WCO KNOWLEDGE ACADEMY FOR CUSTOMS AND TRADE 2014 Rules of Origin July 2014
Trade and Investment Effects of Rules of Origin and...
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2008/SOM3/CTI/TPD/006 Agenda item: 3
Trade and Investment Effects of Rules of Origin and Convergence
Submitted by: Inter-American Development Bank
Trade Policy Dialogue on Effect of Rules of Origin on Trade
Lima, Peru19 August 2008
Jeremy Harris and Kati Suominen Integration and Trade Sector Department
Inter-American Development Bank
APEC CTI Trade DialogueLima, Peru
19 August 2008
Trade and Investment Effects of Rules of Origin and Convergence
Motivation of Presentation• RoO are here to stay—remain after RTA tariffs
removed
• RoO are a trade policy instrument, and can be an “NTB in disguise”
• Restrictive RoO can choke access to cost-efficient inputs, reduce incentives for preferential trade, and undermine RTAs’ trade-creation potential
• RoO “Spaghetti Bowl” can create undue production and administrative costs
• How to reduce RoO’s negative economic effects while preventing free-riding by third countries?
Organization
I. RoO Goals and Types
II. Measuring and Assessing Restrictiveness of RoO
III. Trade and Investment Effects of RoO– Aggregate trade– Intermediate goods trade– Firms’ production costs– Sectoral FDI flows
IV. Effects of RoO Convergence
IOverview of RoO
• Two types of RoO: non-preferential and preferential– Non-preferential used for definitive determination of origin
(trademarks, antidumping etc. purposes) – Preferential RoO used for determining access to preferential
treatment in an RTA (just that and that alone)
• Preferential RoO define:– Type and/or quantity of inputs that have to be procured; and/or– Production processes that have to be performed within the RTA
area in order for the good to be considered originating
• Justification for preferential RoO: Avoid trade deflection = free-riding on RTA preferences by 3rd parties
Objectives of RoO
• Change in Tariff Classification (CTC)• At Chapter, Heading, Subheading, or Item level
• Exceptions and Additions to CTC• Value Content (VC)
• Technical Requirement (TECH)– Infinite possibilities
• These criteria are used in various combinations for each product in each RoO regime (existing total permutations in the world >200)
• Great potential for administrative difficulty, for both the public and private sector
RoO Criteria
Stylized RoO Families in APEC
• ASEAN, ASEAN-China, Chile-China, Chile-Peru– General: across-the-board classification change or
value content rules– Few technical or processing requirements
• NAFTA, NAFTA members’ RTAs, most trans-Pacific agreements– Complex: different types of CTC w/ VC and/or
processing requirements– High variation across products
APEC RTAs: Many RoO CombinationsNumber of RoO Permutations, Selected APEC RTAs
0
20
40
60
80
Variation also in Regional Value Content
Seven different calculation methods– Transaction Value/Build-Down/Maximum
Non-Originating content– Build-Up– Net Cost– Factory Cost– Allowable Cost– Qualifying Value Content– Value Added Content
IIMeasuring
RoO Restrictiveness
• Definition: Rules are “restrictive” when they increase the costs of producing and trading– Some costs are administrative: documenting and
demonstrating origin– Other costs: derive from material sourcing restrictions
based on the rules
• Restrictive RoO: can dampen trade– Associated production cost and trade cost increases have
the same effect as tariffs
Restrictiveness of RoO
Measuring Restrictiveness
• How to capture restrictiveness? Indices in:– Estevadeordal (2000) (from 1 to 7)– Harris (2007) (from 1 to 21)
• Logic– CC > restrictive than CH, CH > restrictive than CS, etc.– VC, TECH, exceptions to CTC: add to restrictiveness– Alternative rules provide flexibility, lessen restrictiveness– Calibrated using list of alternative rules in many RTAs
• Note: Indices capture only “observed” restrictiveness, not “effective” restrictiveness– However, these are correlated on average
High Variation in RestrictivenessAvg. Restrictiveness, 23 APEC RTAs
2
4
6
8
10
12
JPN
SIN
G
CH
LC
AN
NA
FTA
ME
XJA
P
AU
STH
A
USA
CH
L
USA
AU
S
USA
SIN
G
CH
LK
OR
USA
KO
R
AU
SSIN
G
AU
SNZ
TH
AN
Z
USA
PER P4
PER
TH
A
CH
LM
EX
ASE
AN
CH
N
CH
LC
HN
JPN
TH
A
CH
LPE
R
ASE
AN
JPN
MY
S
Har
ris (
2007
)
Highest Restrictiveness in Textiles, Ag…Average Sectoral Restrictiveness, 23 APEC RTAs
2
4
6
8
10
12
1. Live
Anim
als
2. Veg
etable
Produ
cts
3. Fats
and O
ils
4. Foo
b, Bev
. & T
abac
co
5. M
ineral
Produ
cts
6. Che
michals
7. Plas
tics
8. Lea
ther
Goods
9. W
ood Pro
ducts
10. P
ulp and Pap
er
11. T
extil
e and
App.
