The Urgent Call for Harmonizing Preferential Rules of Origin E-Book

Hatem Mabrouk

• Herausgeber: Editora Dialética
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 218

Veröffentlichungsjahr: 2024

Beschreibung

In an increasingly interconnected world, rules of origin—laws determining the national source of a product—play a crucial role in international trade. Yet, with each country setting its own standards, the global market faces a complex web of regulations that often impedes rather than facilitates trade. "The Urgent Call for Harmonizing Preferential Rules of Origin" by Hatem Mabrouk delves into these complexities and challenges. The book reveals how preferential rules of origin, designed to determine eligibility for tariff preferences under trade agreements, are often manipulated for protectionist and political aims, creating significant obstacles for global producers and traders. Through rigorous analysis and case studies, Mabrouk explores the detrimental impacts of these systems and proposes a harmonized approach aligned with the World Trade Organization to streamline and improve international trade practices. Mabrouk's proposal offers a robust blueprint for policymakers and trade bodies to refine global trade mechanisms. "The Urgent Call for Harmonizing Preferential Rules of Origin" is essential reading for anyone involved in international trade or global economics, advocating for clearer and fairer trade regulations to enhance global economic prosperity.

Leseprobe

I dedicate this book to my wife, my daughter, and my parents, whose unwavering support and dedication have been the foundation of my achievements. I would also like to express my profound gratitude to Allah Almighty for providing me with the strength and wisdom throughout this journey

