Rules of Origin, Trade, and Customs

This chapter has benefited from the comments and suggestions of Antoni Estevadeordal, Moshe Hirsch, Holm Kappler, Kunio Mikuriya, Mark Pearson, and Kati Suominen, to whom the authors are most grateful. This paper reflects the views of the authors and should not in any way be attributed to the organizations with which they are or have been affiliated.

Determining the country of origin or "nationality" of imported products is a requirement for applying basic trade policy measures such as tariffs, quantitative restrictions, antidumping and countervailing duties, and safeguard measures as well as for requirements relating to origin marking, public procurement, and for statistical purposes. Such objectives are met through the application of basic or nonpreferential rules of origin. Countries that offer zero or reduced duty access to imports from certain trade partners will apply another and often different set of preferential rules of origin to determine the eligibility of products to receive preferential access. The justification for preferential rules of origin is to prevent trade deflection, or simple transshipment, whereby products from nonpreferred countries are redirected through a free trade partner to avoid the payment of customs duties. Hence the role of preferential rules of origin is to ensure that only goods originating in participating countries enjoy preferences. Therefore, preferential rules of origin are integral parts of preferential trade agreements such as bilateral and regional free trade agreements and the nonreciprocal preferences that industrial countries offer to developing countries.

The nature of rules of origin and their application can have profound implications for trade flows and for the work of customs. Rules of origin can be designed in such a way as to restrict trade and therefore can and have been used as trade policy instruments. The proliferation of free trade agreements with accompanying preferential rules of origin is increasing the burdens on customs in many countries with consequent implications for trade facilitation. Perhaps surprisingly, given their potential to influence trade flows, rules of origin is one area of trade policy that has been subject to very little discipline during the almost 50 years of the multilateral rules-based system governed by the General Agreement on Tariffs and Trade (GATT) and more recently the World Trade Organization (WTO). It is also worth noting that during this period the determination of the country of origin of products has become more difficult as technological change, declining transport costs, and the process of globalization have led to the splitting up of production chains and the distribution of different elements in the production of a good to different locations. The issue becomes which one or more of these stages of production define the country of origin of the good.

This chapter seeks to summarize the key issues relating to both preferential and nonpreferential rules of origin and to highlight the economic impact that rules of origin can have. It concentrates on the implications of rules of origin for customs, drawing on a recent survey of customs administrations throughout the world. The main conclusion is that the specification and implementation of rules of origin can have significant effects both on traders and on the work of customs. Complex rules of origin that differ across countries and agreements can be a significant constraint on trade and a substantial burden on customs and on the improvement of trade facilitation. The nature of the rules of origin can act to undermine the stated intentions of preferential trade agreements.

The first section of this chapter explains what is meant by origin. The second section examines methods for determining substantial transformation. The third section discusses the current situation with regard to nonpreferential rules of origin, where a concerted attempt (yet to bear fruit) has been made to harmonize the rules regarding wholly obtained products and substantial transformation. The fourth section elaborates on the definition of preferential rules of origin for which, to date, there has been no attempt to achieve harmonization and for which there are no real and effective multilateral disciplines. The fifth section looks at the rules of origin in existing free trade and preferential trade agreements. The sixth section reviews the economic implications of rules of origin. The seventh section discusses the links between the rules of origin and the use of trade preferences. The eighth section analyzes the use of the rules of origin as a tool of economic development. The ninth section deals with the costs of administering preferential rules of origin by customs. The tenth section looks at the Doha Round and the rules of origin. The final section provides some operational conclusions.

Defining Origin

When a product is produce...

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