V. The Future of the Global RoO Panorama: Toward a De Jure Harmonization
Regional Cooperation (SAARC), Andean Community, and CACM, will be modified to permit cumulation also between Andean Community and CACM members.
Second, the Western Hemisphere will likely become covered by a NAFTA-type RoO regime as a result of the Free Trade Area of the Americas-process. Much like in the case of PANEURO, the NAFTA RoO model—which, after all, is not dramatically different from that of the PANEURO model—will undoubtedly affect the shape of RoO regimes in the Asia-Pacific region, given that it is the NAFTA-model adherents (Canada, Chile, Mexico, and the United States) that are the most enthusiastic Western Hemisphere nations to build cross-Pacific FTAs. The Chile-Korea FTA that incorporates NAFTA-type RoO yet is somewhat less complex and restrictive may well presage the type of RoO resulting from the melding of the NAFTA model with the interests of East Asia’s thus far foremost engines of inter-continental integration—Japan, Korea, and Singapore.
Third, further integration and renegotiation of prior PTAs in Asia, Africa, and the Middle East can well spawn RoO of greater selectivity, as evinced by SADC and JSEPA.
Although such selectivity would likely follow the types and levels of sectoral restrictiveness of RoO in place in Europe and the Americas, the final outcome will likely resemble JSEPA RoO or CACM’s revised RoO, with the relatively general change of heading RoO (or VC) being interspersed by some exceptions, combinations with VC (or change of heading), and technical requirements, albeit to a more moderate extent than in the PANEURO or NAFTA models.
In sum, the expanding geographical reach of the PANEURO model; the convergence toward a single FTAA RoO regime in the Americas; the rise of the inter-continental FTAs between European and Western Hemisphere partners on the one hand, and partners in other regions, on the other; as well as third parties’ entering in PTAs with one another can be expected to lead to the application of two to three relatively similar RoO regimes on the global level. Indeed, as seen above, the main poles of RoO regimes, NAFTA and PANEURO models, come out rather similar when abstracted to the level of sectoral restrictiveness and regime-wide facilitation index. This potential de facto harmonization dynamic, along with (1) the harmonization of the non-preferential RoO at the WTO, and (2) the fact that many RoO regimes particularly in the Asia-Pacific and African PTA theaters are thus far relatively simple, with the same RoO often applying across the board, could facilitate eventual convergence toward a single global preferential RoO regime.
Such an outcome of global RoO convergence would be particularly beneficial to the
“spoke” countries that implement divergent RoO regimes across their FTA partners, rather than applying a single, uniform RoO regime in operations across partners, as is done by the EU hub and, within the Americas, by the US and Mexico hubs.
ii. Non-Preferential RoO: Awaiting the Final Push for Harmonization
The rapid evolution of the preferential RoO panorama stands in contrast to the glacial progress of the non-preferential RoO negotiations. Although the painstaking and laudable process of tackling the RoO of the about 5,000 products defined in the Harmonized System at the 6-digit level is today nearing in its final stages, the prospects for a rapid conclusion are dimmed by the fact that the remaining issues are also the politically most sensitive ones. The main sticking points as of June 2003 can be divided into three broad
categories: (1) issues going to the very heart of the fundamental differences between the WTO members in the conceptualization of some product-specific RoO, as reflected by the differences between their preferential RoO regimes particularly in machinery; (2) broader differences in trade policy concepts between the members, such as issues pertaining to sanitary and phytosanitary standards, the exclusive economic zone, and trademarks; and (3) disagreements over the application of RoO in anti-dumping actions.27
First, the NAFTA and PANEURO models diverge on the RoO for assembled machinery, electrical equipment, vehicles, airplanes, and ships. The NAFTA model assigns basically all RoO a CTC component, whereas the PANEURO model leaves a quarter of RoO without CTC and bases such RoO on a stand-alone VC (or TECH). This difference is particularly prominent in machinery. The United States favors CTC and/or TECH as the most appropriate types of RoO in machinery, while the EC supports a RoO based on value added. Neither type of RoO is without faults. The VC rule is difficult to implement particularly in complex products made of parts from several sources; it also provides for relatively high degrees of subjectivity by the importing country customs when verifying origin. Meanwhile, the CTC rule is straight-forward to implement and thus reduces the margin for administrative error and the likelihood that the implementation of RoO becomes politicized. However and as noted above, CTC, if implemented at the level of tariff heading, is nearly impossible to meet in many machinery products given that the parts and the final good inherently originate from the same tariff heading. For its part, TECH is criticized for lacking clarity and transparency.