ABBREVIATIONS

AANZFTA

ASEAN-Australia-New Zealand FTA

AFTA

Association of Southeast Asian Nations Free Trade Agreement

ANZCERTA

Australia New Zealand Closer Economic Agreement

APEC

Asia-Pacific Economic Cooperation

APTA

Asia-Pacific Trade Agreement

ASEAN

Association of Southeast Asian Nations

CARICOM

Caribbean Community

CBERA

Caribbean Basin Economic Recovery Act

CBI

Caribbean Basin Initiative

CBTPA

Caribbean Basin Trade Partnership Act

CIF

Cost Insurance and Freight

CU

Customs Union

DR-CAFTA

Dominican Republic – Central America Free Trade Agreement

EC

European Community

EFTA

European Free Trade Association

EU

European Union

EUCU

European Union Customs Union

FOB

Free on Board

FTA

Free Trade Agreement

FTAA

Free Trade Area of the Americas

GATT

General Agreement on Tariffs and Trade

GSP

Generalized System of Preferences

HS

Harmonized Commodity Description and Coding System

MFN

Most-Favored-Nation

NAFTA

North American Free Trade Agreement

QIZ

Qualifying Industrial Zone

SAARC

South Asian Association for Regional Cooperation

SAPTA

South Asian Association for Regional Cooperation Preferential Trading Agreement

SG&A

Selling, General, and Administrative

TTIP

Transatlantic Trade and Investment Partnership

UAW

United Auto Workers

UK

United Kingdom

US

United States of America

USMCA

U.S. – Mexico – Canada Agreement

WCO

World Customs Organization

WTO

World Trade Organization

SUMÁRIO

Capa

Folha de Rosto

Créditos

CHAPTER I: INTRODUCTION

1.1 ARTICLE I, III AND XXIV OF THE GATT 1994.

1.2 RULES OF ORIGIN IN GENERAL.

1.3 RULES OF ORIGIN IN PREFERENTIAL TRADE AGREEMENTS.

1.4 ADDRESSING THE BOOK ISSUE.

1.4.1 Protectionism.

1.4.2 Trade Diversion.

1.4.3 The Propagation of Rules of Origin Worldwide.

1.4.4 Political Purposes.

1.5 THE BOOK QUESTION.

1.6 TESTING THE BOOK HYPOTHESIS.

CHAPTER II: THE MISUSE OF PREFERENTIAL RULES OF ORIGIN

2.1. DO PREFERENTIAL RULES OF ORIGIN LEND THEMSELVES TO BEING USED FOR PROTECTIONIST PURPOSES?

2.1.1 The WTO Agreement on Rules of Origin.

2.1.2 The USMCA.

2.1.2.1 Automobiles.

2.1.2.2 Ketchup.

2.1.2.3 The Triple Transformation under the USMCA.

2.1.3 The EU GSP Rules of Origin.

2.1.4 What should be done to Face Protectionist Rules of Origin?

2.2 RULES OF ORIGIN AS TRIGGERS TO TRADE DIVERSION.

2.2.1 The Possible Trade-Diverting Consequences of Preferential Trade Agreements.

2.2.2 The Trade-Diverting Consequences of Preferential Trade Agreements Rules of Origin.

2.2.3 The Relation between the Imposition of Protectionist Rules of Origin and Trade Diversion.

2.2.4 North America vs. Asia and the Caribbean: An Emphasis on Historical Data.

2.2.5 The EU double transformation rule and trade diversion.

2.2.6 The Negative Effects of Article XXIV of the GATT 1994.

2.3 THE USAGE OF RULES OF ORIGIN FOR POLITICAL PURPOSES.

2.3.1 The Issue of Recognition.

2.3.2 Using Preferential Rules of Origin to Pursue Political Objectives.

2.4 THE WORLDWIDE PROPAGATION OF PREFERENTIAL RULES OF ORIGIN.

2.5 SUMMARY.

CHAPTER III: THE HARMONIZATION OF PREFERENTIAL RULES OF ORIGIN

3.1 THE HARMONIZATION OF NON-PREFERENTIAL RULES OF ORIGIN.

3.1.1 The Outstanding Issues Obstructing the Completion of the Harmonization Process of Non-preferential Rules of Origin.

3.1.2 Problems Concerning the Application of Rules of Origin Worldwide and Suggestions to Overcome Remaining Obstacles.

3.2 HARMONIZING PREFERENTIAL RULES OF ORIGIN.

3.2.1 The Calculation of the Number and Using the Denominator.

3.2.2 Product-Specific Rules of Origin.

3.2.3 Cumulation Rules: The Baits.

3.2.4 The Basic Required Origin Method to be applied under the Last Substantial Transformation Norm.

3.2.5 Proposed Harmonized Set of Preferential Rules of Origin.

3.2.6 Commentary on the Proposal.

3.2.7 The Position of WTO Member States.

3.2.8 The Prospects for Agreement on Harmonized Preferential Rules of Origin.

CHAPTER IV: TESTING THE HARMONIZED PREFERENTIAL RULES OF ORIGIN

4.1 PROTECTIONISM.

4.2 TRADE DIVERSION.

4.3 POLITICAL PURPOSES.

4.4 THE SPAGHETTI BOWL.

4.5 ALL POSSIBLE OUTCOMES.

CHAPTER V: CONCLUSION

BIBLIOGRAPHY

Landmarks

cover

titlepage

copyright-page

Table of Contents

bibliography

CHAPTER I

INTRODUCTION

“While the primary aim of rules of origin is to ensure that preferences accrue only to the signatories of a preferential trade agreement, they are often complex and can act as a barrier to trade”1

