modalities for the calculation of "preference utilization"

note by the secretariat[1]

Revision

The 2015 Nairobi Ministerial Decision (WT/L/917/Add.1) on rules of origin for least developed countries (LDCs) mandated the Committee on Rules of Origin (CRO) to agree on modalities for the calculation of utilization rates (Paragraph 4.3). Members agreed to such modalities in 2016-2017 (item 3.3 in G/RO/M/67 and item 4.4 in G/RO/M/68). This note updates a previous one prepared by the Secretariat which assisted Members in these discussions. It reflects on additional methodologies and data requirements.

1  What is PREFERENCE UTILIZATION?

1.1.  "Preference utilization" may be defined in different ways. For example, utilization of trade preferences can be understood more generally as the ability of beneficiary countries to increase exports, attract productive investments, create jobs and raise income. According to this wider understanding, successful preference beneficiaries would be those that "actively use preferences" to leverage economic development[2]. Under this definition, factors that impede preferences from fully deploying their benefits include for example the absence of trade-related infrastructure, lack of resources, the lack of a clear export strategy, or also lack of knowledge at the firm level, among other reasons.[3]

1.2.  This definition is of course useful. However, this definition is not specific enough to guide the work of WTO Members in the Committee on Rules of Origin (CRO). This wider definition seeks to answer the question: "to what extent are strategies in place to actively utilize trade preferences available and to promote economic development?".  However, the work of the CRO seeks to answer the narrower question "to what extent are the applicable rules of origin and origin requirements facilitating or hindering the utilization of existing non-reciprocal trade preferences?".

2  PREFERENCE UTILIZATION IN THE CONTEXT OF THE WORK OF THE CRO

2.1.  For this reason, in the context of the work of the CRO, a more specific definition is needed. "Preference utilization" can be described simply as the extent to which imports which are eligible for trade preferences are in practice imported under these preferences rather than under Most Favoured Nation (MFN) conditions. In more technical terms, the preference utilization rate is the amount of imports which are granted preferential tariff treatment on entry, as a proportion of the total value of imports which would be eligible for a preferential tariff. Utilization rates therefore speak to the capacity of economic operators to seize market access opportunities which are available to them through reciprocal or non-reciprocal preferences.

2.2.  This definition enables the identification of trends in trade flows and hence offers an indicator about the impact that rules of origin and origin requirements have on the ability of businesses to tap into preference programmes.

3  UTILIZATION RATES AS A TOOL TO EXAMINE RULES OF ORIGIN

3.1.  When, on the one hand, statistics show that imports receive preferential tariff treatment, it is necessarily a sign that imported goods complied with all three components of rules origin:

(i)      origin criteria: imported goods were either wholly obtained in the beneficiary country or comply with the minimum substantial transformation (or sufficient transformation) requirements (that is, satisfy general or product-specific rules of origin);

(ii)     proof of origin: imported goods were accompanied by the prescribed proof of origin (namely, a certificate of origin delivered by a designated competent authority or certifying body, or a self-declaration of origin); and

(iii)    consignment requirements: imported goods were directly consigned from the beneficiary Member to the preference granting Member or could prove that there was no manipulation or processing of the goods in third or transit countries (documentary evidence about non-manipulation or non-alteration in transit).

3.2.  When, on the other hand, statistics show that imported goods pay MFN tariffs despite being eligible for trade preferences, it is a sign that some factor or factors could be hindering the use of the preference. Rules of origin are one possible factor. It is for this reason that utilization rates have been proposed as a useful indicator to examine preferential rules of origin[4].

3.3.  It should be noted, nonetheless, that there are also limitations to the use of utilization rates as a tool to examine the impact of rules of origin. In fact, other factors – not related to rules of origin – could influence preference utilization rates. Common explanations include that the economic operator was not aware that a preference was available or that the operator preferred to pay MFN duties because the preferential margin was not sufficiently attractive (that is, the preferential margin does not work as an incentive to use the preferences) to cover the costs related to fulfil origin requirements.

3.4.  Another possible explanation for low utilization rates is that imports are receiving tariff preferences under other preferential schemes. If multiple preferences are available, economic operators may opt for the scheme that offers equivalent or greater preferential advantages. For example, they might prefer to use a reciprocal regional trade agreement (RTA) instead of a non-reciprocal preferential trade agreement (PTA) due to better knowledge about the requirements, or a more attractive preferential margin or less restrictive rules of origin. The same reasoning applies when other tariff concessions are available, such as temporary tariff concessions or duty drawback schemes.