Besides assembled industrial products, there are several other contested sectoral RoO involving agricultural and industrial products alike, first and foremost pizzas, refined vegetable oils, fruit juices, wines, cement, pharmaceuticals, leather, and iron and steel.
The main issues at stake on these front are two-fold: (1) the type of processing or manufacturing that suffices to confer origin; and (2) the extent to which a given country’s input share in a final product suffices to assign origin to that country and not others whose materials are used in the product. The former is the most commonly disputed question;
however, the debate on some products such as pharmaceuticals involve both issues.
The second challenge facing the non-preferential talks concerns the relationship of RoO to other international trade policy instruments such as sanitary standards and trademark often governed by their own WTO agreements. There are three main issues. One, the definition of RoO will have implications to the application of many other international trade policy instruments; thus the beneficiaries of the other agreements will have a stake in the harmonization process. Two, RoO negotiators are up against the major task of making RoO as closely compatible with the other WTO agreements as possible. Three, movement on the RoO front can be contingent on movement on issues larger than RoO. There are several such broader issues:
- Trademarks are protected as intellectual property by the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). One of the key issues surrounding trademarks and RoO concerns coffee. Colombia is particularly insistent on its trademark
“100% Colombian Coffee”; other coffee producers, such as Brazil, oppose the 100% rule
27 The following draws on interviews with WTO and WCO officials and on Thorstensen (2002).
on coffee due to producing blends. This poses a challenge for reconciling harmonization work with the TRIPs Agreement
- Geographic indications, also covered by TRIPs, affect RoO particularly in wines and liquors. As on trademarks, RoO would have to be made compatible with TRIPs.
- Origin marking requirements will be affected by the how origin is defined on the RoO front; yet, the marking requirements tend to be stricter than RoO. Although the purposes of origin markings are distinct from the purposes of RoO, the application of the two sets of rules becomes problematic if they conflict.
- Export subsidies that encourage eligible producers to import raw materials, process them, and subsequently re-export them, subsidized, to the raw material producer countries—a practice that undercuts domestic producers’ market share in these countries.
The issue is particularly pertinent to refined sugar.
- Sanitary and phytosanitary (SPS) standards. The SPS Agreement stipulates that the health standards for food products should be defined in ways that would not create new barriers to trade. The key question is how to comply with this provision in a world where a given food product may contain inputs from various different countries with differing health standards—and differences in the uses of chemicals, antibiotics, hormones, and genetically modified seeds. Although the objectives of the SPS Agreement and the ARO differ, their provisions should be compatible with each other.
- Codex Alimentarius defines the international norms for food products, informing consumers of the ingredients and processes involved in the production of the final product. It basically defines origin on the grounds of processing. However, the RoO negotiations will complicate the labeling requirements, as they have given rise to several proposals to define origin especially for meat products, such as on the basis of country where the animal was born, raised, or slaughtered, or where the meat was processed.28 - Disagreement over the exclusive economic zone (EEZ) in the affects origin definition for fish products. While all countries agree that fish caught within 12 nautical miles from the shore of a country is accorded the origin of that country, the origin of products obtained from the EEZ extending 200 nautical miles from a country’s coast is disputed. Most developing countries favor RoO that confers origin to the country in whose EEZ the fish was caught, while the EC supports a RoO that determines origin of fish caught in the EEZ by the origin of the vessel.
Another broad issue complicating RoO talks is country-specific textile quotas, whereby proving and claiming origin is crucial for obtaining a share of the quota. However, the abolishing of textile quotes in 2005 under the Multifiber Agreement (MFA) will relegate non-preferential RoO in textiles to much reduced importance, as no longer will countries require to prove origin with the purpose of accessing a quota.
