Rules of origin and the Uruguay round's effectiveness in harmonizing and regulating them

American Journal of International Law

Volumn 90, Issue 4, 1996, Pages 625-640

  LaNasa III, Joseph A ^a  

^a NONE

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EID: 0030507803     PISSN: 00029300     EISSN: None     Source Type: Journal    
DOI: 10.2307/2203989     Document Type: Article

References (74)

1. Once the origin of a good is known, a country can apply any country-specific or trade-area-specific preferences or restrictions to imports of the good (such as duty-free entry for goods originating in a free trade area, quantitative restrictions on goods originating in a country subject to a quota, and antidumping duties on goods from a targeted company originating in a targeted country).
2. For example, special rules of origin designed to "prevent" circumvention of antidumping duties were increasingly used as a shortcut to applying such duties to products produced in and exported from third countries. See Edwin A. Vermulst, Rules of Origin as Commercial Policy Instruments - Revisited, J. WORLD TRADE, Dec. 1992, at 61, 62. The United States and the European Community used specially created rules of origin as justification for imposing antidumping duties on third-country exporte following findings that merchandise produced in a third country had not acquired its origin but, rather, continued to have the origin of the country on which the antidumping duties had been imposed. Id.
3. On the other hand, if a country treated all imported goods alike, the importance of rules of origin would diminish greatly. While such rules would be necessary, they would be easy to harmonize because the goods would receive the same treatment regardless of origin.
4. Agreement on Rules of Origin, Dec. 15, 1993, in FINAL ACT EMBODYING THE RESULTS OF THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS, MARRAKESH, 15 APRIL 1994, Ann. 1A (1994).
5. This does not violate GATT's principle of nondiscrimination because Article XXIV of GATT allows the formation of free trade areas and customs unions as long as, among other things, the duties and "other regulations of commerce" applied by the members are not more restrictive than those applied prior to formation of the area.
6. Reciprocal trading agreements confer the same trade preferences on goods from any and all member countries. An example is an agreement creating a free trade area, such as the North American Free Trade Agreement between the United States, Canada and Mexico. Nonreciprocal trading agreements give trade preferences to goods from the beneficiary country, but not to those from the country "donating" the preference. These agreements are designed to promote the development of certain lesser-developed countries, as do the Generalized System of Preferences (GSP) and the Caribbean Basin Initiative.
7. Examples of potentially restrictive trade practices that require the application of nonpreferential rules of origin include most-favored-nation treatment, quantitative restrictions, imposition of countervailing duties, voluntary export restraint agreements, buy-national government procurement requirements, imposition of antidumping duties (including issues of third-country circumvention and complaints by domestic producers), country-of-origin marking requirements, drawback programs and economic sanctions.
8. For example, the United States, in the Cuban Liberty and Democratic Solidarity Act of 1996, recently reaffirmed the prohibition on the entry of, and dealings outside the United States in, Cuban products, and set forth an overly broad rule of origin. Pub. L. No. 104-114, §110(a), 110 Stat. 785, 800 (Mar. 12, 1996) [hereinafter Helms-Burton Act]. The Helms-Burton Act stated that a good is Cuban for purposes of the prohibition if that good is of Cuban origin or if it has been located in or transported from or through Cuba, or if it is made of or derived from, in whole or in part, any article that is the growth, produce or manufacture of Cuba. Id. This special rule of origin has a much broader application than a more traditional rule, in that it applies to all goods that have any contact with Cuba, and not just goods that have been substantially transformed in Cuba. Furthermore, the Act applies its prohibition of trade in Cuban products to any sugar produced in a country that is a net importer of sugar if that country is unable to verify that it does not import for reexport to the United States any sugar produced in Cuba. Id. §110(c).
9. For example, the European Community's preferential rules sometimes allow donor-country benefit and full global cumulation to recipient countries but at other times allow very limited regional cumulation. See Vermulst, supra note 2, at 93.
10. Of course, preferential trading agreements themselves are often inefficient. Restrictive preferential rules of origin only make them more inefficient.
11. See Bernard Hoekman, Rules of Origin for Goods and Services: Conceptual Issues and Economic Considerations, J. WORLD TRADE, Aug. 1993, at 81, 81.
