Nhóm-2- -Rule-of-origin-in-international-trade Kinh tế quốc tế PDF

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FOREIGN TRADE UNIVERSITY HIGH-QUALITY PROGRAM OF INTERNATIONAL BUSINESS ECONOMICS ====000====

INTERNATIONAL ECONOMICS GROUP RESEARCH

RULES OF ORIGIN IN INTERNATIONAL TRADE

Student Group: 2 Class: Anh 04 – CLCKT – K57 Module title: International Economics Module Convenor: Dr. Nguyen Binh Duong

Ha Noi, 11/2019

GROUP MEMBERS Number 1 2 3 4

Full name Bach Khanh Linh Le Thu Nga Nguyen Minh Ngoc Nguyen Hoang Linh Trang

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Student ID 1810150011 1810150022 1810150025 1811150131

TABLE OF CONTENTS INTRODUCTION ............................................................................................................... 4 LITERATURE REVIEW ................................................................................................... 5 INTRODUCTION TO RULES OF ORIGIN..................................................................... 7 1. Definition and classification ........................................................................................ 7 2. Roles of Rules of Origin in international trade ............................................................ 7 3. Origin criteria .............................................................................................................. 8 a. Wholly obtained criterion ......................................................................................... 8 b. Substantial transformation criterion .......................................................................... 8 4. Origin certification and verification .......................................................................... 10 a. Certification: .......................................................................................................... 10 b. Verification: ........................................................................................................... 11 THE SIGNIFICANCE OF RULES OF ORIGIN IN INTERNATIONAL TRADE....... 12 1. Introduction ............................................................................................................... 12 2. The significance of Rules of Origin ........................................................................... 12 a. ROO reduce costs of doing business in international trade ...................................... 12 b. Rule of Origin as trade policy instrument ............................................................... 13 c. ROO expand foreign direct investments (FDI) and export processing zones (EPZs) 13 d. ROO circumvent trade remedy measures ................................................................ 13 e. Minor rule amendment requires a big operation change .......................................... 14 3. Conclusion ................................................................................................................. 14 THE HINDRANCE OF RULES OF ORIGIN IN INTERNATIONAL TRADE ........... 15 1. Introduction ............................................................................................................... 15 2. ROO as International Trade Hindrances................................................................... 15 a. ROO as protectionist apparatuses ........................................................................... 15 b. ROO rules of origin triggers trade diversion ........................................................... 16 c. Trade – diverting ROO lead to a loss in welfare ...................................................... 17 d. The harmonization of non-preferential and preferential ROO ................................. 17 THE RULES OF ORIGIN IN ASEAN FREE TRADE AGREEMENTS ....................... 19 1. Reforms in ASEAN FTA Rules of Origin: ................................................................. 19 2. Comparison of ROOs in ASEAN and ASEAN + 1 FTAs ........................................... 21 CONCLUSION ................................................................................................................. 23 REFERENCES .................................................................................................................. 25

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INTRODUCTION In the modern world, countries all over the world are becoming more and more interdependent. With the establishments of many trade unions and associations, countries can now benefit from the trade agreements they participate in. However, each country has a different level of advantages and duties. As the origin of goods plays an important role in determining this level, specific rules have been set to remedy the problems regarding the good’s origin. These rules are called “Rules of Origin”. Since its approval, Rules of Origin have been widely implemented in many agreements and now are becoming topical than ever. Understanding the importance of Rules of Origin, in this study, we want to focus on providing knowledge about these rules: what it is, how it is classified and how to determine the origin of a product. Moreover, like any kind of provision, Rules of Origin still has merits and demerits. In this study, we can have a thorough look at these rules and then come up with a better solution for any problems. Also, this study will mention the implementation of Rules of Origin in ASEAN so that we can obtain a deeper insight into the provision and its real situation. Hopefully, our study can enrich your economic knowledge and provoke your interest in international trade and policy. Thanks for your time and we would appreciate it if you could leave any comments or ideas.

