EPA Review Annex Documents - DFID

RoO and the EPAs
1. Introduction
Rules of Origin (RoO) serve the purpose of averting trade deflection 141 by conferring
originating status to products within a free trade area (FTA) so as to enable the application of
duty free treatment. In a world that is increasingly being dominated by regional trade
agreements, the origin of a product needs to be clearly delimited in a bid to avoid unlawful
transhipment of goods into FTAs via the country with the lowest tariff. Hence originating
status is generally granted to a product if it is either ‘wholly obtained’ in a preferential country
or if it satisfies one or a series of processing or working conditions. Whilst some conditions
specify a change in tariff classification (generally at the HS 4 or 6 digit level) as enough to
attribute originating status to a domestically processed product others do so under specific
processing (SP) requirements which are detailed in a long annex. However the most
common and EU preferred rule, for attributing origin to products containing non-originating
components, is the value added requirement. 142 Under this rule, non-originating products are
to undergo domestic transformation above a value added threshold. In essence the rule sets
out minimum or maximum originating or non-originating content for a given product.
Irrespective of the conditions that apply for a given good, the burden of proof, and hence the
cost of compliance, tends to fall on the exporter side. This entails that RoO, if not properly
delimited or if particularly onerous, may unnecessarily restrict trade. 143
2. Cumulation
In the advent of increasing international fragmentation of production structures where value
added is being performed in many different locations, RoO can act on firm incentives when
choosing the origin of intermediate goods. Cumulation allows countries to collectively satisfy
originating status rules. As an example, and in the case of a value added rule, countries may
share the value added (VA) threshold between them to gain originating status. In this
respect, RoO have an effect not dissimilar to the trade creation and trade diversion effects in
the preferential trade literature. Promoting cumulation between non-natural trading partners
is likely to yield trade diversion whereas promoting cumulation between natural trading
partners will promote trade creation. This will depend on the type of cumulation rules that
apply. Bilateral cumulation only allows cumulation to occur between two countries whereas
diagonal cumulation allows for other countries sharing a common preferential trade
agreement (PTA) to cumulate with each other. On the other hand, full cumulation (or
extended cumulation) extends the principle to countries party to a similar agreement but not
necessarily engaged in the same PTA. The RoO governing the Cotonou agreement is an
example of full cumulation where countries party to this agreement could cumulate with each
other. Hence Botswana could cumulate with Cote d’Ivoire to obtain originating status and
receive preferential treatment in the EU even if these two countries do not share a trade
agreement between them. It can be thus argued that diagonal or full cumulation can serve a
development purpose as it promotes the use of intermediate goods from regional partners.
The counter argument is that this could cause trade diversion as countries will switch
sources to cumulating partners, not for efficiency reasons, but rather to obtain originating
status and gain preferences into a market. The question is then; who should developing
countries be allowed to cumulate with? It is not obvious that cumulating with other
141
Trade deflection occurs when non-originating products evade tariffs by transhipping goods into an
FTA via the country with the lowest tariff.
142
According to EC (2005) “Justification of the choice of a value added method for the determination
of the origin of processed products.”
143
This is where the cost of compliance can be assumed to be increasing in the complexity of the
rules.
206