Origin challenges persist
Harmonized rules remain elusive to WTO members.
By Chris Gillis
The dictionary defines origin as where something gets its start, but in the world of international commerce and customs control, it's not that simple.
Negotiators in the World Trade Organization (WTO) have been grappling with the question of how to harmonize rules of origin for more than 15 years, and they don't appear to be anywhere close to an answer.
'They can't agree on the harmonization in the WTO,' said Mette Werdelin Azzam, a technical officer at the World Customs Organization (WCO), which is charged with putting into practice at the customs control level whatever trade policies the WTO sets. 'Lots of political and economic aspects are at stake.'
Origin rules often determine the amount of duties assessed on goods crossing borders, a big deal especially for developing countries that rely on duty collections to pay for government programs.
During the Uruguay Round of negotiations under GATT, the predecessor to the WTO, participating countries recognized the importance for concise origin rules. They determined these rules should not be used to pursue trade policy goals or to create restrictive or disruptive effects on international trade or discriminate against imports and exports between countries.
Instead, the Uruguay Round determined that origin rules should be applied in a consistent, impartial and reasonable manner. The agreement also says governments should not change origin rules retroactively and importers should have the ability to seek appeals for origin-related administrative actions by customs.
However, the origin debate has become bogged down at the commodity level. For example, should the origin of coffee beans be at the point of harvest or roasting? Some trade negotiators want the origin to be at roasting, which would make that the United States and Germany the biggest originators of coffee. Under this scenario, green coffee bean producers, such as Brazil and Vietnam, technically would no longer exist as the origin in the eyes of customs and buyers.
A number of other major commodities pose similar obstacles for trade negotiators, including vehicle and machinery assembly, slaughtered animals, refining sugars and oils, footwear manufacturing, dyeing and printing of yarns and fabrics, coating steel, and preparing dairy products. There are even unresolved questions about whether the origin of a product obtained from an exclusive economic zone of the sea should be based on either the territory of the coastal state or reside with the country of the fishing vessel's flag.
From 1995 to 1999, the WCO Rules of Origin Committee drafted standard guidelines for origin rules, much like it did successfully with the harmonized system nomenclature. Despite the availability of these recommendations, the WTO has not been able to move forward.
For more than a century, the general U.S. rule of origin is the country where a product last underwent transformation; that is where it was made into a new and different article for commerce. For example, if Australian lumber is made into furniture in China, the country of origin of the furniture is China.
'The 'substantial transformation' test is usually straightforward, simply identifying where something was made,' said Don Luther, a former U.S. Customs officer and owner of 19CFR Trade Consulting, based in Cumberland, Md. 'However, there are cases where such a determination is difficult, and can be somewhat subjective.'
An alternative 'tariff shift' approach to origin rules has arisen in recent decades, largely under the auspices of free trade agreements. Under a tariff shift approach, origin is determined by analyzing whether the tariff classification of the finished product is sufficiently different from the classifications of the parts and materials used to make it, Luther said.
Without a unified WTO approach to liberalize trade, many countries have crafted their own regional and bilateral free trade agreements.
The United States has free trade agreements with Canada and Mexico, and also with Chile, Australia and others. There are also agreements pending with South Korea, Panama and Colombia. Europe has negotiated numerous agreements with its trade partners. There are now more than 200 trade agreements in force throughout the world.
However, each of these trade agreements is negotiated separately and their origin rules differ slightly. The rule for obtaining preferential treatment for a product imported into the United States from Chile may be different from the rule covering an identical product from Mexico. The multitude of trade agreements actually works against the goal of harmonizing rules of origin.
'We refer to this as the spaghetti bowl,' Werdelin Azzam said. 'Free trade agreements often make life more complicated for companies outside the free trade agreement and confuse customs authorities.'
Even after 15 years of being in place, companies still struggle to follow the North American Free Trade Agreement's origin rules. There are typically two criteria used for NAFTA origin: regional value content and tariff shift, also known as change in tariff heading. For a product to gain NAFTA benefits, one or both of these tests must apply.
Manufacturers with products requiring hundreds of thousands of parts or dozens of major assemblies may find NAFTA origin rules even more difficult to meet. For these cases, a manufacturer may need to obtain the actual classification and value of every single part in the final production, along with the classification, value and NAFTA origin status of any subassemblies (made of individual parts) that may be part of the manufacturing process.
Non-compliance with any origin rules may wreak havoc on a shipper's bottom line. In the United States, if Customs finds an origin certificate to be invalid, the importer will lose the right to preferential treatment under the free trade agreement, for a single shipment or for the time period covered by the certificate. The importer will also have to pay customs duties based on the normal duty rate for the products concerned. In addition, the agency may assess penalties against the importer for negligence or willful wrongdoing.
The country of origin is not where the product was shipped from, but where it was made. 'In the era of global sourcing and production, determining origin can be complicated under both the substantial transformation and tariff shift method,' Luther said.
In July 2008, U.S. Customs and Border Protection issued a proposal to redefine the simpler 'substantial transformation' test and essentially replace it with the NAFTA tariff shift rules, which would apply for all origin determinations. This proposal was widely opposed by the U.S. trade community, and CBP put the proposal on hold indefinitely. But this concept still has considerable support among some in the international community.
WCO Action Plan. While harmonization of origin rules remains stalled in the WTO, the WCO has developed an action plan to assist its 177 customs administration members to understand the rules of origin among the various free trade agreements.
The plan includes the development of a database of preferential trade agreements. The database enables users to access and study preferential trade agreements and related rules of origin. It also provides a function to compare core texts of origin rules of two to four different agreements and reproduces origin certificates used in the agreements.
Access to the database costs 185 euros (about $259) a year. Agreements are generally written in English and French and sometimes in other national languages in which they're negotiated.
The WCO also conducted a comparative study that allows WCO members and other interested parties to compare NAFTA and European rules of origin. The study will be further developed, adding other agreements and modules. The next module will be a study into how customs administrations control verification of origin. The organization sent a comprehensive questionnaire to its members and received 120 responses back, Werdelin Azzam explained.
She said the purpose of the questionnaire was to develop practical tools for members, including studies and 'good practices.' 'They can see how other countries are managing their origin controls. We're not trying to impose anything on them,' Werdelin Azzam added.
'Developing countries, in particular, need help with understanding rules of origin,' she said. 'For many of them, these rules don't even exist.'
In addition, the WCO will upon request help educate customs administrations about rules of origin through seminars, workshops and online tools. 'We tell them about the rules and give them exercises to understand how to use these rules,' she said.
Werdelin Azzam was recently invited by the Bahamas Customs Service to conduct a seminar about origin rules for 20 officers. The Bahamas is part of the African, Caribbean and Pacific Group of States (ACP) countries (48 African, 16 Caribbean and 15 Pacific), created by the 1975 Georgetown Agreement.
The European Union-backed group's main objectives were sustainable development and poverty reduction within its member states, as well as greater integration into the world's economy. Due to WTO incompatibility, the non-reciprocal preferential trade agreement offered by the European Union to the ACP countries was replaced with Economic Partnership Agreements between the EU and these countries, resulting in new origin rule requirements. 'We expect that rules of origin will be a big challenge for the 79 ACP countries,' she said.