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LITERATURE REVIEW Studies on Rules of Origin have been undertaken by not only researchers with political background but also economists, most of these concerned with measuring impacts of Rules of Origin on trade flows. Others have noticed that approaches to trade facilitation studies can be used to address certain administrative issues of ROO (Harris & Staples, 2009; Izam, 2003; James, 2006; Messerlin & Zarrouk, 2000). Estevadeordal et al. (2007) summarise two key aspects of the ROO that were the subject of their research: restrictiveness and divergence. While ‘restrictiveness’ refers to the aspect of ROO that restrict trade under FTAs, ‘divergence’ denotes the divergent ROO that differ across FTAs and products within an FTA.Though few studies embrace other issues concerning ROO, most studies have been devoted to assessing these two aspects. The complexity that results from the diversity of ROO has been examined frequently based on the estimated cost of complying with such rules (Anson et al., 2003; Anson et al, 2005; Carrère & De Melo, 2004; Estevadeordal et al., 2007). Anson et al. (2003,) suggest that the compliance costs of ROO largely negate preferential access under FTAs, and that the compliance costs of ROO amount to 6% of a product’s export value, which is higher than the average preferential margin of 4%. Carrère and De Melo (2004) argue that, to compensate for the production and compliance costs caused by the restrictiveness of ROO, about 10% of the preference margin would be needed for NAFTA. Cadot, Carrère, De Melo and Portugal-Pérez (2005) estimate that the border price of Mexican apparel product has risen 12% to compensate for the cost of complying with NAFTA’s ROO. Cadot, Carrère, De Melo and Tumurchudur (2006) estimate the trade-weighted compliance costs at approximately 8.0% for the PanEuropean Union (PANEURO) and 6.8% for NAFTA. The fundamental objective of ROO is often identified as the checking of freeriders who ‘seek to enjoy the benefits of the FTA without paying the costs associated with FTA membership’ (Boadu & Wise, 1991). For this reason, researchers often suggest that the origin certification and verification procedures under the ROO be made integral to the administration of ROO. Izam (2003), Brenton and Imagawa

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(2005) and Estevadeordal et al. (2007) conclude that the procedures for exporters or producers to obtain the certificate often require expensive accounting and inventory systems. The administrative burden in this procedure, they warn, may result in inadequate administrative cooperation, faults, and fraud in the certification of origin process. Manchin and Pelkmans-Balaoing (2007b, p. 14) indicate that the costs and delays in obtaining certification and in proving conformity with their origin requirements depend largely on the stringency of the verification procedures. Harris and Staples (2009, p. 7) suggest that the primary dilemma in this regard is ‘balancing the rights and obligations of the producer and the importer’. While the producer has sufficient knowledge of the origin of their product, the importer is responsible for the payment of tariffs. Therefore, if the producer, either by fraud or by negligence, provides faulty origin details about their product, the importer is liable for non-paid tariffs and penalties. Boadu and Wise (1991), Cantin and Lowenfeld (1993) and Harris and Staples (2009) emphasise the fact that the administration of ROO often results in considerable uncertainty for companies, and this can occur under circumstances in which ‘procedures are unclear, customs officials lack capacity, or legal provisions are incomplete’ (Harris & Staples, 2009). In summary, studies have found the restrictiveness, complexity (or divergence), compliance costs, and uncertainty arising from the administration of ROO to be factors that influence the full use of FTAs. However, in this report, we are going to have a brief look over the landscape of Rules of Origin and specific case of ASEAN is given at the end of the report. Abbreviation: ROO: Rule of origin

WTO: World Trade Organization

RTA: Regional Trade Agreement

MFN: Most Favoured Nation

FTA: Free Trade Agreement

PsROO: Product-specific Rules of Origin

CU: customer union

GSP: Generalized System of Preferences

AD: Anti-dumping

CTC: Change in Tariff Classification

CV: Countervailing

VC: Value Content

ICC: International Chamber of Commerce

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INTRODUCTION TO RULES OF ORIGIN 1. Definition and classification Rules of Origin (ROOs) are specific provisions that are established in the agreement to determine the origin of goods (Medalla, Balboa, 2009, p.2). Rules of Origin are usually used in cross - border trade, especially free trade agreements (FTA). There are two types of Rules of Origin: preferential rules of origin and non-preferential rules of origin. - Preferential rules of origin are used to determine whether the good qualifies for the preferential tariff offered under the agreement. They are a set of criteria that the good needs to comply with in order to be considered originating in the territory of the trade agreement. The goods are checked against these criteria to establish whether they can be considered originating in a country when exported to an FTA partner. - Non-preferential rules of origin apply to goods traded between countries not linked by any preferential trade agreement (in the absence of any preferential agreement or when the goods are not covered by an existing FTA). It does not lead to a reduction in tariffs but is used for a number of other purposes such as quotas, anti-dumping and countervailing duties. It is also used for trade statistics and for the purpose of labelling. 2. Roles of Rules of Origin in international trade - Rules of Origin allow the application of trade measures to the right subject-matters. For example, when country A wants to impose an import tariff for apples from country B. There may be 3 cases: (1) The apples are from country B, which means country A can apply the measure properly; (2) The apples are from country C and just transit through country B, which means country A cannot impose the tariff on these apples; (3) The apples are from country B but transit through country C, which means country A should impose the tariff. To differentiate between these cases, Rules of Origin are inevitable in order to assure the right implementation. - Rules of origin are also used in trade statistics which is very important for countries to keep track of their trade balance. - In FTAs, Rules of Origin are used to differentiate between goods originating in contracting parties and those originating in third countries. Such differentiation serves

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two purposes: (1) it allows the importing party to determine whether a product is eligible for preferential treatment under the FTA at hand; (2) it avoids the scenario where exports from third countries enter the FTA via the member with the lowest external tariff (i.e., trade deflection). 3. Origin criteria As Rules of Origin plays an important role in determining the accuracy of trade policies, it focuses on the criteria that differentiates between products from different countries. There are 2 approaches to determine the country origin of goods: wholly obtained (or produced) criterion and substantial transformation criterion. a. Wholly obtained criterion Wholly obtained or produced goods are defined as natural products in a country or products made from entirely domestic inputs in a country. They are minerals extracted from the soil, animals born and raised in the country and their products, plants harvested in a single country. These goods are more easily identified and have clear HS nomenclature and coding. b. Substantial transformation criterion For non - wholly obtained goods, there are 3 common ways to determine the country origin of goods: the value-added measure (VA), the tariff heading criterion (CTH), and the specified processes (SP) test. These methods can be used singly or in combination based on specific cases.