12. See Frédéric Cantin & Andreas F. Lowenfeld, Rules of Origin, the Canada-U.S. FTA and the Honda Case, 87 AJIL 375, 389-90 (1993).
13. See Richard H. Steinberg, Antidotes to Regionalism: Responses to Trade Diversion Effects of the North American Free Trade Agreement, 29 STAN. J. INT'L L. 315 (1993).
14. Origin complications may arise when products wholly obtained in a single country are extracted from territorial waters or the seabed. For example, fishery products are considered wholly obtained in a country as long as they are obtained on a vessel of that country. This rule may lead to the anomalous result of fish caught in the waters of country A by a vessel from country B being considered fish of country B, even though they were "obtained" in country A's waters.
15. See Anheuser-Busch Ass'n v. United States, 207 U.S. 556, 562 (1908) (quoting Hartranft v. Wiegmann, 121 U.S. 609, 615 (1887) (explaining that a good is substantially transformed when it is "manufactured into a new and different article, having a distinctive name, character or use from that" of the original article or good)). The United States uses the last substantial transformation rule, as created by the courts and codified in administrative regulations, to determine the origin of goods for nonpreferential purposes. subsidiary test when the 45% value-added primary test is not met. Id. It may be unduly restrictive of origin because it ignores local assembly and overhead costs. Id.
16. See, e.g., Michael P. Maxwell, Formulating Rules of Origin for Imported Merchandise: Transforming the Substantial Transformation Test, 23 GEO. WASH. J. INT'L L. & ECON. 669, 671-72 (1990) (calling for a rule of origin based on value-added criteria).
17. See Joseph A. LaNasa III, Rules of Origin under the North American Free Trade Agreement: A Substantial Transformation into Objectively Transparent Protectionism, 34 HARV. INT'L L.J. 381, 392 (1993) (explaining that most of the origin determination controversies under the Canada-U.S. Free Trade Agreement involved the value-added test).
18. Of course, the problem of fluctuation could be minimized through the use of weighted monthly, quarterly or annual averages.
19. See Vermulst, supra note 2, at 65-71. The local value added of a good can be calculated either by deducting the cost of nonoriginating parts from the sales price or by adding up all items of local value added. While in theory these two methods should lead to the same result, in practice they do not because the amounts used may differ owing to the lack of harmonization of the methods of calculation. Id.
20. Id. at 65. Countries value similar goods at different stages of the transportation cycle. Goods can be valued, in ascending order, at the ex-works price (the price as it leaves the factory), the free on board (FOB) price (the price at the border of the exporting country), the cost insurance and freight (CIF) price (the price at the border of the importing country) or the delivered-into-factory price. The later the article is valued in the transport stage, the harder it becomes for the article to meet the local-value-added content requirements, because the transport costs increase the amount of the sales price, unless the delivery costs are also added to the amount of value added as originating costs. Id.
21. Vermulst, supra note 2, table 4, at 71 (showing that the same product will have different domestic content ratios in the United States, the European Community, Australia, Canada and Japan).
22. The problem of punishing low-cost producers also arises from other methods of determining origin. In practice, all origin rules impose value-added constraints since they all require value-added processing. The effect on low-cost producers, however, is most acute when the value-added test is explicit.
23. Compare North American Free Trade Agreement, done Dec. 8, 11, 14, 17, 1992, Can.-Mex.-U.S., Art. 403(6), 32 ILM 289, 605 (1993)
24. [hereinafter NAFTA] (requiring a regional value content equal to or greater than 62.5% for light trucks and passenger vehicles using the net cost method) with id., Art. 401 (b) (requiring just a specified change in tariff classification for most goods) and id., Ann. 401.1, §6401.01-6401.10 (requiring that footwear meet the specified tariff classification change and that it have a regional value content equal to or greater than 55% under the net cost method).
25. See LaNasa, supra note 24, at 400-01 (arguing that the enormous clout of the U.S. car manufacturers resulted in rules of origin for automobiles that discriminated against foreign car companies); Cantin & Lowenfeld, supra note 12, at 388 (describing the preferential treatment received under NAFTA by General Motors in its joint venture with Suzuki regarding the origin of CAMI).
26. See LaNasa, supra note 24, at 400-01 (arguing that the enormous clout of the U.S. car manufacturers resulted in rules of origin for automobiles that discriminated against foreign car companies); Cantin & Lowenfeld, supra note 12, at 388 (describing the preferential treatment received under NAFTA by General Motors in its joint venture with Suzuki regarding the origin of CAMI).
