RULES OF ORIGIN

Direct Shipment Requirements on Preference Use by LDCs Kills Trade

· Only Half the LDC Shipments Get the Benefit in Land Locked Countries

· China Emerges as Biggest Defaulter

The impact of product rules of origin on the use of tariff preferences by least developed countries (LDCs) was the focus of discussion at a meeting of the Committee on Rules of Origin on 17-18 October. WTO members examined the impact of direct consignment requirements on the use of tariff preferences by LDCs and whether they are the cause of low utilization rates. Members also discussed the use of tariff preferences in China and reviewed a joint proposal for enhancing transparency in non-preferential rules of origin.

Rules of origin are the criteria used to define where a product is made and are important for implementing other trade policy measures, including preferences in favour of developing countries or LDCs. Concern about how these rules may be making it more difficult to utilize preferences was a reason WTO members adopted the 2015 Nairobi Decision on Preferential Rules of Origin for LDCs, which set out, for the first time, a set of multilaterally agreed guidelines to help make it easier for LDC exports to qualify for preferential market access granted by WTO members.

A WTO Secretariat paper presented to the committee last May found that LDCs were often unable to fully use preferences even when their exports were subject to simple origin requirements. For example, 82% of imports of fruits, vegetables, and plants by preference-granting members from LDCs did not receive any tariff preference, despite being eligible for such treatment. Other factors, such as certification of origin and/or transportation requirements, could explain under-utilization, the Secretariat noted.

Impact of direct consignment requirements on preference utilization by LDCs

The WTO Secretariat presented members at the October meeting with a further paper (G/RO/W/187) looking at what impact direct consignment (also known as direct shipment or direct transport) requirements may be having on the use of tariff preferences by LDCs. One common requirement in preferential trade agreements is that goods being granted preferential market access must be transported directly from the country claiming preferential treatment to the country granting preferences.

The Secretariat report looked at what the impact of these requirements might be, using the difference in utilization rates between landlocked LDCs (where exports often pass through third countries) and those with sea access as an indirect indicator. In theory both groups should have an identical or similar ability to utilize trade preferences if direct consignment obligations have no impact on preference utilization.

However, the report found a big difference in utilization rates: over 50% of all imports from landlocked LDCs do not receive any tariff treatment (52%) despite being eligible for preferences, more than double the under-utilization rate for LDCs with sea access (21%). Similar results were found even when only one product category was examined. For agricultural products subject to identical origin criteria, under-utilization is higher for landlocked LDCs (29%) than for LDCs with sea access (14%), giving a clear indication that transportation requirements have an impact on preference utilization.

In a separate paper presented to the committee meeting (G/RO/W/191), the LDC Group concurred with the notion that direct shipping requirements were a major hindrance to the use of tariff preferences.

Speaking on behalf of the group, Cambodia noted the majority of preference-granting members require documentary evidence of non-manipulation during transit in the territory of a third country and that the goods have not entered the customs territory of the third country. Such documentary evidence is not easy to obtain, or it may entail a significant cost. In such cases it is simply impossible to comply with such demands.

A number of WTO members commented on the two papers and agreed to continue to discuss these matters in the committee to identify specific aspects of these requirements which may need to be relaxed.

Utilization of China's tariff preferences by LDCs

Tanzania, for the LDC Group, presented its second analysis of the use of preferences by LDCs in a preference-granting member, following the group's initial report on Switzerland last spring. The presentation on China showed low usage of preferences for the majority of tariff lines and wide variations in utilization rates among LDCs, with the result that a significant amount of some LDC exports to China are being charged most favoured nation (MFN) tariff rates instead of receiving duty-free treatment. Tanzania said the purpose of the presentations was not to accuse any particular member but to look and see how utilization rates could be improved.

China replied that it was ready to work with LDCs to see what the reasons for the low utilization rates were but noted that utilization of tariff preferences under separate free trade agreements might be the cause, particularly for South Asian and Southeast Asian LDCs. In addition, more than 10 African LDCs, including Tanzania, Ethiopia and Mali, were enjoying preference utilization rates above 80% on their China-bound exports, China said.

Enhancing transparency in non-preferential rules of origin

Switzerland once again presented a joint proposal, now on behalf of 14 WTO members, for enhancing transparency in non-preferential rules of origin (G/RO/W/182/Rev.1). The idea is to set out a template that WTO members could use to notify rules of origin that they use in the application of most-favoured-nation treatment and other non-preferential commercial policy instruments, as well as any other practices with respect to certification of origin and other mandatory documentary proofs of origin for non-preferential purposes.

A number of the proponents took the floor to underline the benefits of the template. One proponent noted that non-preferential rules of origin cover a significant portion of trade and apply to all members, thus making this an important initiative. However, one member said it still had concerns about the proposal and the additional reporting requirements it would impose on overburdened administrations in developing countries.

The chair asked those expressing concerns to submit these concerns as amendments to the text of the joint proposal in order to facilitate further consultations on the issue.

Presentation of the Rules of Origin Facilitator

The meeting opened with the presentation of the new Rules of Origin Facilitator, an initiative with the International Trade Centre and the World Customs Organization which will enable firms to take fuller advantage of benefits under free trade agreements and preferential trade arrangements by helping them comply with product rules of origin requirements. More information on the initiative is available here.