12. F
ootw
ear
13. S
tone a
nd Glas
s
14. J
ewell
erly
15. B
ase M
etals
16. M
ach. &
Elec
Eq.
17. T
ransp
ortat
ion E
q.
18. O
ptics
19. A
rms &
Ammun
20. D
ivers.
Mer
ch. a
nd Pro
d.
21. W
orks o
f Art,
Misc
.
…and similar patterns in most RTAsSectoral Restrictiveness, 4 APEC RTAs
0
2
4
6
8
10
12
14
16
1. Live
Anim
als
2. Veg
etable
Products
3. Fats
and O
ils
4. Foo
b, Bev
. & Tab
acco
5. M
ineral P
roducts
6. Chem
ichals
7. Plas
tics
8. Lea
ther Goo
ds
9. W
ood Pro
ducts
10. P
ulp an
d Paper
11. T
extile
and A
pp.
12. F
ootw
ear
13. S
tone a
nd Glas
s
14. J
ewell
erly
15. B
ase M
etals
16. M
ach. &
Elec
Eq.
17. T
rans
portat
ion E
q.
18. O
ptics
19. A
rms &
Ammun
20. D
iversi
fied M
erch.
21. W
orks o
f Art,
Misc
.
Asean Japan-Thailand P4 USA-Korea
Think of It This Way: Trade with Restrictive RoO = Limited between RTA and ROW
ROW Pool of Inputs
RTA Pool of Inputs
Trade with Flexible RoO = Freer between RTA and ROW
ROW Pool of InputsRTA Pool
Similar Effects if employ a larger Cumulation Zone = Expanded Pool of Inputs, Smaller Pool Excluded
ROW Pool of Inputs
RTA Pool of Inputs
3 Preliminary Policy Prescriptions
• Relax RoO in existing RTAs
• Create a larger cumulation zone by connecting RTAs
• Do both• But are restricive RoO really that
important?
IIITrade and Investment
Effects of RoO
Policy Implications of RoO• RoO can be employed to political ends• Restrictive RoO can
– Protect intra-RTA intermediate goods producers by favoring intra-RTA supply links
– Insulate an entire industry from the consequences of an RTA
• If RoO are restrictive enough to increase production and/or admin. costs vis-à-vis pre-RTA world, they can– Impede sourcing from the globally efficient producer– Undermine firms’ utilization of RTA preferences (take the MFN route
instead)– Divert trade and investment– Dampen RTAs’ liberalizing and trade-creating potential
Empirical Evidence:Political Economy of RoO
• Estevadeordal (2000): In NAFTA, restrictive RoO driven by same factors as are high tariffs and long tariff phaseouts
• Suominen (2004): This is also true in EU-Mexico FTA. RoO were arguably used as substitutes for exclusions: rather than excluding sectors from the FTA, parties put in tough RoO
What Are the Trade Effects of RoO?Exploring through the Gravity Model
Country A Country B
Distance AB(-)
RTA(+)
Tariff Preferences(+)
Restrictive RoO(-)
GDPB
(+)
Other country B
characteristics
(+/-)
GDPA
(+)
Other country A
characteristics
(+/-)
Bilateral Total Trade
Trade Effects of RTAs with Restrictive RoO (Global sample)
-2
-1
0
1
2
3
RTA Effect RoO Effect
Source: Suominen (2004).
-2
-1
0
1
2
3
RTA Effect RoO Effect
Restrictive Rules of Origin Can Dampen RTAs’ Potential
Net RTA effect
Source: Suominen (2004).