27. Roll-up occurs when imported parts are substantially transformed in a preference-receiving country into an intermediate part whose whole value then counts toward the value-added requirement for the final good. For example, under the Canada-U.S. Free Trade Agreement, an intermediate part was considered a wholly domestic part if it had regional value content equal to or greater than 50%. If it had regional value content of less than 50%, then roll-down occurred, i.e., the part was considered as wholly imported. Free Trade Agreement, Dec. 22, 23, 1987, Jan. 2, 1988, Can.-U.S., Ann. 301.2, para. 4, 27 ILM 281, 297 (1988) [hereinafter FTA]. Under the FTA, the controversy over roll-up became an international affair. Honda assembled cars (Civics) in Canada with engines produced in Ohio, using some Japanese parts. Canada and Honda claimed that the engines had a direct cost of 66%, entitling them to roll-up. With the rolled-up value, the assembled cars met the FTA regional value content requirement and were therefore endued to preferential treatment. The United States claimed that the engines were not entitled to roll-up because Canada and Honda had included indirect costs in their computation of the direct costs; a proper calculation of the direct costs, according to the United States, revealed that the engines had less than 50% regional content and that their value must be rolled down. When the value of the engines could not be counted, the Honda cars assembled in Canada no longer could meet the FTA value content requirement and were therefore not entitled to preferential treatment. The U.S. interpretation of direct costs of assembly excluded costs that could reasonably be allocated to the assembly costs such as overhead costs and general expenses of doing business. The United States claimed that the dispute was purely technical. The Canadians claimed that the decision was political, motivated by American desires to bash Japan and to force Japanese companies to relocate their assembly operations to the United States. The dispute was settled by the rules adopted under NAFTA, described in text at and note 30 supra. See Cantin & Lowenfeld, supra note 12, at 379-88.
28. NAFTA, supra note 30, Art. 403(1)-(2) (requiring tracing of the value of a specified list of automotive parts), Ann. 403.1-.2 (listing the automotive parts and materials whose value must be traced). The administrative burden is lessened somewhat by allowing the producer to use an annual averaging method. Id., Art. 403(4)-(5).
29. See LaNasa, supra note 24, at 400-02.
30. See id. at 391-92 nn.48-49; JAN HERIN, RULES OF ORIGIN AND DIFFERENCES BETWEEN TARIFF LEVELS IN EFTA AND IN THE EC (European Free Trade Ass'n Occasional Paper No. 13, 1986) (25% of trade between EFTA and the EC is on a nonpreferential basis because of the high costs of satisfying the change-in-tariff-classification and the value-added rules of origin). See also Ralph H. Sheppard, NAFTA Rules of Origin from the Importen' Perspective: What the Agreement Should Contain, MEX. TRADE & L. REP., Nov. 1991, at 20, available in WESTLAW, MEXTLR (stating that the need to certify content in specific shipments so as to comply with value- added requirements leads many businesses to forgo benefits because of the inordinate accounting or inventory costs).
31. See id. at 391-92 nn.48-49; JAN HERIN, RULES OF ORIGIN AND DIFFERENCES BETWEEN TARIFF LEVELS IN EFTA AND IN THE EC (European Free Trade Ass'n Occasional Paper No. 13, 1986) (25% of trade between EFTA and the EC is on a nonpreferential basis because of the high costs of satisfying the change-in-tariff- classification and the value-added rules of origin). See also Ralph H. Sheppard, NAFTA Rules of Origin from the Importen' Perspective: What the Agreement Should Contain, MEX. TRADE & L. REP., Nov. 1991, at 20, available in WESTLAW, MEXTLR (stating that the need to certify content in specific shipments so as to comply with value-added requirements leads many businesses to forgo benefits because of the inordinate accounting or inventory costs).
32. See Vermulst, supra note 2, at 74. The United States uses specified process tests for preferential and nonpreferential purposes, often in combination with a value-added test. The European Community uses them for many nonpreferential, product-specific origin regulations. Id.
33. Edwin A. Vermulst & Paul Waer, European Community Rules of Origin as Commercial Policy Instruments, J. WORLD TRADE, June 1990, at 55, 66.