28 Moreover, that consumers have recently become more demanding of the information on the origin of meat and the type of processing that can be employed will likely have important implications to the Codex and the definition of RoO alike (Thorstensen 2002).
The third and perhaps the most important question holding up the harmonization process revolves around application of RoO in anti-dumping investigations. ARO states that non- preferential rules are to be the basis for antidumping actions. However, some member countries, such as the United States, Korea, and Japan, argue that the calculation of the margin of dumping—the wedge between the price of the exported good and its value in the domestic market—as per the Agreement on Anti-Dumping is based on the concept of exporting country and not on the country of origin. Should this concept be employed, the determination of origin would be unnecessary: the final exporter of a good that has passed through production in various countries on its way to the importers’ market would be the subject of antidumping investigations by the importer. However, since countries would under this notion be able to use their own concept of origin for antidumping investigations without considering the harmonized RoO, they would also be able to define “exporter” in broader terms than allowed by the multilateral non-preferential rules, and hence target every country through which a good has passed with the same antidumping investigation—rather than targeting only the country that RoO define as the country origin. Applying harmonized RoO in anti-dumping actions is resisted also because of the changes that this would require the member to make in their respective domestic anti- dumping legislations.
A related problem is circumvention of anti-dumping actions. It takes place when an exporter, in an effort to circumvent an antidumping measure by an importer, exports dumped components to the importer country’s market and produces the final good within the borders of the importer. Alternatively, the exporter ships dumped goods to a third country and proceeds to export from the third country to the importer, thus subjecting the third country to antidumping action by the importer, rather than being itself the subject.
Harmonized RoO would allow for resolving numerous cases of circumvention, particularly of goods shipped from Asia to the US or EU markets, and help deter anticircumvention activities (Thorstensen 2002). However, that RoO would do so also gives rise to opposition to harmonizing them.
In sum, that the non-preferential RoO continue contested still today, eight years after the harmonization work was launched, attests to the complexity of interests seeking to affect the definition of origin around the world. Although the CRO has been able to define a RoO for most products, it has been compelled to send the most complex and politically sensitive pending issues—ones that cannot be resolved at the technical level—to the highest instance of the WTO negotiations, the General Council, in order for the member state ambassadors to reach a political solution. Besides raising the profile of RoO talks, various ways are being envisioned at the WTO to facilitate the resolution of the pending issues. The first is to simply devise ambiguous language that leaves some room for subjective interpretations yet establishes an effective regulation. Two, the difference between the EC and the United States in RoO in machinery can be solved by adopting both types of rules as interchangeable alternatives to govern a given product. Third, the Doha Round could help engender solutions to the bigger issues hampering the finalization of the harmonization program, such as antidumping and the definition of trademarks.
Fourth, RoO are a particularly prominent area for compromises and logrolling: negotiators can achieve gains in some sectors by yielding in others. A clear prioritization of issues by each member state would help produce a productive give-and-take bargaining process.
B. Harmonizing Preferential RoO: A Boost to Open Regionalism i. Problems with the Multi-Regime RoO World
Less well-known than the harmonization of non-preferential RoO are ARO’s provisions on preferential RoO enshrined in the Common Declaration with Regard to Preferential Rules of Origin. The declaration spells out the intent by the ARO signatories to bring also preferential RoO under a harmonization program and use the harmonized non-preferential RoO as the blueprint in the process. Thus far, however, preferential PTA RoO have fallen under the responsibility of the WTO Committee on Regional Trade Agreements rather than being dealt with by the CRO. For their part, GSP RoO are the responsibility of the Committee on Trade and Development.
To be sure, some might argue that the entrenchment of the preferential RoO regimes since the mid-1990s, the ostensive de facto convergence in RoO regimes, and the overall lowering of tariffs around the world have made harmonization of non-preferential RoO increasingly irrelevant. However, we posit that there are two particularly compelling reasons for pursuing the harmonization of preferential RoO.
First, non-preferential RoO, if used as the benchmark for harmonizing preferential RoO, are, as seen above, less restrictive and complex than any of the main RoO regimes. In forthcoming work, Estevadeordal and Suominen seek to estimate the impact of ROO in trade should all preferential RoO be set at the levels of non-preferential RoO. As such, replacing the existing RoO in most preferential schemes would enhance the prospects for open regionalism around the world.
