With this blog, “Speaking of Origin…”, Origen.Digital takes up the challenge of opening a space for exchanging opinions on issues related to Rules of Origin. To this end, in the coming months we will address various issues related to implementation, administration, control, and capacity building issues for preferential origin.
Exchanging ideas recently with our colleague Mette Werdelin Azzam, we found that the problems related to the difficulties, and ignorance, that exist round origin are common to many countries on different continents. It is not only one region where there is deficient treatment of the subject of rules origin.
In this context, we consider that it would be convenient, by way of introduction, to start this blog with a very generic list of the main difficulties and challenges that we find in the application of preferential origin.
To this end and as examples, we offer an incomplete bur indicative list of some of the peculiarities that exist in the operation of rules of origin, among which are worth mentioning:
Asymmetry of effort between their negotiation and their administration
- There is a notable difference between the importance and efforts that are allocated to the issue of origin at the time of its negotiation in a trade agreement, and that given to it for its implementation and administration. Origin is one of the most arduous chapters to negotiate and are usually only agreed on at the very end of the negotiation.
- However, its subsequent application is neglected by governments by reducing its importance both in the allocation of resources and in their interest in having a consistent and adequate administration.
- As a consequence, once the preferential agreement enters into force, origin becomes a second-order issue when compared with the importance and resources that the authorities assign to other topics such a tariff classification, valuation and the tariff rates applied. The effort in these fields is aimed at avoiding fraud in determining the amounts of fees to be received, and, consequently, in the fundamental protection of tax resources.
Loss of revenue
- While the authorities work to apply the tariff classification, valuation, and tariff rate correctly in order to prevent a loss of tariff revenue, they forget that mistakes or fraud in origin generally means no revenue collected at all.
- In this context, it is worth wondering if the authorities are aware of the economic damage. In terms of tariff collection, the loss is total in an erroneous or fraudulent operation in terms of origin while, usually, the loss is only partial in the case of a mistaken tariff classification or incorrect valuation.
- To justify these shortcomings, it is frequently argued that there are no resources to verify origin. But why is it not considered that an efficient control of origin, like any other control in tax matters, can be self-financing?
Private sector capacity
- Parallel to this is a difference in the importance given controlling origin, are private-sector training efforts. Enforcement authorities make quasi-permanent efforts on issues related to tariff classification, valuation, regulations on sanitary procedures, fees, etc., while training on issues related to origin is scarce.
- In effect, the implementation of a preferential agreement does not usually include adequate and in-depth training for customs brokers and origin-certifying entities regarding the requirements and flexibilities of the origin chapter of the agreement. Nor are producers and exporters adequately trained, as in general the trainings for new agreements are generic and partial, usually assuming that those being trained already know origin, when in reality the lack of knowledge is quite generalized.
Formalities vs. realities
- The focus of the intervening authorities and certification entities is on the formal issuance of a certificate of origin, but much less on the analysis and actual control of compliance with the rule declared in that certificate.
- Likewise, how much do producers know about the flexibilities contained in the origin regimes such as De Minimis, the cumulation of materials and of processes, treatment of intermediate materials, etc.?
- The notable lack of statistical information on the effective and real use of cumulation of origin in countries that permanently proclaim regional integration, and the promotion of their value chains as guiding objectives of their international trade policy, is surprising. How can policy be designed to promote regional value chains if there is no data on the effectiveness of current policies?
- On the other hand, how many countries have origin control and management areas that systematically carry out origin verification investigations?
- How many companies are prepared to prove that their products are originating in the event of such a verification?
Additional challenges abroad
- The problems of not managing the origin regime well, or of undervaluing its importance, are not limited to the collection of tariffs. When there is no adequate control of origin in imports, the private sector does not end up appreciating the importance of compliance with the rules of origin, and they have greater difficulty in taking advantage of preferences in exports to the agreement partners. The loss of the benefits under the negotiated agreements produces inefficiencies and lost opportunities in both exports and imports.
Rules of Origin require maintenance
- Lastly, rules of origin are mainly based on the tariff classification of goods and the inputs used in their production. The classification nomenclature, in practically all the countries of the world, uses the Harmonized System (HS) established by the member countries of the World Customs Organization (WCO), and this HS is updated approximately every 5 years to account for changes in world trade trends and to accommodate technological changes that make different categorizations of goods necessary. These updates “move the floor” of the origin regimes, distorting the interpretation of the rules if their expression is not updated to the new version of the HS. But, how many countries update their origin requirements to the current nomenclature with each new HS amendment?
- If not taken into account, the reorganization of the products in each amendment may result in products that qualified as originating before the amendment appear not to qualify afterwards, and vice versa. This analysis must be done by both the businesses that want to benefit from the tariff preferences, and the custom officials that want to correctly administer the free trade agreement. Failure to update the rules can cause trader to be harmed by having to pay tariffs when he is eligible for preferences, or tariff collections to be lost when a business improperly avoids paying tariffs for a product that in fact does not comply with the origin rules.
These are some of the aspects that we plan to address in this blog, and hope that they are of interest to you. Comments are open, and we are happy to hear from, and interact with, those who are interested.