“Rules of Origin” in Global Trade: The Coin Has Two Sides

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It is debatable whether “Rules of Origin” (ROO) are beneficial or detrimental to global trade. Many nations contend that ROO are needed for fair trade. However, others, particularly developing nation exporters, have complained that complicated ROO raise costs and pose a different kind of trade barrier. While FTAs such as the Trans-Pacific Partnership (TPP) are set to facilitate trade by reducing quotas, tariffs and other trade barriers, concerns have been raised by non-members over the potential supply chain erosion resulting from strict ROO. On the other hand, strong ROO can help promote and protect employment within the FTA. Strict and complicated ROO can also mean increased costs to suppliers, which may reduce utilization of preferential trade agreements. However, strict ROO can sometimes protect vulnerable nations from trans-shipment.

“Rules of Origin” (ROO) are specific criteria for determining the country in which a product was made. They can be useful for adding ‘made in’ labels to goods, and for trade data collection. However, the real purpose is to ascertain which imported products come under trade policies such as quotas, preferential tariffs, anti-dumping initiatives, counter-veiling duties and safeguards.(1) When all production inputs are obtained within a single country, ROO can be very simple. However, with a global supply chain for inputs, ROO can become complex.

Under the TPP, labor unions have pushed for strict ROO while manufacturers propose flexible ROO. Three labor unions – The United Steelworkers, United Auto Workers and International Association of Machinists – proposed strict ROO for automobiles and light trucks. According to the unions, “The TPP-FTA, to be successful, must maintain, as well as reclaim, production and jobs that have transferred offshore as a result of the globalization of supply chains.” (2) They proposed that 62.5% of component inputs be manufactured in TPP countries for the finished product to be eligible for TPP benefits, and this content requirement be raised to 68.5% in four years and 75% in eight years. (2) The Association for Global Automakers, however, felt that given the global supply chain flexible ROO would maximize US auto-parts and vehicle manufacturers’ benefit. In the statement released June 2013, the Association proposed flexible ROO with multiple methodologies to determine origin. (3)

ROO can cause FTAs to make or break supply chains. For example, the ‘Yarn-Forward Rule of Origin’ (starting with yarn all inputs must be obtained with the FTA) may benefit TPP apparel exporter Vietnam at the expense of non-TPP competitors. (4) Non-FTA countries are not merely disadvantaged by higher tariffs; ROO may effectively reduce their trade participation or exclude them from the supply chain. For this reason, Taiwan for example is pressed to join the TPP, as its major trade partners (USA, ASEAN, EU, China, and Japan) are set to be members.(5) For the Least Developed Countries (LDCs), the dangers of preference erosion and exclusion from the supply chain are particularly significant as other nations join FTAs.

It is argued that relaxing ROO is the reason African apparel exports to the US soared while exports to the EU lagged behind; but others see China in the picture. In fact, stricter ROO could have protected African apparel exporters from Chinese trans-shipment under AGOA. After the implementation of AGOA in Oct. 2000, African apparel exports to the US surged until 2005, after which it has steadily declined. It is interesting to note that the decline happened after the Multi-fiber Arrangement was cancelled. The AGOA enabled African exporters to export apparel to the US duty-free and quota-free, and without strong Rules of Origin. Any proportion of inputs could be obtained from other nations. At the time when the US had quotas on Chinese apparel imports, China found an effective way to ‘trans-ship’ products via African plants.(6) When the Multi-fiber Arrangement was abandoned in 2005, the absence of quotas meant that China no longer required trans-shipment, and apparel exports under AGOA declined.

ROO can entail considerable compliance and administrative costs that may limit utilization of trade preferences. Manchin (2006) found that the ROO costs are equivalent to additional tariff that would require a margin of 4-4.5% for preference utilization. Although the US has signed relevant FTA preferences with 20 countries, at present only about 14% of apparel imports into the US utilize these preferences. ‘Yarn-Forward’ and associated administrative costs are cited as main reasons. This implies that the 17% average duty advantage is not enough to cover ROO compliance costs.(7) ROO compliance costs are also the major reason why many LDCs do not fully utilize the Duty-Free-Quota-Free preferences available to them.

ROO are thus constantly debated in global trade, and the goal forward seems to be to make the ROO as consistent and transparent as possible to minimize administrative costs. There will always be some loss and some gain resulting from ROO. ROO plays a large role in determining the success of Free Trade Agreements and other preferential trade agreements.

(1) WTO. (2014) Non-tariff barriers: red tape, etc. Retrieved April 04, 2014, from http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm9_e.htm#origin

(2) Flaherty, Scott. (2013) Steel, Auto Workers Push for Strong Origin Rules In TPP. Retrieved April 04, 2014, from http://www.law360.com/articles/485583/steel-auto-workers-push-for-strong-origin-rules-in-tpp

(3) Association of Global Automakers, Inc. (2013) Association of Global Automakers’ Statement To the Office of the United States Trade Representative On Negotiating Objectives Regarding Japan’s Participation in the Trans-Pacific Partnership Trade Agreement. Retrieved April 04, 2014, from http://www.globalautomakers.org/sites/default/files/document/attachments/GlobalAutomakersStatementUSTRJapanTPP.pdf

(4) Scissors, Derek. (2013) Rules of Origin Can Make or Break the Trans-Pacific Partnership. Retrieved April 04, 2014, from http://www.heritage.org/research/reports/2013/08/rules-of-origin-can-make-or-break-the-trans-pacific-partnership

(5) Liu, Da-Nien. & Shih, Hui-Tzu. (2013) The Transformation of Taiwan’s Status Within the Production and Supply Chain in Asia. Retrieved April 04, 2014, from http://www.brookings.edu/research/opinions/2013/12/04-taiwan-production-supply-chain

(6) Rotunno, L., Vezina, P-L., Wang, Zheng. (2012) The rise and fall of (Chinese) African apparel exports. Retrieved April 04, 2014, from http://www.voxeu.org/article/rise-and-fall-chinese-african-apparel-exports

(7) Nuthall, Keith. (2014) US apparel firms fail to exploit free trade deals. Retrieved April 04, 2014, from http://www.just-style.com/analysis/us-apparel-firms-failing-to-exploit-free-trade-deals_id121163.aspx

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Switzerland Global Enterprise. (2014) Origin. Retrieved April 05, 2014, from http://www.s-ge.com/switzerland/export/en/content/static/Origin

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