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Rules

Content

Merits

Demerits

Value - added A good is considered

- Simple and precise

- Costly and

measure (VA) substantially transformed when

- Suitable for

sophisticated due to

the value added of a good

addressing certain

differences in

increases up to a specified level

goods which have

calculation methods,

expressed by ad valorem

been further refined

fluctuation in

percentage. The value added

or value-added

values…

criterion can be expressed in

- Having implicit

two ways, namely a maximum

bias against low-

allowance for non-originating

wage, capital-scarce

materials or a minimum

countries

requirement of domestic content. Tariff

A good is considered

- Simple and

- HS is not always

heading

substantially transformed when

predictable

suitable for origin

criterion

the good is classified in a

determination

(CTH)

heading or subheading

purposes

(depending on the exact rule)

- Documentary

different from all non-originating

requirements are

materials used.

difficult to comply with.

Specified

A good is considered

processes (SP) substantially transformed when test

- Technical and

- Modifications

objective

needed to keep up

the good has undergone specified

with technological

manufacturing or processing

changes and new

operations.

products

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There are other tests used for different products. Some FTAs use the so-called “hybrid tests”. One type of this test requires a combination of two (or more) criteria; the other type provides a choice among two (or more) criteria. There is no standards and countries can choose the appropriate approach based on different partners. Apart from the core origin criteria, there are also general rules to determine the economic nationality of products. Examples of these are De Minimis and cumulation principle. De Minimis principle is a provision that allows a small amount of nonoriginating materials to be used in the production of the good without affecting its originating status. The provision acts as the relaxation of the rules of origin. The other principle - cumulation is a provision which allows to consider goods obtained in as well as processing taking place in one FTA member country as originating in another. 4. Origin certification and verification Certification and verification are also important when applying rules of origin. Although a product can fulfill all the criteria, they may not be entitled to preferences unless they comply with procedural requirements. These requirements can differ between trade agreements but are clearly declared, so participating countries must follow in order to gain the benefits. Certificate of origin is one of the most important requirements for a consignment. Many agreements provide a value threshold under which the country origin of the goods cannot be certified. a. Certification: - This is usually the responsibilities of exporters but sometimes the producers or importers. - Firstly, the trader should classify the product under appropriate HS code in order to look up the rules of origin applicable for this product. Then, it is necessary to verify if the products meet the rules of origin. - Another important step is to obtain the suppliers’ declarations as a pROOf. - Once the exporter has verified that the good meets the relevant rule of origin, a certificate of origin needs to be provided. If self - certification is permitted, the trader only needs to fill out the information relating to the consignment on a prescribed form (if any), and declare that the goods listed therein fulfill origin criteria and other requirements.

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- However, if self-certification is not allowed, a trader must apply for a pROOf of origin issued by a certifying authority, which is normally the chamber of commerce or an agency of the ministry of trade or commerce. To obtain such document, the exporter or the producer will submit various documents relating to the production or manufacturing of the goods. The competent authority will examine the documents, and pay visits to an applicant's premise to verify if necessary, and certify if the goods are compliant with the origin criteria set out in the trade agreement at hand. b. Verification: - When the consignment arrives at the port of entry in the importing country, the pROOf of origin will be submitted to the customs authority. To facilitate trade, sometimes a physical submission is not required - the importer or its representative may simply submit the document number and/or an electronic copy thereof. The customs' acceptance of the pROOf of origin will decide whether or not the consignment is entitled to preferential treatment. - In case there arise some doubts, the customs authority may resort to several measures, e.g. examining the original pROOf or origin or verifying the information on the document and the goods actually imported. The customs may require the trader to provide more information, or even contact the issuing authority in the exporting country for further clarification.

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THE SIGNIFICANCE OF RULES OF ORIGIN IN INTERNATIONAL TRADE 1. Introduction The basic role of Rules of Origin is the determination of the economic nationality as opposed to the geographical nationality of a given good. There are several mandatory legal or administrative requirements to observe when goods are traded on the international market. This is necessary for the implementation of various trade policy instruments such as imposing import duties, allocating quotas or for the collection of trade statistics. The determination of the country of origin is the last step in the customs clearance procedures, the first steps being the classification of the goods and ...