Policy Brief

Building Inclusive Rules of Origin in the 21st Century

By Jeremy T. Harris, 
March 2017
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This report provides an analysis and evaluation of rules of origin (RoO) in the context of regional trade agreements (RTAs) and the multilateral system. The number of bilateral and plurilateral trade agreements, and preferential trading schemes has increased dramatically over the past two decades. These agreements effectively enable today’s international production-sharing possibilities and are at the centre of developments in supply chains and the fragmentation of value-addition. The rules of origin contained within RTAs therefore have significant implications in the way firms choose the locations in which they set up segments of their production. Consequently, strict RoO can result in economically sub-optimal functioning of value chains by disincentivising the use of cheaper parts and materials from third countries. Strict and diverse RoO also affect the ability of developing countries – especially the least-developed countries (LDCs) – to fully benefit from the enhanced market access granted through RTAs.

The RTA Exchange Dialogue on Rules of Origin therefore seeks to identify the role of RoO in the international trading system and identify the bottlenecks that arise in their application, especially where these can impact and suppress trade of developing countries. In this regard, the important questions revolve around how to harmonise RoO, how they can best be reformed to truly benefit all countries – including LDCs – and what additional, complementary issues need to be addressed to make these efforts effective.

To do so this report first looks at the various sectoral approaches to RoO. Preferential RoO have different roles in different sectors, and tend to be products of the political economy of each sector in the specific signatory countries. In some sectors like processed foods and fisheries RoO are extremely complex, whereas other sectors like primary products tend to have very straightforward RoO regimes. The report finds that RoO can be used to promote development, if the preferences are sufficient and their implementation is flexible and efficient. For example, unilateral preference programmes like the African Growth and Opportunity Act (AGOA) in the United States (US) or the General Preferential Tariff in Canada provide fairly liberal rules to LDCs with the objective of promoting employment in the simplest assembly operations. Countries that successfully take advantage of these opportunities can be “graduated” to programmes with stricter rules, and if the country is able to provide adequate governance and protection for the investment, it can create technology transfer and higher-wage employment.

Next the report examines different consolidation and harmonisation models in Europe, North America and Latin America. The fragmented and piecemeal nature of the vast network of RTAs calls for consolidation and harmonisation of the rules of origin, but how they operate in reality is another question. The report therefore examines models like the Pan-European Cumulation System (PECS), the North American Free Trade Agreement (NAFTA) and the Canada-Colombia free trade agreement (FTA) that offer product-specific extended cumulation and the participation of non-originating content. The report finds that expanding cumulation and modernising/reforming administrative procedures can lower the costs of compliance with RoO and promote preference utilisation. Where these apply to developing countries, greater opportunities to use preferences can boost competitiveness and encourage foreign investment that creates backward linkages and greater productivity. How to design and implement these mechanisms, however, is still a challenge.

The report goes on to explore new approaches to simplification, harmonisation, and consolidation of RoO. To do so the report outlines the role multilateral organisations like the World Trade Organization (WTO) and the World Customs Organization (WCO) can play, as well as the important contributions needed from RTA administration committees and national customs authorities. The report suggests that the WTO could provide more guidance as to what cumulation models are clearly consistent with General Agreement on Tariffs and Trade (GATT) Article XXIV. This would eliminate the concern of countries seeking to lessen the restrictiveness of their rules through broader cumulation zones. The report also suggests that the WCO would be an appropriate forum for establishing a sort of “global uniform regulations” to reduce or eliminate where possible the uncertainty in the evaluation firms’ origin information by customs administration. This could provide a mechanism for seeking standardisation of documentary evidence of preferential RoO compliance, and help guide both firms’ preparation and customs’ interpretation. Additionally the report recommends ways in which trade facilitation can better address preferential RoO, for example through integration into electronic single windows and authorised economic operator programmes.

At the regional level, coordination among RTAs to both identify best practices and to promote harmonisation of procedures and elements of documentation would significantly improve the functioning and benefits of RoO. Additionally, committees established to oversee the RoO should be more active in taking feedback from the private sector on ways to make origin compliance and documentation less burdensome and costly, addressing the issues listed here and others.

The report finishes by identifying issues needing further study. First, the ambiguity of the Article XXIV consistence of different models of expanded cumulation requires organised analysis by international trade law experts, and recommendations on technical approaches to expanded coverage of RoO in the Transparency Mechanism and the possibility of establishing a plurilateral agreement on RoO. A second area that merits further study is the development of International Organization for Standardization (ISO) standards on origin information management as a tool to help the private sector address the difficulties of RoO compliance. This would give firms obtaining certification under such standards greater certainty that their practices would be acceptable to customs. A third area that requires further study is rules of origin for services. Even if only for non-preferential statistical purposes, identifying the origin of services will become increasingly relevant, and merits careful analysis. Finally, the report recommends examining whether or not there is there a role for RoO in seeking to help moderate the environmental impact of global trade.

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