Rules of Origin Facilitator: Making it easier for MSMEs to use trade agreements
Governments have signed hundreds of bilateral and regional free trade agreements (FTAs) lowering or even eliminating tariffs and other barriers to trade among signatories. To prevent these agreements from becoming a conduit for diverted merchandise from third countries, they require merchandise to meet certain ‘rules of origin’ criteria before they can qualify for preferential market access terms.
These rules of origin, which typically require a minimum level of value addition to have occurred within the countries party to the agreement, can be extremely product-specific and differ from one trade deal to another. The proliferation of overlapping bilateral and regional trade agreements, sometimes dubbed the ‘spaghetti bowl,’ has come with a plethora of rules of origin associated with different criteria and margins of preference.
For companies, particularly micro, small, and medium-sized enterprises (MSMEs) that may be unable to afford expensive consulting services to help them navigate FTAs, these rules of origin can lead to confusion, costs and compliance problems. Businesses might be unaware that their products are eligible for tariff preferences in a target market. The process of identifying relevant agreements and complying with origin and certification requirements can be so onerous that some companies opt to pay the non-preferential ‘most-favoured nation’ tariff instead. Not using preferential tariffs denies businesses an edge vis-à-vis their competitors, erodes their profit margins, makes it harder for them to maintain a foothold in export markets, and limits their ability to benefit from international value chains.
ITC business surveys in developing countries find that rules of origin are the single most complained-about non-tariff measure for manufacturing firms. Other surveys in Australia and the United Kingdom similarly find that FTAs go underused, in significant measure due to problems related to rules of origin.
Making it easier for MSMEs to maximize duty savings through FTAs would make them more competitive in target markets while helping them source inputs more cheaply.
ITC has created a web-based platform, Rules of Origin Facilitator (findrulesoforigin.org), to help MSMEs understand how to qualify for tariff cuts resulting from bilateral and regional trade agreements as well as from unilateral trade preference schemes.
The Rules of Origin Facilitator database, which ITC developed in partnership with the World Customs Organization and the World Trade Organization, aggregates product-specific origin requirements and origin-related provisions from 250 trade agreements. It aims to cover the majority of the more than 400 active trade agreements by the end of 2019.
To account for the wide variety in agreements and product-specific rules of origin, ITC developed natural language processing algorithms that apply text-as-data techniques to thousands of pages of legal text, recognizing elements that can be systematically classified and mapped into the database.
Businesses can use the tool to find out whether a particular product and target market are covered by a bilateral or regional trade agreement, and identify the necessary rules of origin. In addition to agreement texts, users can also find information on certification-related procedures and documentation requirements; shipment and invoicing processes; and how to contact competent national authorities such as customs offices, trade ministries and chambers of commerce.
In practice, a Viet Nam-based clothing manufacturer seeking to export t-shirts made from Chinese cotton fabric to the Republic of Korea could use the tool to determine whether there are any trade agreements between the two countries. She would learn that the garments would be eligible for duty-free access, instead of the standard 13% rate under two separate trade agreements: a 2007 agreement between Korea and the Association of Southeast Asian Nations (ASEAN), and Viet Nam’s 2015 bilateral FTA with Korea.
The tool would explain that her company’s use of Chinese fabric would not preclude duty-free access, since the cutting and stitching that occurred within Viet Nam would be sufficient to count the clothes as Vietnamese for the purposes of both trade agreements.
Finally, the tool would point to an important advantage of using the bilateral Viet Nam-Korea agreement: it allows certificate-free shipping for consignments worth less than $600. Under the Korea-ASEAN agreement, the equivalent figure is only $200. For shipments above those thresholds, the Vietnamese exporter would simply need to download the relevant FTA certificate of origin form via a link provided in the Rules of Origin Facilitator, fill it out, get it stamped by the Vietnamese trade ministry and send it to her Korean importers, who would then be exempt from customs duties.
The Rules of Origin Facilitator aims to cover the more an 400 trade agreements for which legal texts have been publicly released. It is being translated into French and Spanish.
In addition to developing training material and programmes for the tool, ITC and its partners are also planning new functionalities. One of these would make it easier for users to visualize where they might be able to source inputs while still being able to use preferential trade access. Another would use artificial intelligence to automatically perform origin determination for the purposes of optimal tariff treatment in a destination market.
A user survey is foreseen for 2019, the results of which will guide modifications to the tool.