World War I severed trade relations. Back then, no organization existed to maintain trade relations or recreate balanced international trade.2 By November 11, 1918, Germany surrendered to the Allied nations.3 In 1919, Germany and the Allied forces signed the Peace Treaty of Versailles.4 Under such treaty, Germany was obligated to pay war reparations to the Allies, mainly France and Great Britain. “These reparations cut into the financial resources of central Europe”.5 The recovery of Europe’s economy was hindered, the amount of poverty increased, which led possibly to the emerging of the fascist movement in Italy and Germany in the 1920s and 1930s.6 After World War I, Japan was the first country that practised protectionism on a very excessive level to protect itself from big markets like the United States (US) because it was very difficult for small-sized markets like Japan to globally compete and prosper.7 On the other hand, Great Britain had inefficient production firms and its producers suffered from a low rate of the national demand. Also, when Australia, New Zealand, India and Canada started to practise protectionism, Britain encountered hindrances when it came to exporting to and selling in the commonwealth markets.8 Thus, Britain tried to protect its firms on a national and global level to increase the demand on its products.9 Before World War II and during the period of the Weimar Republic, Germany gave up open trade.10 To have a “self-sufficient” economy (Autarky), Germany’s New Plan of 1934 continued Germany’s introduction of exchange controls that took place in 1931.11 Between 1929 and 1933, Germany practised protectionism mainly in Agricultural products.12 In 1929, the Great Depression (from 1929 until the early 1940s) took place. The inapt financial policies in Europe and the United States and the crash of the US stock market of 1929, commonly known as the Wall Street Crash, are the main triggers to the depression.13 In the 1930s, the practice of protectionism was on the rise.14 Following the Wall Street Crash of 1929, the Smoot–Hawley Tariff Act was adopted by the US Congress in 1930.15 The Act raised US tariffs on about 20,000 imported goods to mainly protect national farmers against competition from foreign agricultural imports.16 Responding to the Smoot–Hawley Tariff Act, Italy and Spain imposed high tariffs on many US goods.17 Many European countries were affected by such action and it was the beginning of the trade war against the US.18 Subsequently, Switzerland, Canada, Australia, Cuba, Mexico, France and New Zealand participated as well in such trade war.19 As a result, the Great Depression was worsened and a severe drop in international trade took place.20 Towards the end of World War II, in July 1944, the United Nations Monetary and Financial Conference, known also as Bretton Woods Conference, took place at which the Allies gathered for the purpose of establishing institutions that would abolish the economic reasons of wars.21 The conference led to the formation of two international organizations, namely International Bank for Reconstruction and Development (The World Bank) and the International Monetary Fund.22 In 1947, the General Agreement on Tariffs and Trade (GATT) was established as reaction against the protectionism that hindered international trade and aided the expansion of the Great Depression.23

The GATT held eight rounds of negotiations and succeeded in gradually reducing the level of tariffs and urged trade facilitation between the member states.24 The Uruguay Round of Multilateral Trade Negotiations was the eighth round (1986-1994). It resulted in the conclusion of the Marrakesh Agreement and updated the GATT 1947 to the GATT 1994. The GATT 1994 included 12 additional side agreements. In 1995, the institutional machinery of the GATT was replaced by the World Trade Organization (WTO) under the Marrakesh Agreement.25 Today, the WTO acts as the umbrella for about 60 various agreements26 and over 164 countries are members.27 One of these agreements is the Agreement on Rules of Origin.

1.1 ARTICLE I, III AND XXIV OF THE GATT 1994.

There are two vital principles to the GATT: the Most-Favoured-Nation (MFN) principle and the National Treatment principle. Pursuant to Article 1 (General MFN Treatment) of the GATT 1994, a WTO member state is not allowed to discriminate between its trading partners. Accordingly, when a WTO member state lowers its customs duty rate for one of its goods coming from a particular member of the WTO, the same shall be done for all other WTO members.

Pursuant to Article III of the GATT 1994, WTO members are prohibited to adopt domestic policies designed to discriminate against foreign imported goods in favour of the same or similar locally-produced goods. For example, it is a violation to the GATT national treatment principle when a WTO member state imposes technical standards on imported goods that are more stringent than on similar domestic goods.

With the fulfillment of certain conditions under Article XXIV of the GATT 1994, preferential trade agreements can be formed as a discriminatory exception to the MFN principle. A preferential trade agreement is a trading agreement between certain countries. It gives preferential tariff treatment to certain goods from countries that are parties to the agreement. A preferential trade agreement could be multilateral or bilateral. A multilateral trade agreement is formed between many countries. A bilateral agreement is formed between two countries. Moreover, in 1979, the GATT adopted the “Enabling Clause” under which unilateral concessions can be formed when a country unilaterally decides to grant preferential access to certain goods from another country or countries, such as the EU (European Union) Generalized System of Preferences (GSP) regime.28 About 800 preferential trade agreements were notified to the WTO as of January 1, 2014.29 Each preferential trade agreement has its own rules of origin.30

Figure 1: Evolution of Regional Trade Agreements in the World, 1948-202431

1.2 RULES OF ORIGIN IN GENERAL.

Rules of origin are those laws and regulations that are applied to determine the country of origin of goods. A good is conferred origin if it was wholly obtained in the exporting country or has undergone a last substantial transformation there.