3.5.  It is for this reason that the WTO Secretariat has proposed to complement the analysis of utilization rates with that of "non-utilization" or "underutilization".^[5] Non-utilization rates demonstrate the extent to which trade occurs under MFN conditions, even though imports would be eligible for preferences. Therefore, "non-utilization" or "underutilization" rates offer a complementary tool to identify areas in which origin requirements could have a restrictive impact.

4  MODALITY FOR THE CALCULATION OF UTILIZATION RATES ADOPTED BY THE CRO

4.1.  Members agreed to modalities for the calculation of utilization rates after discussions held in 2016 and 2017 (item 3.3 in G/RO/M/67 and item 4.4 in G/RO/M/68). The agreed modality is as follows:

4.2.  Under this modality, preference utilization rate (pur^value) is based on the "reported value" of preferential imports: that is, the value of those imports that have reportedly benefited from a preferential duty scheme as a proportion of imports that would be eligible for preferential duty treatment. This method sheds light on the utilization of individual preference programmes.

4.3.  Tariff lines with a zero MFN duty rate are excluded from the calculations because there can be no "preference" offered for these tariff lines. Imports under tariff lines that are not eligible for trade preferences are also excluded from calculations for the same reason.

5  OTHER POSSIBLE CALCULATION METHODOLOGIES

5.1.  There are different possible methodologies to calculate preference utilization rates. Below is a description of two^[6]:

(a)     One alternative option could be to base preference utilization rates (pur^value) on the sum of "reported value" of imports under both PTA and other preferential schemes (either Regional Trade Agreements (RTAs) or other temporary or special tariff concessions). This methodology compares the amount of imports that have benefited from a tariff preference with the amount of imports that would be eligible for preferences under any existing scheme. This methodology takes into account the existence of any preferential tariff opportunity and does not focus on a single scheme. Tariff lines with a zero MFN duty rate are excluded from calculations, as a preferential scheme does not offer any additional advantage for these lines.

This formula has the advantage of considering tariff preferences received under any preferential scheme available. It offers a more comprehensive view of the benefits being received by LDCs. However, it could lead to wrong assumptions about the utilization of individual preference programmes.

(b)     Another approach is one which focuses on "non-utilization" or "under-utilization" instead of utilization. The underutilization rate corresponds to eligible imports entering under the MFN status despite being eligible for preferential treatment under any available scheme:

5.2.  Using both the rates of utilization of individual preferential schemes (the modality agreed by the CRO) and the rates of "non-utilization" of any available scheme offer advantages and disadvantages. As a result, both methods of calculation are complementary and can be usefully combined to identify schemes, sectors or products for which rules of origin could be hindering preferential market access for LDCs.

5.3.  It should also be noted that the mandate, derived from the Bali and Nairobi Ministerial Decisions, is to focus on the simplification of preferential rules of origin used in the context of non-reciprocal trade preferences. As a result, the availability of and rules of origin applicable in "other preferences" (RTAs or special tariff concessions) are relevant context, but the main focus of work of the CRO must be on LDC non-reciprocal preferential rules of origin.

6  DATA NEEDS AND LIMITATIONS

6.1.  A corollary for the calculation of utilization rates (irrespective of the method chosen) is the availability of complete data sets describing trade between preference-granting Members and beneficiary LDCs. Data available with the WTO Secretariat is based on Members' annual notification of tariff and trade data (imports) in compliance with the Transparency Mechanism for Preferential Trade Agreements (PTA), established by General Council Decision on 14 December 2010 (WT/L/806). Members shall notify, on an annual basis[7]:

(a)     Applied MFN import tariffs at the national customs tariff nomenclature (at the most detailed level, for example HS codes with 8, 9, or 10 digits, as normally applied by the Member's customs administration);

(b)     Import statistics in the same national tariff nomenclature as the corresponding MFN applied tariffs for the same year (i.e. same HS version and with the same level of disaggregation), including value (in USD or national currency) and volume (quantity and unit), by country of origin and by tariff line;

(c)     Data elements required by the Transparency Mechanism for Preferential Trade Arrangements[8], which include:

(i)      Preferential applied tariffs and import statistics, for preferences by developed countries to developing and least-developed countries in accordance with the Generalized System of Preferences (GSP)[9], including the list of countries or separate customs territories on which they apply.

