For many countries, the economy this decade presents similar challenges, as they are facing higher pandemic-related health expenditures and increases in prices for energy and many basic raw materials due to the war between Russia and Ukraine.
One consequence of these higher expenditures is that there is a general need to make the collection of fiscal resources more efficient. Therein, customs taxes an important source to be considered. At the same time, trade agreements promote the elimination of tariff taxes on goods that meet the origin requirements.
In this context, adequate and efficient application of origin requirements should today be a priority activity, with increasing importance for all those countries with aggressive trade policies of opening through trade agreements. In effect, the rules of origin establish the conditions and requirements that must be met by goods manufactured in the member countries of an agreement in order to achieve the benefits and tariff reductions negotiated throughout its various chapters.
Negotiations of the rules of origin in a trade agreement constitute one of the chapters that requires the most effort and time to achieve the necessary consensus, both in the general definitions and in the specific rules for some products. For this reason, some rules can only be agreed upon in the final give-and-take during the nights prior to the closing of the negotiation. This results in some decisions not being agreed upon until the end of the process. Therefore, origin negotiation demands effort, negotiating skills, flexibility and willingness to work until the end of the negotiation and thus achieve a successful outcome.
However, once the agreement is finalized and signed, the attention of governments to the issue of origin begins to fade. This becomes evident in other stages or subsequent activities such as the implementation, administration, and control of preferential origin. Experience shows us that the importance given to the rules of origin decreases throughout this process to such an extent that it is worth wondering if, once the negotiation is over and after playing a significant role in that stage, origin becomes a second-order issue.*
The decline of interest is observed over a series of events that are evident in the various stages mentioned, namely:
a) One of the commitments that is frequently assumed in the text of the agreements consists of the preparation of a “Uniform Regulations” or “Common Guidelines” for the use and administration of the origin requirements. The level of commitment regarding the common guidelines shows a range of options, from simply suggesting the possibility of their definition to identifying them as an obligation of the countries. Regardless of the level of commitment assumed, in fact, this commitment is usually not fulfilled and, when it is, it is sometimes done in a very superficial way.
The uniform regulations are important because some new preferential agreements regulate trade between countries where previously there were no origin requirements and, therefore, the subject was unknown to their traders. Additionally, one of the objectives of trade agreements is to increase the number of exporters that operate in this relationship. Are these operators in a position to correctly interpret and apply the flexibilities and obligations contemplated in the text of the origin chapter? Are these chapters understandable enough to have confidence that traders will understand their impact and how to use them? One example of the many that could be given will clarify this idea:
b) Many agreements establish that: “all the costs considered for the calculation of the regional value content will be recorded and maintained in accordance with the Generally Accepted Accounting Principles” Is this expression sufficient to provide understanding of how to value each input? How are they linked to the inventory systems of materials and products? What are the implications of the different calculation methods and their impact on origin when materials are sourced both from the countries of the agreement and from outside the zone? It is assumed that exporters know the incidence and implications of these three lines from the origin chapter, but in fact it is known that producers and exporters do not always have this knowledge.
2) Administration of the agreement
a) The most important benefit of a preferential market access agreement is a tariff issue. National tax issues are frequently part of the curricular content of various university programs, and there are specialized courses and certifications for understanding the main tax regimes and their modifications. Regarding origin regimes, are there similar courses at the tertiary or technical level? In most countries the answer is NO, which once again increases the lack of training throughout the life of the agreement.
b) The texts of the origin chapters of trade agreements often have a similar structure and though the variables and topics addressed are the same, their scopes and treatments can differ. There is a certain order or similar model of the contents, which sometimes leads to the erroneous conclusion that, since similar agreements already exist, it is not necessary to disseminate, clarify and explain the requirements of the new origin chapter. But in fact, these similarities notwithstanding, there are differences that require an adequate explanation that enables understanding by the operators, and these aspects are often overlooked. The consequence is that these new agreements the common misunderstandings that exist about rules of origin in many countries.
c) There are “Administrative Commissions” established in the agreements for origin issues. Do they meet regularly? Do they fulfill their assigned tasks? Experience once again shows us that these administration tasks are postponed due to other more urgent activities or are only partially carried out, or meet only to attend specific issues, not general maintenance of the agreement.