A wholly obtained good is a good that is produced entirely in the exporting country. It is either a natural product or a good produced from natural products, like minerals extracted from soil or water, live animals, harvested vegetables or goods produced thereof.

The last substantial transformation is the concept used to determine the country of origin of the good when more than one country is involved in the production of the good, i.e. the importation of inputs from one or more country was needed to produce the good. The last substantial transformation is indicated by three means: the change in tariff classification, the value added and the specific manufacturing operation.32 These three means are also recognized in the Agreement on Rules of Origin.

The change in tariff classification method relies on the Harmonized System (The Harmonized Commodity Description and Coding System or the HS).33 The HS has been developed by the World Customs Organization (WCO) to classify the goods being traded between “all participating countries” by using names and numbers.34 The goods in the HS are classified under up to 6-digit codes. However, WTO member states are free to add more digits for more specific classification of products, like 8 or 10 digits.

Under the change in tariff classification method, origin could be conferred when a product has undergone a change in tariff classification at 2, 4, 6 or 8 to 10-digit levels. While the 2-digit level is called the tariff chapter, the 4-digit level is called the tariff heading, the 6-digit level is known as the tariff sub-heading and the 8 to 10-digit level is called the tariff item.35 A change in tariff classification rule of origin could look like this:

Figure 2: Change in Tariff Classification at a 2-Digit Level (Chapter Level).

Chapter

Tariff heading

Tariff Sub-heading

Product description

Rule of Origin

58

5806

5806.31

Other woven fabrics: of cotton

A change to sub-heading 5806.31 from any other chapter

Source: Author’s example

Under the mentioned rule of origin, a manufacturer in an exporting state (state A) could produce woven fabrics by using cotton yarn imported from another state (state B) which falls under sub-heading 5206.25 of the HS. Thus, according to this example, origin would be conferred by a change in tariff classification from chapter 52 (which includes sub-heading 5206.25) for cotton-yarn to sub-heading 5806.31 (woven fabrics) , i.e. the exporting producer’s woven fabrics would be considered to originate in State A.

The value added criterion is different from the change in tariff classification because it does not rely on the HS when applied. It is in principle very straight forward, but often complicated to operate in practice since the methods of valuation differ from one agreement to another (discussed in chapter 3). In general, the value added criterion could be either the maximum allowed percentage of imported inputs or the minimum percentage of local inputs used to produce the good.36 The imposition of the value added criterion could look like this:

Figure 3: An example for the Value Added Criterion.

Chapter

Tariff heading

Tariff Sub-heading

Product description

Rule of Origin

73

7302

7302.10

Rails

A maximum import content of 40%

Source: Author’s example

So, if an exporter in state A manufactured rails using inputs imported from other states, the rails would be considered to originate in state A if the value of the imported materials was no greater than 40% of the value of the manufactured rails.

The specific manufacturing operation method is straight forward in principle just like the value added, but sometimes requires too much technicality related to the operation that the product shall undergo. The manufacturing operation test could be either positive, by requiring certain materials to have been used or operations to have occurred in the exporting state if the goods are deemed to originate there, or negative, when the rule of origin prohibits the usage of certain inputs or certain operations to take place. Sometimes the positive or negative tests are clarified by clear statements and sometimes they are clarified by using the change in tariff classification method. The following is an example showing what a positive test might look like:

Figure 4: An Example for the Change in Tariff Classification Test in a Positive State.

Chapter

Tariff heading

Tariff Sub-heading

Product description

Rule of Origin

61

6103

6103.10

Suits

The good (suits) is both cut and sewn in the territory the exporting state

Source: Author’s example

The following example shows how a manufacturing operation test could rely on the change on the change in tariff classification test in a negative state:

Figure 5: An Example for the Change in Tariff Classification Test in a Negative State.

Chapter

Tariff heading

Tariff Sub-heading

Product description

Rule of Origin

90

9002

900211

“Objective lenses: For cameras, projectors or photographic enlargers or reducers”

“Change to subheading 900211 from any other subheading, except from heading 9001”

Source: Author’s analysis based on the Australia New Zealand Closer Economic Agreement (ANZCERTA) Annex G: Product Specific Rules of Origin

900211 is the sub-heading number under which the product is classified. The first two digits (90) represent the chapter. The first four represent the tariff heading (9002). According to the table, the product (objective lenses) classified under sub-heading 900211 could be conferred origin when goods classified under any other sub-heading are used in its production, except goods classified under heading 9001 (negative test).

