Rules of Origin and Regional Integration in the Americas

Summary of Key Issues Rules of origin (ROO) are key factor determining the impact of FTAs Complex and restrictive product specific ROO limit scope to benefit from tariff preferences Negative impact falls particularly heavily on smal low income countries Limits spread of transnational production networks Cumulation is a key issue Can compromise objectives regarding trade facilitation Practical Implications Simple, consistent and predictable ROO are more likely to foster the growth of trade and investment and promote development

ROO are a key trade policy issue! ROO are an essential element of PTAs to prevent trade deflection Hence, ROO are a key element determining the magnitude of the economic benefits of preferential trade agreements and who gets them. 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

Examples of the Impact of ROO on Trade Only 50 per cent of eligible exports from Asian LDCs enter the EU duty free under the EBA. Just 36 per cent of Cambodia’s exports obtained duty free access to the EU in 2001 – implies that on average Cambodia’s exports paid a tariff of 7.7 per cent A significant proportion of Canadian exports to the US do not claim preferences but pay the tariff Increase in US imports of clothing under AGOA From countries which have flexibility in sourcing fabrics % From countries which face more restrictive ROO %

The Specification of Rules of Origin Three main criteria can be used to identify substantial transformation Change of tariff classification Domestic value-added requirement or minimum import content Specific manufacturing process requirement EU and NAFTA model of ROO has detailed product specific ROO which use all 3 criteria, sometimes in combination – this tends to lead to complex and often restrictive ROO. There are over 200 pages of NAFTA ROO! Basic distinction between “wholly obtained” products and those for which the place of “substantial transformation” needs to be identified

Examples of Complex and Restrictive ROO 1. 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 and at least 75 per cent of the crew must be nationals of the beneficiary country or the EU.

Examples of Complex and Restrictive ROO 2. US NAFTA rules on Clothing The following example is for men’s or boys overcoats made of wool (HS620111) A change to subheading from any other chapter, except from heading 5106 through 5113, 5204 through 5212, 5307 through 5308 or 5310 through 5311, Chapter 54 or heading 5508 through 5516, 5801 through 5802 or 6001 through 6006, provided that: (this is a fibre forward requirement) (a) the good is both cut and sewn or otherwise assembled in the territory of one or more of the Parties, and (b) the visible lining fabric listed in Note 1 to Chapter 62 satisfies the tariff change requirements provided therein (a fabric forward requirement) There are also rules which allow for certain non-originating fabrics to be used, for example, Fabrics of subheading or , if hand-woven, with a loom width of less than 76 cm, woven in the United Kingdom in accordance with the rules and regulations of the Harris Tweed Association, Ltd., and so certified by the Association;

Complex and restrictive rules of origin limit benefits of tariff removal ROO which vary across products and agreements add to the complexity and costs of participating in and administering trade agreements. The burden of such costs fall particularly heavily upon small and medium sized firms and upon firms in low income countries. Complex 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 the growth of cross-country production networks. Restrictive rules of origin constrain sourcing of inputs

Cumulation provisions can reduce the restrictiveness of specific processing requirements But full cumulation the most difficult to implement. Full cumulation provides for deeper integration and allows low income countries the greatest flexibility in sourcing inputs. Cumulation provisions allow the use of imported inputs from specified countries without losing originating status. Three key types of cumulation – bilateral, diagonal and full. The area of cumulation is crucial – determines from which countries inputs can be sourced

Conclusions A coordinated approach to ROO in can be beneficial in avoiding highly complex and extremely difficult to administer systems of rules of origin Clear and consistent ROO, with minimal costs to firms in adhering to them, are fundamental to improvements in effective market access and the facilitation of trade and investment Allowing for full cumulation acts to strengthen regional integration