Explaining Bilateral Trade in Intermediate Products
Country A Country B
Distance AB(-)
RTA(+)
Tariff Preferences (+)
RoO in Final Goodsin Sector X
(+)
GDPB
(+)
Other country B
characteristics
(+/-)
GDPA
(+)
Other country A
characteristics
(+/-)
Bilateral Intermediate TradeIn Sector X
Restrictive RoO in Final Goods May Divert Trade in Intermediate Goods
Effects of RoO on Intermediate Trade, Selected Sectors
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Vehicles TV and RadioTransmitters
Machinery Textiles Chemicals
New IDB Study in LAC - % of firms that say: “costs of RoO on production are ‘medium high’ or ‘high/very high’”
0%
20%
40%
60%
Chile -
Food
Chile -
Meta
l
Chile -
Tex
tiles
Colombia
- Foo
d
Colombia
- Meta
l
Colombia
- Tex
tiles
Mex
ico - F
ood
Mex
ico - M
etal
Mex
ico - T
extil
es
Panam
a - Foo
d
Panam
a - M
isc.
High or very high
Medium
60
70
80
90
100
1990 1991 1992 1993 1994 1995 1996 1997
Textile sector
Chemical sector*
Iron/steel sector*
Products experiencing equal or less restrictiveRoO under NAFTAProducts with more restrictive RoO underNAFTA
% of total U.S. imports from Canada
Canada’s Utilization Rates of US preferences: dropped from Canada-US FTA to NAFTA in sectors with restrictive RoO
Sectors with less restrictive RoO under NAFTASectors with more restrictive RoO
Cadot et al. (2006): Restrictive RoO cost a total of 2% of Mexican exports to US
What of RoO’s Investment Effects?
• 2 hypotheses: with RTA tariff preferences as a carrot, – Restrictive RoO can propel RoO-jumping, market-
seeking FDI (which subsequently source from withinthe RTA)
– Flexible RoO attract efficiency-seeking FDI from companies with global supply chains
• Very little empirical work– Estevadeordal, Lopez-Cordova, Suominen (2006):
Sectoral FDI in Mexico in 94-01 significantly related to flexible NAFTA RoO => Liberal RoO = good for FDI
Results in Sum
• Restrictiveness of RoO dampen aggregate trade flows
• Restrictiveness of RoO in final goods can significantly boost trade in intermediates– And may result in trade diversion of
intermediate goods
• Complex and restrictive RoO add to the costs of exporting firms
• Flexible RoO can help attract globalized, efficiency-seeking FDI
IVEffects of RoO Convergence
APECUnited States
CanadaMexico
NAFTA
CAFTA-DR
Costa Rica, Guatemala, El Salvador, Honduras, Nicaragua & Dominican Republic
ANZCERTA
AustraliaNew Zealand
ASEAN (AFTA)
BruneiPhilippines
VietnamMalaysia
Thailand SingaporeIndonesia
China, Korea Japan
Bangkok
Laos
Cambodia Myanmar
BangladeshSri Lanka
India
BhutanNepal
MaldivesPakistan
SAFTA
Northeast Asian
ASEAN + 3 (EAFTA)
ASEAN + 6 (CEPEA)
How to Build on RTA Spaghetti Bowl => toward REI
Peru
Chile
Through Convergence?
A
B C
RTA 1
RTA 2
RTA 3
Common cumulation zone
Input
Assembly
Final goodRoO x RoO x
RoO x
Modalities for Convergence• Expanded Cumulation
– Allowing third party cumulation (A,B in a common RTA allow from C)
– Common RoO not a requisite– Possible even when not all economies linked by RTAs– Sectoral examples in Japan-Thailand and Japan Malaysia,
more generalized in Canada-Peru (subject to reciprocity by cumulation zone)
• Full Convergence– Allowing cumulation among zone ABC– Common RoO necessary– Easier when all economies linked by RTAs– PANEURO case
Why Do This? Costs of “Missing Convergence”
• APEC Customs– Management of differing verification procedures– Information management costs
• APEC Companies– Transactions costs across multiple RTA theaters– Inventory management costs (materials and products)– Uncertainty and delays in customs– Under-utilization of RTA preferences due to lack of/too
expensive inputs
• APEC Economies– Potential trade and investment diversion
Potential Effects of RoO Convergence/Cumulation
• Trade between two countries A,B that can suddenly cumulate from a third country C:– Greater supply of cumulable materials from C for final goods
production and trade between A,B – If C allows A,B cumulate among each other for final goods exports
destined for C: A,B can experience greater final goods exports to C
• If inputs from C are cheaper than inputs in A,B: – Positive effects on C-AB trade (more input imports to AB from C)– Reduced trade diversion in input trade between A and B – Increase final good trade between A,B (containing C inputs)
• The bigger the cumulation partner C, the greater the likelihood of reduced trade diversion between A and B– Larger partner C => larger pool of inputs!