Upon the importation of a product, each country applies its own rules of origin to determine the origin of the product. That is why rules of origin differ from country to another. Such origin rules are known as “non-preferential rules of origin”. Non-preferential rules of origin are mainly used for gathering trade statistics, government procurement, carrying out origin marking and labeling requirements and the application of trade policy instruments such as anti-dumping duties, countervailing measures and quantitative restrictions. However, there is another type of rules of origin called “preferential rules of origin”. Preferential rules of origin deal with preferential trade agreements. They are used to stipulate whether a good is deemed to originate in a preferential trade agreement partner country and consequently eligible for preferential tariff treatment.

1.3 RULES OF ORIGIN IN PREFERENTIAL TRADE AGREEMENTS.

Free Trade Areas and Customs Unions (CUs) are two forms of preferential trade agreements. A Free Trade Agreement (FTA) is an agreement under which two or more countries agree to preferentially grant tariff free access to goods being traded between only them. However, each party to the agreement is imposed on the goods imported from countries who are not members of the free trade area (third countries). In FTAs, each member maintains its own restrictions on trade with third countries. Therefore, the external tariff of a member can be different (lower or higher) from the external tariff of another member of the FTA. That is why; if lax rules of origin are imposed in the FTA, trade deflection (or the transshipment of goods) could take place. Trade deflection is the movement of goods from a third country to the member imposing the least external tariff in order to benefit from the FTA preferences when entering the market(s) of another member(s) imposing higher external tariff. If in a FTA one member, State A, charges 10% customs duty on imported cars and another member, State B, charges 30%, and there were no rules of origin governing trade between members of that FTA, an exporter of cars in a third State might find it cheaper to export cars to State B by exporting the cars first to State A, where it pays 10% duty and then re-exporting the cars duty free from State A to State, thereby circumventing State B’s 30% duty. This phenomenon is known as a deflection of trade. Preferential rules of origin between members of a FTA are designed to prevent such deflections of trade.

A CU is formed when two or more countries agree to preferentially grant tariff free access to goods traded between them and apply a common external tariff to the goods imported from non-members (third countries). In other words, unlike FTAs, all of the CU members agree to impose the same (not different) tariff rates on imports coming into the CU which leaves no room for transshipment to take place. Thus, there is no need for preferential rules of origin in CUs when it comes to internal trade (within the trade area) because of the common external tariff.

FTAs and CUs can be multilateral, such as the Association of Southeast Asian Nations Free Trade Agreement (AFTA) and the European Union Customs Union, or bilateral, such as the US-Singapore Agreement and the Switzerland-Liechtenstein CU.

1.4 ADDRESSING THE BOOK ISSUE.

Although preferential rules of origin play an increasing role and are an important issue in international trade because of the number of preferential trade agreements, such rules can be used in a way that can obstruct international trade.

Even though the primary purpose of preferential rules of origin is to identify the beneficiaries of tariff preferences, the incidental effect of such rules may be protectionist when countries use preferential rules of origin as alternative barriers to trade to protect their own national interests and susceptible goods susceptible to adverse to adverse competition from imports by imposing too stringent rules of origin. Using rules of origin as replacement barriers to trade is called the “Law of Constant Protection” by Bhagwati.37 The formation of preferential trade agreements has its positive effects on international trade, which will be explained in the next chapter. However, the imposition of too stringent preferential rules of origin in preferential trade agreements and the propagation of preferential rules of origin worldwide because of the formation of many preferential trade agreements have been contributing to hindering international trade.

A country could use the preferential tariff as a bait to induce another to form together a preferential trade agreement. Because of such inducement, sometimes the latter country does not pay appropriate attention to the rules of origin when concluding the trade agreement. Also, sometimes all members of a preferential trade area agree to impose protectionist rules of origin so as to divert trade from an efficient external source of supply (outside the preferential trade area) to an inefficient internal one (within the trade area). More than that, sometimes rules of origin are imposed in preferential trade agreements for political purposes. Each of these points is discussed in more detail in Chapter II. Examples for all these points are provided in the next chapter as well.