34. Id.
35. Commission Regulation 2071/89 on determining the origin of photocopying apparatus incorporating an optical system or of the contact type, Art. 1, 1989 O.J. (L 196) 24.
36. See Vermulst & Waer, supra note 36, at 66-67.
37. The Harmonized System was implemented by the International Convention on the Harmonized Commodity Description and Coding System, June 14, 1983 (entered into force Jan. 1, 1988). It was developed and is administered by the Customs Co-operation Council. By 1993, 121 countries had adopted it for customs tariffs and trade statistical purposes. See Hironori Asakura, The Harmonized System and Rules of Origin, J. WORLD TRADE, Aug. 1993, at 4, 8.
38. Asakura, supra note 40, at 8.
39. Id. If a product has not been classified, it is placed in a basket of unclassified goods. A question may arise as to which basket it should be included in.
40. Many of the headings are subdivided into subheadings, which are further subdivided into two-dash subheadings. Id. at 9. Sometimes the required change in tariff classification occurs at the chapter level if the headings in that chapter reflect minimal processing. Id. at 17 (describing, for example, how the headings in many of the agricultural chapters reflect only minimal processing, such as the transformation of fresh vegetables into frozen vegetables).
41. See, e.g., NAFTA, supra note 30, Art. 401 (d) (i). This provision states that a good originates in the preferential territory if it is produced entirely in the territory of one or more of the Parties but one or more of the non-originating materials provided for as parts under the Harmonized System that are used in the production of the good does not undergo a change in tariff classification because (i) the good was imported into the territory of a Party in an unassembled or a disassembled form but was classified as an assembled good pursuant to General Rule of Interpretation 2(a) of the Harmonized System.
42. See, e.g., Origin Agreement, supra note 4, Art. 9(2)(c)(iii) (stating that the harmonized rules of origin may use supplementary criteria).
43. See id., Art. 9(2)(c)(i) (stating that the harmonized rules of origin will contain a list of minimal operations or processes that do not by themselves confer origin on a good). The disqualifying processes may include simple packing and preservation operations, simple mixing of products of the same or different kind, and simple assembly of parts into complete articles. The disqualifying provisions may be controversial because they may exclude processes, such as mixing and assembly, that can add a great deal of value. However, this problem can be resolved by adopting exceptions to the exceptions, i.e., by specifying the mixing and assembly processes that will confer origin, notwithstanding the general rule that mixing and assembly do not confer origin.
44. See, e.g., NAFTA, supra note 30, Art. 402 (setting out the regional value content test, which is used as a supplementary test to the change-in-tariff-classification test), Art 412 (listing nonqualifying operations). 48 However, disputes over tariff classification, such as whether a vehicle is a truck or a van, do occur, because this system, like any classification system, is sometimes imprecise and subject to political considerations. N. David Palmeter, The U.S. Rules of Origin Proposal to GATT: Monotheism or Polytheism?, J. WORLD TRADE, Apr. 1990, at 25, 28.
45. The Harmonized System Committee assists with the problem of fitting millions of goods into the 1,241 four-digit headings by publishing the General Rules for Interpretation of the Harmonized System, its detailed Legal Notes, and the extensive complementary publications such as the Customs Co-operation Council's Explanatory Notes. These sources of information on interpretation and assistance with application help ensure more uniform, accurate and predictable classifications.
46. See Asakura, supra note 40, at 6 (describing the development of rules of origin as differentiated tariffs and other trade measures introduced by certain countries early in the 20th century).
47. See JOHN H. JACKSON, WORLD TRADE AND THE LAW OF GATT 468 (1969).
48. Under the ICC proposal, a product "resulting exclusively from" labor and material in one country would originate in that country, and a product resulting from materials and labor of two or more countries would originate in the country where the product last underwent a substantial transformation. A substantial transformation was defined as processing that confers a new individuality on the goods. GENERAL AGREEMENT ON TARIFFS AND TRADE, BASIC INSTRUMENTS AND SELECTED DOCUMENTS [BISD], 2d Supp. 56 (1954).
49. See Edurne Navarro Varona, Rules of Origin in the GATT, in RULES OF ORIGIN IN INTERNATIONAL TRADE: A COMPARATIVE STUDY 355, 358 (Edwin A. Vermulst, Paul Waer & Jacques Bourgeois eds., 1994) (quoting BISD, supra note 52, at 55).