(ii)     Preferential applied tariffs and import statistics, in case of preferential treatment accorded by any Member to products of least-developed countries, including the list of countries or separate customs territories on which they apply.

(iii)    Preferential applied tariffs and import statistics, in case of non-reciprocal preferential arrangements authorised under the WTO Agreement, including the list of countries or separate customs territories on which they apply.

6.2.  In addition, Members are encouraged[10] to submit comprehensive applied tariff and import information, to the extent possible and particularly when the information is already publicly available in a national website, by notifying the following information: Paragraph 1.2 of G/MA/367:

"(a)  Applied non-MFN tariffs, including:

(i)      Preferential tariffs applied in the context of regional trade agreements (for example free trade agreements or customs unions), including arrangements under Article XXIV of the GATT 1994 and Paragraph 2(c) of the Decision on "Differential and More Favourable Treatment Reciprocity and Fuller participation of Developing countries" (Enabling Clause)[11]. The submission should include list of countries or separate customs territories covered by each of these agreements; and

(ii)     Other applied non-MFN tariffs, for example tariffs applied on imports originating in non‑WTO Members, if applicable, including the list of countries or separate customs territories on which they apply.

(b)     Preferential import statistics under regional trade agreements (for example free trade agreements or customs unions), including arrangements under Article XXIV of the GATT 1994 and Paragraph 2(c) of the Enabling Clause. They should include the value (in USD or national currency) and volume (i.e. quantity and unit), disaggregated by country of origin, by tariff line, and by the duty regime under which each product was imported. The statistics should distinguish at the tariff line level, and for each of the beneficiary partners, the imports entered under MFN conditions from the imports entered under preferential conditions.

(c)     Ad valorem equivalents (AVEs) of non-ad valorem (NAV) duties, as calculated by the Member.

(d)     Applied internal taxes and other duties and charges (ODCs), when available at the tariff line level.

(e)     Imports or proportion of imports (value and volume) under tariff rate quotas (TRQs) for each identified tariff line associated with the relevant TRQ, in particular in case the in-quota and out-of-quota imports are recorded under the same tariff line code. In case the data corresponds to a bound TRQ, the TRQ identification (TQ ID) as contained in the CTS."

6.3.  This information should include a list of countries or separate customs territories covered by each agreement and preferential import statistics, such as value and volume (quantity and unit) of imports, disaggregated by country of origin, tariff line, and duty regime. It is crucial to distinguish imports entered under MFN from those under preferential schemes at the tariff line level for each beneficiary partner. While the practice is not compulsory, Members are encouraged to submit comprehensive data, including tariff lines entering under "other preferences (e.g. RTAs), to avoid any potential inconsistencies in calculating preference utilization rates (seesee calculation methodologies above).

6.4.  Second, the preference regime notified to the WTO by some Members might be the duty scheme as "requested" or "claimed" by economic operators (e.g. importers), not necessarily the scheme actually applied after customs clearance. As a result, figures for preferential trade may be somewhat overestimated.

6.5.  Third, data may also be impacted by variations of duty rates during the year. In fact, Members' import data notifications to WTO IDB are annual and would not capture temporary variations. This may be particularly important if seasonal duties or tariff rate quotas are applied.

6.6.  Lastly, the comparison between preferential and MFN duties may also be affected if a non‑ad valorem duty is used. In such cases, the conversion into ad valorem equivalents is necessary.[12]

6.7.  Preference granting Members hold the most detailed data with respect to their imports from LDCs and hence preference utilization. As a result, their own analyses and sharing of information in the Committee are of key importance to better understanding patterns of and factors that influence preference utilization.

7  ACCESSING UTILIZATION RATES THROUGH WTO TOOLS

7.1.  The WTO Secretariat provides access to preferential import data to Members and authorized users through its Tariff Analysis Online portal (http://tao.wto.org). The enhanced functionality of the tariff line report allows to consult import data for preferential trade arrangements (as notified to the Secretariat following the adoption of the PTA Transparency Mechanism outlined in document WT/L/806). Aggregated summary statistics can be consulted on the PTA online database (http://ptadb.wto.org). Both online resources provide access to preferential import data in accordance with the "Decision on the Modalities and Operation of the Integrated Database" adopted by the Committee on Market Access (see document G/MA/367).

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