Second, even subtle differences among RoO regimes can result in the formation of trade- and investment-diverting hubs. Even in a simple world with two main and rather similar RoO regimes, FTAA tailored after NAFTA and PANEURO models, three important differences would continue affecting producers and exporters in both hubs and in particularly in countries that are spokes of both of the hubs.
One, as noted above, a central difference between the PANEURO and NAFTA models is the type of RoO governing some manufacturing sectors, particularly machinery, where the PANEURO model employs a stand-alone VC rule, while NAFTA model relies on its staple RoO of CTC, often accompanied by VC. This difference can have important effects on economic decisions. For example, a small Chilean exporter seeking to access both FTAA and EU markets and who lacks, as is often the case for a small country, intermediate products in Chile will likely have to choose between producing to either market rather than to both given the difference in RoO: switching production patterns and outsourcing relations according to the RoO regime may simply be too cumbersome and costly. A major European car company might present another example. Such a company would likely be deterred from the FTAA market should the restrictiveness of RoO rise to levels above 50-60% value content, as the remaining share of outsourcing is done in Europe. Thus, in order to qualify for FTAA-conferred preferential treatment, European car companies would have to create outsourcing linkages in the Americas and/or encourage
their European suppliers to set up shop in the Western Hemisphere; however, both options feature a time lag which can give a crucial foothold to US car companies in the continent.
The second major difference between the two poles is the use of cumulation; the PANEURO model has gained prominence to a great extent thanks to the lure of cumulation, while the PTAs in the Americas—and PTAs based on the NAFTA model—
remain disconnected. However, the FTAA will in practice result in one major cumulation zone in the Western Hemisphere. Indeed, this prospect could stir some concerns of bipolar trade diversion—growth in intra-bloc trade within the American and Europe at the expense of the rest of the world—which is a real possibility as long as the pole members have restrictive RoO, positive MFN tariffs vis-à-vis the ROW, and/or are reachable only by paying high transportation costs.
Third, the differences between the PANEURO’s two-step certification method and NAFTA’s self-certification will likely remain. The EU is planning to facilitate certification by moving to electronically-issued certificates; however, the extra step a potential exporter must take in certifying origin through a governmental entity, particularly in some of the EU’s partner countries where the costs of obtaining a certificate are notably high, may not only undercut exporters’ incentives to seek PTA- conferred preferential treatment per se, but tilt export decisions in favor of PTAs operating on the self-certificate.
ii. Counteracting the Splintering of the RoO Panorama: Possibilities and Prospects
While RoO per se in any given RoO regime are not necessarily “bad” for sound economic decisions, restrictive RoO can be. Furthermore, the existing differences in the restrictiveness of product-specific RoO and the regime-wide facilitation mechanisms between RoO regimes can and do make a difference in the decisions of economic actors in favor of less efficient outsourcing and investment strategies even in a simplified bi- or tripolar RoO world. But how can the potential frictions created by stringent RoO and by the differences between RoO regimes be reduced? How can entrepreneurs continue importing inputs from the cheapest sources, firms exploit cross-border economies of scale at lowest costs, and multinational companies make sweeping investment decisions based on economic efficiency rather than distortionary policies? What are the best ways to counter the development of trade- and investment diverting hubs in favor of globally free flow of goods, services, and investment?
Abolishing RoO altogether would certainly be the best and simplest means to counteract the impact of RoO. Another way to relegate RoO to irrelevance is by bringing MFN tariffs to zero globally. However, since these options are hardly politically palatable in the near future, a third possibility would be to harmonize preferential RoO at the global level. This would ensure that at least the required production patterns in a given sector would remain similar across export markets.29 A further measure to accompany the harmonization work
29 Of course, qualifying for preferential treatment would even in the presence of harmonized RoO require tailoring outsourcing relations and production to the demands of the RoO of the PTA conferring the preferences. For example, a Chilean firm faced with a CH requirement in both the EU and US market would have to verify that when exporting to the EU, the CH is met by production in Chile (or in the Chile-EU FTA