50. Cf. id. at 359 (arguing that the view of rules of origin as an instrument of economic policy is the more common view).
51. The Kyoto Convention is officially called the International Convention on the Simplification and Harmonization of Customs Procedures, May 18, 1973, 1975 Gr. Brit. TS No. 36 (Cmnd 5938) (entered into force Sept. 25, 1974). Annex D.1 on rules of origin entered into force in 1977. At the time Navarro wrote, 23 countries had ratified the annex. Navarro, supra note 53, at 359-60.
52. The Kyoto Convention's rule of origin for goods wholly obtained in the originating country has been adopted repeatedly in other trade agreements.
53. See Hoekman, supra note 11, at 84. The additional methods were a change in tariff heading in a specified nomenclature, the use of specific processing operations that do or do not confer origin, a percentage content test (either of the materials or the value added), and any other criterion that does not impede realization of the Convention's objectives. Id.
54. See Navarro, supra note 53, at 9-10. The United States was an especially strong advocate of including rules of origin in the Uruguay Round because it felt that the European Community's local content requirements threatened to impede access of U.S. goods to Europe. Id. In recent years, the United States had engaged in similar use of its rules of origin, especially in its preferential trade agreements and with respect to textiles.
55. See Harold Owen Beede, Note, The EEC Rules of Origin "Game": Can Non-Members Play?, 14 SUFFOLK TRANSNAT'L L.J. 81 (1990). See also text at notes 36-39 supra.
56. Origin Agreement, supra note 4, Art. 1(1) (expressly excluding rules of origin "related to contractual or autonomous trade regimes leading to the granting of tariff preferences going beyond the application of [most-favored-nation status]"). While there was some discussion about harmonizing all rules of origin, the more restrictive approach was adopted, partly because that was what the European Community preferred and partly because the United States had begun using preferential rules of origin in a restrictive manner. See Navarro, supra note 53, at 10. For an explanation of why countries may want to adopt different rules of origin for preferential trade agreements and even vary the rules among the different agreements, see supra part II.
57. Attached to the Origin Agreement as Annex II is a Common Declaration with regard to Preferential Rules of Origin.
58. Origin Agreement, supra note 4, Art. 9(2) (a). The transitional period will last until the harmonization program is completed, which, it is hoped, will take no longer than three years.
59. Id., Art. 9(3) and (2)(b). Each party to the Origin Agreement has the right to be represented on both the Technical Committee, id., Ann. I, and the Committee, Origin Agreement, Art. 4(1). Additionally, trade organization representatives are allowed to attend meetings of the Technical Committee as observers. Id., Ann. I, (6).
60. Origin Agreement, supra note 4, Art. 9(4).
61. Id., Art. 9(1)(b) and (2)(c)(i).
62. Id., Art. 9(1)(b) and (2)(c)(ii).
63. Id., Art. 2(f).
64. Set text at notes 36-39 supra.
65. Origin Agreement, supra note 4, Art. 9(2)(b). See also id., Art. 9(1)(d) (stating that the rules of origin "should not themselves create restrictive, distorting or disruptive effects on international trade").
66. This increased certainty will result in a loss of flexibility, as national customs administrators will not be able to adapt the rules to changes in technological or manufacturing processes or attempts at circumvention. Instead, any changes in the harmonized rules to accommodate technological change or unforeseen abuses will have to be made multilaterally in the Technical Committee.
67. Origin Agreement, supra note 4, Ann. II(3)(e).
68. Origin Agreement, supra note 4, Art. 2(h) (providing for advance ruling procedure during transitional period), Art. 3(f) (providing for the same advance ruling procedure after transitional period), and Ann. II (providing for same advance ruling procedure for preferential rules of origin).
69. E.g., Origin Agreement, supra note 4, Art. 2(g).
70. E.g., id., Art. 2(i).
71. E.g., id., Art. 2(a) (stating that the administrative determinations must "clearly specify the sub-headings or headings" when using the criterion of change in tariff classification; must indicate the method of calculating the percentage when using the percentage criterion; and must "precisely specify" the prescribed operation when using a technical criterion).
72. E.g., id.
73. E.g., id.
74. Id., Arts. 2(j), 3(h), and Ann. II(3)(f).