Making rules of trade transparent

In today's globalised production, conduct of international trade doesn't necessarily remain free and fair.

Rules of Origin (RoO) one of the most contentious issues in international trade came back to hold the centrestage in world economy recently. Developed and developing countries were at loggerheads to devise a set of criteria that should allow the trade transactions to settle in an open, transparent and predictable manner. The issue in all seriousness looks much more complex than what really appears. Therefore, it is necessary to look at the issue in detail.

RoO are a set of criteria required to determine the national origin of a product. When a product is wholly produced in one country, it doesn’t invite any controversy or disagreement over its origin. However in current era of globalisation, where more and more products are produced through amalgamation of inputs from different sources and countries, conferring origin to the product has become a difficult task.

In today’s active pursuit of globalisation of production, conduct of international trade in goods doesn’t necessarily remain free and fair, rather confronts many complex challenges in terms of various stages of preparations such as sourcing of materials, tariffs negotiations, labelling requirement, value creation, involvement of technology, etc.

Trade distortions that emanate out of this transaction have invited wraths of many exporters and countries, who have repeatedly expressed in various forums to the WTO to establish a ‘Rules of Origin Agreement’ to determine the origin of the product among members.

This would ensure that their RoO are transparent; that they do not have restricting, distorting or disruptive effects on international trade; that they are administered in a consistent, uniform, and reasonable manner; and that they are based on a positive standard which essentially would mean that they should state what confers origin.

Harmonisation of rules

RoO that are currently active are of two types: non-preferential and preferential. Non-preferential RoO define the origin of goods mainly for statistical purposes and for the application of trade measures such as tariffs, quotas, anti-dumping, countervailing duties, etc. Preferential RoO, which is often more stringent, is defined by members of a preferential trade area to ensure that only goods which originate from one of the member countries benefit from a preferential access at importation.

It’s often non-preferential which is critical and needs to be harmonised. Though technical committee on RoO set up by the WTO has already made some advancement, collective will and efforts of developed and developing countries are needed to make them workable.

What is currently at stake is the opacity in RoOs. It’s not clear as to how RoOs can be implemented on products that are undergoing complex trade transactions. For example, India has always emphasised that globalisation of production has reinforced the need for an early agreement on rules of origin as much of the global production of goods takes place in stages, using materials and components produced in different countries.

This has encouraged the global policy makers to look at the dimension of the ‘last substantial transformation’. There are three prime ways of determining this. First, the change-in-tariff heading test verifies whether the tariff heading of the final product is different from the tariff heading of the input.

Secondly, the percentage check examines whether a minimum of total value addition is achieved with domestic inputs. Lastly, the specified process tests require a product to undergo certain stipulated processes.

Till now, India argues, there is no common understanding among members on what constituted the last substantial transformation at the core of the country of origin status as different members are using their own criteria to determine the source of goods of multi-country origin — where more than one country is involved in the production process.

Indian textile exporters, for example, are forced to adopt one set of rules for supplying to the US and another set for exports to Canada or other countries because of absence of a harmonisation of non-preferential rules of origin.

The multiplicity of rules has given rise to a situation where the same product could be required to meet the value added criterion in one country, manufacturing or processing operations criterion in another and tariff change criterion in a third country.

RoO should not be used as a trade policy instrument having restrictive or disruptive effects on international trade, instead should be seen as a device to promote trade. The expected benefit lies in providing certainty to the origin of product to realise full potential of world trade.

(The writer is with Indian Institute of Foreign Trade, Delhi)