1.4.1 Protectionism.

In general terms protectionism is used to make certain that domestic producers are protected from adverse competition from foreign producers and from the possible avidity of domestic consumers for imported goods. This can happen by the imposition of tariffs on imported products, restrictive rules of origin and other trade regulations created by governments. Protectionism is the economic policy of shackling trade among countries. With the spread of protectionist motivations, preferential rules of origin have been used as protectionist apparatuses.

A too stringent preferential rule of origin could be costly when it requires producer in a member state of a FTA to source components from within the FTA that are more expensive than components from outside the FTA when producing the finished product for export to another member of the FTA. This makes the exported product more expensive than it might otherwise have been, thereby providing some protection to producers making the same goods in the importing State. Also, a too stringent preferential rule of origin could be complex when it requires the producer to comply with complicated production operations within the trade area when producing the final product. In preferential trade systems (in FTAs and unilateral concessions, but not in CUs), rules of origin play a considerable role in avoiding trade deflection. However, too stringent rules of origin are applied in many preferential trade agreements not to avoid mainly trade deflection, but for protectionist purposes, at which the level of the rules of origin stringency becomes more than that required to avoid trade deflection. As a result, complying with the indicated rules of origin will require costly and/or complex operations to be taken, and hence, the entry of the sensitive competitive goods under the preferential trade agreements preferences to the markets protected by the imposition of the preferential trade agreements restrictive rules of origin will be shackled.38

Although developing countries usually lack the employment of advanced operations when it comes to producing goods, they are characterized by inexpensive labour outlays needed during the production processes. So, for example, they benefit from the production of textiles since excessive expenditures and/or advanced operations are unnecessary to set up an enterprise in that industry.39 These factors induce developed countries to form a preferential trade agreement with or grant preferences to developing countries to encourage investment and the establishment of manufacturing firms there. On the other hand, as aforementioned, the preferential tariff could induce the preference-granted country to form a preferential trade agreement with the preference-granting country without paying appropriate attention to the rules of origin when concluding the trade agreement. As a result, the preference-granting country could attempt to protect its domestic products by imposing too stringent rules of origin on the competing products of developing countries trying to enter the market of the former under accorded preferences. Consequently, complying with the mentioned rules of origin would require costly and complex operations to be taken by the developing country which would prevent it from profiting from the accorded preferences and make it exceedingly difficult for its textiles to compete in the market of the preference-granting country. Thus, the developing country might not take advantage of the preferences and instead choose to trade with the preference-granting country on a MFN basis since this would not charge it the costly and the complex operations needed to be taken. Examples and detailed explanation for the problem of using rules of origin as protectionist tools are clarified in chapter 2.

1.4.2 Trade Diversion.

Preferential rules of origin have been used as trade-diverting tools, i.e. diverting trade from efficient sources of supply40 to inefficient sources of supply41. The imposition of stringent rules of origin in preferential trade regimes results in trade diversion when a final good producer switches its importation of inputs from an efficient external source of supply (located outside the preferential trade area) to a less efficient internal one (located inside the preferential trade area) in order then for the producer to comply with the preferential trade agreement stringent rules of origin when producing the final goods and thus trade in such goods under the preferential trade agreement preferences. Hence, the imposition of trade-diverting rules of origin affects the global efficiency negatively since it increases the production of inefficient producers in preferential trade areas and shrinks the production of efficient third countries’ producers.42

1.4.3 The Propagation of Rules of Origin Worldwide.

Preferential rules of origin vary from one preferential trade agreement to another. Their variations along with their complexity are considered to be a nightmare for producers and traders all over the world and have led to the so termed “Spaghetti Bowl” phenomenon.43 For instance, things are complex for a trader whose country is a member of a variety of preferential trade agreements that impose different preferential rules of origin to be complied with. Enterprises also face difficulties when complying with a diversity of administrative costs provoked by different agreements.44

1.4.4 Political Purposes.