Trade Effects of Cumulation• Gasiorek et al. (2007) on PANEURO System
– Cumulation: significant positive effect on spoke-spoke (among East European countries) trade
– Highest positive effects in sectors with restrictive RoO = cumulation allowed for greater availability of inputs (from EU)
• Harris and Suominen (in progress): effects of cumulation on bilateral trade globally 1965-2005– Access to inputs from a large cumulation partner C increases
trade esp. between two smaller countries A,B – If cumulation partner is 10 percent world GDP: Trade between
2 small countries A,B up by a net of 3 percent– Net effect: reduction of trade diversion, increase of bilateral
trade in final goods with C inputs
What do companies think? IDB Study% of firms that say: “savings from harmonizing RTAs would be
‘high’ or ‘very high’”, by country and size of firm
0
20
40
60
80
100
Chile Colombia Mexico Panama
SMEs
LargeFirms
% of firms that say: “savings from harmonizing RTAs and permitting cumulation across them would be ‘high’ or ‘very high’”,
by country and size of firm
0
20
40
60
80
100
Chile Colombia Mexico Panama
SMEsLarge Firms
% of firms that say: “savings from harmonizing RTAs and permitting cumulation across them would be ‘high’ or ‘very high’”,
by country and sector
0
20
40
60
80
100
Food Products Metal Products Textiles
ChileColombiaMexicoPanama
Concurrent ADB Study (IDB-ADB Joint Project)
• Complex rules: barrier to using FTA preferences
• Administration costs & delays often significant when seeking to comply with rules of origin– Firms often prefer to pay MFN tariffs rather compliance
cost of RoO
• Large national firms and MNCs: greatest problems complying with multiple RoO regimes– Large firms frequently trade among more countries and
thus operate through various FTAs than SMEs
0%
20%
40%
60%
80%
100%
Europe
Mex
ico USA
Trans-P
acifi
c
America
s
Chile
APECJa
pan
Global
Singapo
reAsia
Africa
RTA Family
What Prospects for Covergence in APEC? Similarity Index of RoO within Selected RTA Families
Source: Estevadeordal, Harris, Suominen (2007), IDB “Regímenes de Origen de las Americas” Database
Sectoral Similarities: Highest in Wood, Ag.Similarity Index of RoO within APEC RoO Family
0%
20%
40%
60%
80%
1. Live
Animals
2. Vege
table
Products
3. Fats
and O
ils
4. Foo
d, Bev.
& Tab
acco
5. Mine
ral Prod
ucts
6. Che
michals
7. Plas
tics
8. Leat
her Goo
ds
9. W
ood Prod
ucts
10. P
ulp and P
aper
11. T
extile
and App.
12. F
ootw
ear
13. S
tone a
nd G
lass
14. J
ewelr
y
15. B
ase M
etals
16. M
ach.
& Elec Eq.
17. T
ranspo
rtatio
n Eq.
18. O
ptics
19. A
rms &
Ammun
20. D
ivers.
Merc
h.
21. W
orks o
f Art,
Misc
.
In Sum: RoO in APEC RTAs
• Diversity in RoO across APEC RTAs– But 2 broad RoO families - Americas vs. Asian-style
• RoO Restrictiveness also varies– But sectoral similarities across RTAs: Agriculture, food, textiles,
footwear most restrictive
• Economic effects clear– Restrictive RoO can dampen RTAs’ trade-creating potential– Restrictive and complex RoO increase firms’ production costs– Flexible RoO attract efficiency-seeking FDI from producers with
globalized supply chains
In Sum: To REI from APEC RTAs• Convergence + Cumulation could significantly facilitate
trade and production across APEC
• Convergence + Cumulation are useful as long as there are MFN tariffs = incentive to use RoO
• Ways of attaining Convergence, Cumulation, REI– Small steps first: APEC origin certificate and verification
cooperation mechanisms– Copy best practices: EU experience, Canadian and Japanese
cumulation “experiments”– Define and analyze the modalities for getting to FTAAP
• Important: When undertaking RoO convergence, converge toward a flexible model!
Jeremy Harris and Kati Suominen Integration and Trade Sector Department
Inter-American Development Bank
APEC CTI Trade DialogueLima, Peru
19 August 2008
Trade and Investment Effects of Rules of Origin and Convergence