PICARD 2009 Presentation on research project Cezary Sowinski, Ph.D. student, Warsaw University of Economics, Poland „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” Agenda 1.Purpose and assumptions of the research 2.Briefing on rules of origin 3.A model 4.Results of analysis 5.Q&A Appendix: Summary information PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 1. Purpose and assumptions of the research PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA  influenced by practical case  aims at examination of impact of rapid changes in exchange rates on origin of goods produced in the EU and exported to the Republic of South Africa  raises concern whether the EU origin declaration can be trusted at the time of economic crisis severely influencing exchange rates

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 2. Briefing on rules of origin (1/3) Concept of originating products PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA  only ‘originating products’ can be qualified for preferential treatment on importation to a given country  a product is considered to ‘originate’ in the preferential trade partner country when it is: wholly produced, or wholly obtained there or ‘substantially transformed’ in the given country (i.e. transformed according to the respective rules of origin)

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 2. Briefing on rules of origin (2/3) Substantial transformation tests PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA  a product is considered as ‘substantially transformed’ if it meets one / all of the following tests:  the technical test (specific processing test)  the customs classification test (change in tariff heading test)  the economic test (the value added test)  the value added test:  the easiest for practical application but associated with relatively high administrative burden susceptible to the impact of fluctuating exchange rates

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 2. Briefing on rules of origin (3/3) Evidence of origin and its subsequent verification PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA  establishing correct origin of goods should be properly documented, to exclude any doubts (origin certificates, invoice declarations etc.)  subsequent verification of proofs of origin initiation of the procedure rests on the customs authorities of both the exporting and importing country but:  the exporting country customs authorities can do it whenever they want or feel necessary  the importing country customs authorities can do it once they have reasonable doubts toward documents or products

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 3. A model (1/4) Introduction PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA  actual situation of a Poland-based manufacturer of goods exported to the RSA in 2008 made one to consider whether the EU origin can be assured for all and every product manufactured at times of rapidly changing exchange rates  a simplified model was built to answer the following questions:  whether a EU proof of origin can be trusted at the time of economic crisis severely influencing exchange rates?  in what circumstances, not being caused by the exporter, a breach of rules of origin can happen?  what could be done to prevent the above from happening in practice?

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 3. A model (2/4) Assumptions PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA  a Poland-based entrepreneur manufactures a product classified to HS 8418 (refrigerators); this product is exported to the RSA;  refrigerators produced in Poland meet origin criteria provided for in the EU-RSA agreement: ‘manufacture in which the value of all the (non-originating) materials used does not exceed 25% of the ex-works price of the product’;  the model product is composed of a number of components, which are either locally acquired / produced (i.e. of EU origin) or imported (i.e. of non-EU origin);  prices of imported components are set in foreign currencies (other than PLN); prices of components sourced from EU member states other than Poland are set in EUR; prices of components sourced locally in Poland are set in PLN; the prices of all components are fixed during the period of analysis; other costs and mark-up are also fixed;  shipments of finished products to the RSA are effected on monthly basis, accompanied by commercial invoice including origin confirmation;  based on the invoice declarations, the product is imported to the RSA under preferential duty rate 0% (instead of MFN rate 25%)

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 3. A model (3/4) Origin of model product as of January 1, 2008 PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA  under the exchange rates applicable on January 1, 2008, the model product meets origin criteria to enjoy preferential treatment on imports into the RSA under the EU-RSA agreement Total value of non- originating component (PLN) Total value of originating component (PLN) EXW price of final product (PLN) Origin rule (non-EU material value < 25% of EXW price) MET (28 < 30)

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 3. A model (4/4) Exchange rates during 2008 PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 4. Results of analysis (1/3) Meeting ‘origin rule’ during 2008 PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 4. Results of analysis (2/3) Concludions and policy recommendations PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA  the model built for the purpose of checking whether exchange rate fluctuations have an impact on origin of goods confirmed this weakness of the value-added test  as a consequence:  the EU proof of origin regarding model product might not be trusted at the time of economic crisis severly influencing exchange rates  breach of rules of origin can happen without any deliberate activity on the side of manufacturer / exporter of goods subject to preferential treatment in the country of importation

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” 4. Results of analysis (3/3) Conclusions and policy recommendations PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA  for responsible exporter  monitor the cost side of production process very closely  once the analysis shows that some products do not confer origin withhold from issuing invoice declarations to the respective product  for attentive customs authorities  of exporting country  more often audits  increased requirements towards assuring origin of products by their manufacturer (especially ‘approved exporter’) of importing country  how they can raise reasonable doubts with regard to the products imported to their territory in case they are not aware of product composition and all other factors influencing its origin?

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA 5. Questions and answers Discussion

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA Thank you

Cezary Sowinski „Exchange rate impact on origin of goods – can one be sure of accuracy of proof of origin in economic turmoil?” PICARD CONFERENCE 28 – 30 SEPTEMBER 2009 – SAN JOSE, COSTA RICA Appendix. Summary information In this paper influence of rapid changes in exchange rate on origin of goods produced in the EU and exported to the Republic of South Africa was analysed with use of a simplified model. Taking into consideration rules of origin for manufacture of refrigerators (‘manufacture in which the value of all the (non-originating – author’s remark) materials used does not exceed 25% of the ex-works price of the product’), a single model variable was chosen to be the exchange rate. The model was built in order to assess whether the EU origin declaration can be trusted at the time of economic crisis so severely influencing exchange rates. Outcome of the analysis proved widely known weakness of the value-added test, i.e. that it is susceptible to the impact of fluctuating exchange rates. The paper gave also insight on how easily and without any deliberate activity a fraud can be committed at the time of economic turmoil. Beside that it has shown that even a responsible exporter and attentive customs authorities might not be able to restrain committing of a commercial fraud at the very time it is happening. Only a thorough post factum analysis of origin criteria (or a very advanced IT-based origin compliance tool) can reveal the problem on time. Due to the fact that the analysis showed that exchange rate might be crucial factor in ascertaining origin of goods and in some cases it could negatively influence the origin of final product, increased attention should be put to it by each manufacturer producing goods that satisfy certain rules of origin and thus could be imported at trade partner country with preferential duty rates. Special focus should be put on them at the time of economic crisis, also by the customs authorities.