preferential rule agreed upon by the country of export and the country of import would become the applicable non-preferential rule of origin. Any preferential origin claim would automatically become a recognized and accepted non-preferential rule of origin. If there was no preferential trade agreement between the two parties, the country of import would then be required to identify a preferential rule of origin they have with a third party as the applicable non-preferential rule. Although this option would probably complicate any and all types of certification, it would at least introduce an element of certainty around the applicable rule of origin.

Of course, the above-mentioned caveat that applies to the ARO approach applies to this approach as well. If parties object to the use of a preferential rule as a non-preferential rule, they would be required to officially notify their objection and identify in detail the non-preferential rule they intend to replace it with, including the volume of trade this self-selected exclusion covers. This notification would also require parties proposing such exceptions to the use of a preferential rule to make public any changes or rulings that apply to their exceptions. These exclusions would apply for a period of five years, with a possible two-year extension.

  1. Create common ways to establish and prove origin: Determining, establishing and communicating origin are but a few of the many steps required to fully manage and administer origin, but they are critical and essential steps. With these caveats in mind, the following proposals outline how origin standards in these areas could significantly facilitate trade.

Before the application of any preferential or non-preferential rules of origin, there is the actual manufacturing process that results in a product. It is to this actual production that all trade measures, including those relating to preferential and non-preferential origin, are applied, and it is this actual production which is of primary interest to policy makers and origin verification officers alike. However, notwithstanding this foundational manufacturing reality, there are no international standards or guidelines on what constitutes the data and documentation required to determine and prove origin. This absence makes it extremely difficult for the private sector, whose products may cross several borders, and especially for SMEs, to manage preferential and non-preferential data and record-keeping obligations.

Several parties, notably the Global Trade Professionals Alliance, have initiated efforts to propose exactly such international data and documentation standards for origin purposes that include, but are not limited to, the following elements:

  • A description of the manufacturing process: These descriptions could be supplemented and supported by sector profiles developed by various income tax authorities. These profiles usually include a general overview of the sector, related accounting practices and specific issues relating to that sector (for example, the use of third-party production, or specialized inputs).
  • HS tariff classification: Tariff classification of the finished goods exported and inputs used to produce the exported good.
  • Specified documentation (in any format): Including, but not limited to, bills of material, purchase orders, proof of payment, shipping and delivery documentation, such as receiving reports, production yields and reports on a batch basis, raw material and finished inventory techniques.
  • Standardized data delivery mechanisms: The design and implementation of standards to communicate trade and origin-related data and trade determinations as already undertaken by the Origin Blockchain Exchange OASIS Open Project[1].

Once standardized production data sets and related mechanisms are in place, any origin regime (for example, non-preferential, preferential and/or applicable integrity regimes, or private/corporate product specifications) can be overlaid on top of them as required.

Conclusion

The challenges presented by the absence of internationalized non-preferential origin are costly and frustrate the basic assumptions and ambitions of the Trade Facilitation Agreement. The proposals outlined herein are not radical compared to the costs and administrative burdens associated with the absence of such non-preferential disciplines. It is hoped that these proposals and similar suggestions can sow the seeds of internationally coordinated private sector coalition(s) to pursue solutions to this matter at the national level.

More Information
www.tradefacilitation.ca

 

[1] The Origin Blockchain Exchange OASIS Open Project is a neutral forum for diverse stakeholders to create interoperable specifications for determining, obtaining and verifying digital global tax and trade attestations (“GTTAs”) – see https://www.oasis-open.org.