Councils Details

Draft CACCI statement on Rules of Origin in Preferential Trade Agreements
(This document is designed to align with the ICC Policy Statement on Non-Preferential Rules of Origin document, so that they may form a set of policy documents)

Due to the limited progression of the Doha Round of multilateral trade negotiations, bilateral and regional Preferential Trade Agreements (PTA) have become a short-term alternative to progressing free trade between countries, with over 400 PTA treaties presently in existence. Recent years have also seen the negotiation of ‘megaregional’ PTA, covering many major trading countries, including the Trans-Pacific Partnership Agreement (TPP) and the Regional Comprehensive Economic Partnership Agreement (RCEP).

Because each PTA has its own rules for use (Rules of Origin), the growth in these types of treaties has inadvertently resulted in increasing complexity of market access procedures. When trading goods and services across PTA trading zones, traders now experience an exponentially growing regulatory burden from PTA in aggregate. However, the principles contained in the World Trade Organisation’s (WTO) recently concluded Trade Facilitation Agreement (2013) call for reduction of these types of global non-tariff barriers. This is why the ICC calls on PTA negotiators to wherever possible seek the harmonisation of Rules of Origin in PTA with provisions contained in the World Customs Organisation’s (WCO) Revised Kyoto Convention (2006) and the principles contained in the WTO’s Trade Facilitation Agreement (2013).

PTAs contain rules for exporters along with product-specific rules and compliance arrangements in a ‘Rules of Origin’ chapter. The phrase ‘Rules of Origin’ is somewhat misleading, since aside from containing the criteria for determining the origin of the goods, the chapter most importantly contains the methods by which exporters are to claim their tariff concession from foreign Customs (ie the way exporters ‘use’ the trade treaty).

Unfortunately, procedural requirements in trade treaties are sometimes inconsistent with customary international trade documentation for ordinary trade occurring outside the trade treaty. This leads to confusion, and yet another set of paperwork for traders to learn about that is specific to the given treaty. With the growing importance of supply chains and multiple movements of goods through trade zones, such needless inconsistency between trade treaty areas and normal trade areas risks an obstruction to trade, rather than promoting trade facilitation. Negotiators must be aware of the commercial realities, and not invent duplicate administrative systems for each vertical negotiation.

While the constrained negotiation of trade treaties focuses only on the bilateral trade occurring between two countries or only regional trade, the commercial world rarely works in this manner. Companies seek inputs from multiple countries before the ‘last substantial transformation’ of the good, which provides the final ‘origin’ of the good for trade preference purposes. These companies may then supply these goods to multiple buyer nations, requiring compliance on a shipment-specific basis with the needs of market entry for each market. If each market has unique procedural requirements that further branch into multiple means of entry such as MFN or trade treaty zones, then companies need to know and understand the value in each option, in each market, across numerous treaty and non-treaty (general trade) areas. The more complex and numerous these rules and procedures are, the higher the costs to business. If these costs exceed the benefits of using a given trade treaty, companies will avoid the treaty and utilisation of tariff concessions will be low.

This is why better horizontal global cohesion of PTA rules of origin is needed as a goal wherever possible, to improve uptake and improve the later harmonisation of global trade under a Doha-style multilateral agreement. The commercial business interest in doing so is in accessing the benefits and complying with the terms of each treaty in the most efficient way. To this end, standardisation of procedural requirements across PTA is trade facilitating. If producers and manufacturers know that by following procedures to obtain tariff concessions the same way each time they develop a product, regardless of the treaty, then they may predict the requirements with certainty. Business
knows tariff concessions may differ depending on the destination country, but the procedures to access these tariff concessions should be as similar as possible. This means the process can be repeated and then automated, which reduces costs for repetitive processes.

The use of harmonised starting points from which to commence negotiations for trade agreements – for example standards endorsed by the WCO in the Revised Kyoto Convention (2006) reflecting existing business practices – should be utilised by all PTA negotiators to aid in improving the streamlining of international trade and ultimately reduce costs for business and consumers, rather than the current trend of divergent and burgeoning regulatory requirements. We believe that the problem of aggregate complexity in differing treaties can be overcome through the acceptance of a set of standard definitions and procedures for all border crossing and market access – such as those on offer through the WCO’s Revised Kyoto Convention (2006).

The costs of border crossing can be a sizable component of the final built-up costs to production costs for manufacturers, and ultimately transfers to end consumers. Complex market entry requirements mean that companies need to have staff or advisers analysing their market entry systems. Internal staff at each level of the transaction process must understand these processes so they can take advantage of the entry requirements. Business costs are reduced when these systems are predictable and repeatable. Divergence of procedures fails to utilise tried and tested simple systems that were in place before the agreement, and are presently utilised in general trade. Creating novel and divergent regulatory requirements for exporters and producers increases regulatory red tape for business.

CACCI’s concerns are founded on the experience of chambers of commerce from across the Asia Pacific region, whose members are exporters and importers. Our position is based on the practical questions arising from the type of issues businesses face every day when engaging in trade, and how an exporter and an importer takes advantage of the preferences conferred in a trade treaty. This leads to questions such as:

• How does a company make a claim for preference under a PTA?
• What happens to the exporter when a valid claim for preferential tariff treatment is unfairly rejected?
• Who represents the exporter in a dispute?
• What are the agreed timeframes for commercially responsive dispute resolution of the exporter’s claim for preference under a PTA, so that additional costs are not incurred?
• Who bears liability for costs and loss if the exporter’s claim under a PTA was perfectly valid but an administrative oversight causes a delay?
• What prevents non-party goods from being claimed under the PTA?
• What prevents criminal networks from seeking to utilise the PTA?

Trade documentation and procedures have, over centuries, become international customary standards recognised by international practice, precisely because they answer these questions. Creating a new species of procedures and standards in each new trade treaty, however, makes processes opaque for business engaged in international trade and exposes commercial actors to greater risk when conducting or financing trade. It also raises the possibility of fraudulent behaviour that will be harder to monitor, and provides avenues for non-party goods entering the trade zone, raising also the possibility of reputational risk for the producer.

If bilateral or regional trade treaties are interim measures or ‘building blocks’ on the path to an eventual agreement at the multilateral level, then procedures for traders contained within these types of agreements must be harmonised in the horizontal sense in order to facilitate trade now, and under a future multilateral deal. It is essential that PTA negotiators do not continue to repeat the mistakes of previous negotiations in developing yet further divergent sets of rules and administrative procedures.