The rapid and recent spread of reciprocal preferential trading agreements, aiming at liberalising trade through the creation of bilateral and regional free trade areas, has led to increasing attention on rules of origin and their importance. While the main objective of all preferential trade agreements is the net trade creation, the increasing use of rules of origin as a non-tariff barrier and a means of protection for domestic industries, have been raised.

Rules of origin are basically divided into two categories: preferential and non-preferential rules. Preferential rules of origin are used to determine whether certain products originate in a preference-receiving country or trading area and hence qualify for trade preferences. Non-preferential rules of origin are used for all other purposes, including for statistical purposes and for the application of country-specific trade requirements such as anti-dumping duties or quotas.

Under the WTO, there are currently no specific rules governing the determination of the country of origin of goods for non-preferential trade. Each country is free to determine its own origin rules. It is, however, widely accepted by all countries that harmonization of non-preferential rules of origin would facilitate the flow of international trade. Under the WTO Agreement on Rules of Origin, a process has started towards the harmonization of the non-preferential rules of origin to create a more transparent, technical, predictable implementation process for all determination of origin.

Preferential rules are used to determine the eligibility of imported goods under various trade agreements and allow beneficiary countries receive duty-free or reduced tariff benefits under bilateral or regional FTAs and trade preference programs. Preferential rules of origin are generally specific to each FTA, or preference agreement, and thus vary from agreement to agreement.

By varying the level of the required transformation and by allowing different degrees of cumulation, countries can use the rules of origin to control the degree of preference. If the preferential rules of origin are formulated such that they require a greater transformation of the product than the rules of origin otherwise would require, the rules of origin may be serving as a discriminatory policy device that restricts trade.

The restrictiveness of rules of origin is determined by two aspects: (i) the extent of activity that must be undertaken in the beneficiary country (the “origin rule”), and (ii) the extent, if any, to which imported inputs from either the preference provider or other preference beneficiaries counts toward meeting the origin rule (the “cumulation provision”). While both influence how easily preferences may be used, cumulation provisions also may encourage or discourage trade among preference beneficiaries.

Cumulation is a deviation from basic rules of origin which promotes and enhances trade between free trade partners. With cumulation provisions, a product may be manufactured using materials originating from another country as predefined in a trade agreement. The use of these imported originating products is referred to as cumulation. Cumulation may be bilateral (between the preference provider and preference beneficiary), diagonal (involving participants in a multi-partner preference program), regional (among members of a formal regional group), or full (among all beneficiary countries).

By allowing inputs from two or more parties to be counted together, a cumulation rule can add flexibility to a preference scheme. In all cases of cumulation, the working or processing carried out does not need to be ‘sufficient working or processing’, but the manufacturing process must go beyond the minimal operations such as packing, repacking or simple mixing of materials.

While it is widely recognized that, rules of origin are an essential element of all preferential trading schemes, their proper use and application is of utmost importance for the implementation of any agreement as they have the potential of being used both as instruments of development to direct investment and as a means to protect local producers.

It is therefore essential when adopting rules of origin in any trade agreement to keep in view the developmental role of the rules of origin in expanding intraregional trade and investment flows.

Vivagen Amoomoogum

Analyst

Trade Division