FX International Payments
By Karen Lynch
Identifying the origin of a product is not as simple as it sounds, since an export from any given country is itself likely to incorporate imports from one or more additional countries. Adding to that challenge is that free trade agreements (FTAs), which set rules of origin, already number over 400 (and counting) worldwide,1 with many up for renegotiation in 2017.
Rules of origin are usually included in the preferential treatment that countries give their partners in FTAs, such as lower customs duties. The rules are used to determine the national source of a product, with origin often determined by identifying the last country in which a product underwent substantial transformation. However, the method of making that determination can vary from country to country. "While the requirement of substantial transformation is universally recognized, some governments apply the criterion of change of tariff classification, others the ad valorem percentage criterion, and yet others the criterion of manufacturing or processing operation," according to the World Trade Organization (WTO).2
In other words, it's complicated. WTO trade policy specialist Darlan Martí once used the example of children's pajamas to underscore just how complicated. The pajamas' raw cotton was from Malawi; the thread from Pakistan; buttons from India; and copyright for cartoon character imprinted on them from the U.S. While the fabric, dyeing, printing, and cutting into sleeves, pantlegs, etc. were done in South Africa, the final assembly was handled back in Malawi. What is the origin of the pajamas? "There are many different possibilities," Martí said, depending on the approach applied in the market being entered.3
Meanwhile, rules of origin are landing back on negotiating tables across the world, as countries expect to forge new FTAs and adjust existing pacts at the bilateral and regional level. "The number of FTAs is growing, and there is a new dynamic … where multiple FTAs may be in effect between two countries requiring businesses to select the appropriate rule set," according to an international trade report from the EY professional services firm.4
Fifty-seven percent of trade professionals surveyed in the EY report had experienced a "rising import content of exports," while 38 percent reported managing five to 10 preferential agreements, and another 33 percent were managing more than 10. Forty-two percent said they have had disputes with customs authorities over origin or FTA eligibility. "Effectively managing trade in a ‘made in world' environment is challenging," the report concluded.5
For businesses involved in import-export trade and global supply chain management, rules of origin are important for four fundamental reasons, Martí said. They can affect a company's ability to enter a market, for example, if there are limits on the import of certain types of goods from certain countries. They can impact the cost (and competitiveness) of a product in an international traders' target market. And they can influence decisions on where to invest and who to choose as suppliers.
At stake can be the assessment of higher "most favored nation" (MFN) tariffs which, despite the name, apply to most countries, or lower (even zero) "preferential" tariffs, which can apply to countries covered by FTAs. While tariffs have generally been dropping in recent years, the global MFN weighted average tariff for textiles and clothing, as in the pajamas example, was still 14.58 percent in 2015.6 "Virtually all countries in the world have joined at least one preferential trade agreement, under which they promise to give another country's products lower tariffs than their MFN rate," according to the World Bank.7 Procedures for proving origin can also differ at the border, increasing international traders' costs and risk, as well as the potential for fraud, according to the International Chamber of Commerce (ICC).8
Rules of origin and related procedures have become so complex that the ICC and others are calling for action. Among ICC recommendations is that government negotiators streamline rules of origin bilaterally and regionally, aligning wherever possible with the World Customs Organization's (WCO's) existing conventions and the WTO's recently implemented Trade Facilitation Agreement, which aims to expedite the movement, release, and clearance of goods across borders. The ICC also asked the WCO to work with the private sector to develop common procedural standards for customs verification of origin documentation under FTAs.
Ultimately, "the ICC recommends that all parties involved in the development of [FTAs] should consider bilateral or regional trade agreements as interim steps or ‘building blocks' on the path to an eventual agreement at the multilateral level."9 For its part, the WCO held its first Global Origin conference in May 2017, with national delegates concurring on the need to streamline procedures.10
A business report to the G20 Summit earlier this year also addressed the issue, suggesting: "The rules of origin in free trade agreements should be more strongly standardized through precise WTO rules."11 A major WTO meeting is scheduled for December 2017, but the agenda had not been set as of this writing.12
"The subject of the origin of goods traded internationally has perhaps never had a higher profile since the first certificate was issued 118 years ago," the ICC said.13 More products today are "made in the world," with components or other content from multiple countries. More international trade agreements are being forged at the bilateral and regional levels that include different rules of origin. International traders are calling for action to address the increasing complexity in the rules of origin applied to their products as they cross borders around the world.
Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.
1. “Launch of ICC Statement: Business Recommendations on Rules of Origin in Preferential Trade Agreements,” International Chamber of Commerce; https://iccwbo.org/media-wall/news-speeches/launch-icc-statement-business-recommendations-rules-origin-preferential-trade-agreements/
2. “Technical Information on Rules of Origin,” World Trade Organization; https://www.wto.org/english/tratop_e/roi_e/roi_info_e.htm
3. “Introduction to Rules of Origin,” World Trade Organization; https://www.youtube.com/watch?v=jJGCO8y3wcY
4. Making Sense of a World in Motion – A Global Trade Perspective, EY; http://www.ey.com/Publication/vwLUAssets/ey-making-sense-of-a-world-in-motion/$FILE/ey-making-sense-of-a-world-in-motion.pdf
6. “World Product MFN Weighted Average %,” World Bank; http://wits.worldbank.org/CountryProfile/en/Country/WLD/StartYear/LTST/EndYear/LTST/TradeFlow/Import/Indicator/MFN-WGHTD-AVRG/Partner/WLD/Product/All-Groups
7. “Types of Tariffs,” World Bank; http://wits.worldbank.org/wits/wits/witshelp/content/data_retrieval/p/intro/C2.Types_of_Tariffs.htm
8. “Launch of ICC Statement: Business Recommendations on Rules of Origin in Preferential Trade Agreements,” International Chamber of Commerce; https://iccwbo.org/media-wall/news-speeches/launch-icc-statement-business-recommendations-rules-origin-preferential-trade-agreements/
10. “First WCO Global Origin Conference Held in Africa,” World Customs Organization; http://www.wcoomd.org/en/media/newsroom/2017/may/first-wco-global-origin-conference-held-in-africa.aspx
11. “WTO Business Focus Group 2: Market Access, Trade in Services and Investment Facilitation,” World Trade Organization; https://www.b20germany.org/fileadmin/user_upload/documents/BFG2_recommendations_FINAL_logos.pdf
12. “Eleventh WTO Ministerial Conference,” World Trade Organization; https://www.wto.org/english/thewto_e/minist_e/mc11_e/mc11_e.htm
13. “The Future of Origin,” International Chamber of Commerce; https://worldchamberscongress.org/event/the-future-of-origin/