3) Control and Verification of Origin
a) In many countries, little importance is given to the function of administration and verification of origin at the time of allocating economic resources, personnel, and infrastructure. Without going further, compare the importance that customs gives to the issue of classification and valuation of a merchandise vs. the rules of origin. Ultimately, origin consists of controlling and avoiding fraudulent declarations of origin that generate a total loss of customs revenue. However, it is not given the same importance as that assigned to prevention of evasion and avoidance of other trade policies and national taxes.
b) Often the certificate of origin continues to be prioritized for its control to such an extent that it can lead, in some cases, to confuse cause with effect. In this sense, an adequate and intense control over the certificate of origin is mistakenly confused with the actions required to control origin. This is not correct. From the point of view of origin, what is essential and a priority for a preferential import is that the production of the good has been carried out in compliance with the origin requirements set forth in the agreement. The certificate is nothing more than a statement to the effect that this compliance is assumed. Now, this comment does not mean that the different ways of declaring and controlling origin certification are unimportant. On the contrary, they are transcendental, but it is not the only, or even the most important aspect of origin control.
The priority should be to focus efforts on determining if the production of the good complied with the requirements established in the origin regime. In this sense, carrying out efficient automated controls for risk analysis and verification processes, for select groups of products, are a priority. Are preferential origin and possible origin-related fraud included in risk analysis programs?
c) What is the justification for the slow implementation of technological innovations that provide greater security in the declaration of origin process? An example is the introduction of the digital signature for the issuance of digital certificates of origin (CO’s). Unfortunately, the process of its implementation and issuance began in Latin American around 2004 and only at the beginning of this decade, that is, after more than 15 years, did it begin to function effectively in some agreements. Is basic digital origin certification still the most appropriate technology to improve control of origin? Or are there other alternatives such as blockchain that can best
d) The lack of adaptation of the specific rules of origin annexes to the periodic and successive updates of the Harmonized System is a topic addressed in previous blogs. It is an obligation of the governments and, in particular of the Administrative Commissions of the agreements, to update them each time a new version of the HS comes into force. The lack of updating is poorly compensated by foreign trade operators through a partial, and often incorrect, correlation of the origin requirements between the different versions of the HS. These shortcomings by omission are tolerated by the intervening governments and authorities and degrade the correct application of the origin requirements.
e) When trade facilitation measures are implemented, are origin-related facilitation measures included with them? The importance and priority that we give to the issue of trade facilitation in everything related to origin is another example of the lack of interest in matters of origin, as discussed in a previous blog.
These examples mentioned previously are not the only ones that can be offered, but they serve to demonstrate how, throughout the entire process of entry into force, application and control of the origin regimes, the importance of this discipline is diluted until it reaches a level that, from my point of view, degrade it and turn it into a second-order discipline in terms of a correct treatment of preferential trade. This is not the case in all countries, as there are several exceptions, but it is certainly a description that applies to the operational reality of a significant number of agreements and countries.
There is no relationship between the efforts made in negotiation of origin with the subsequent neglect that increases with the years in force of an agreement. The consequence of this neglect undoubtedly represents a source of possible customs errors or crimes that generate damage the correct collection of revenue and undermine the fair competition that domestic producers and exporters face when products from third countries receive benefits under the agreements without cost.
In this context, if there is interest and need to improve the fiscal income, isn’t it time to focus on implementing effective control of the origin requirements established in the agreements?
Comments are welcome.
*This post is based on my article available in Spanish at https://revistas.unlp.edu.ar/aportes/article/view/13963/12797